The legality of personal servitudes serving as security under mortgage bonds has, over time, proven to be a challenge to deeds examiners and, to a limited extent, property law practitioners. In order to better understand the nature of a mortgage bond and its effect on the mortgaged property it would be necessary to first consider the meaning of the concept ‘mortgage’.
According to K M Kritzinger, Principles of Mortgage, Pledge and Lien, 1999, mortgage denotes a form of real security,’ that is a real right which one person has in the property of another to secure an obligation owed to the holder of that right’. The same concept can be applied to movable property where such is delivered to the creditor as security for an obligation owed or still to be owed.
This discussion will, however, be limited to mortgage of immovable property.
What is a mortgage bond?
Section 102 of the Deeds Registries Act defines mortgage bond as ‘a bond attested by the Registrar specially hypothecating immovable property’. Now, immovable property in the deeds registration parlance means land and everything permanently attached thereto and a real right to such immovable property including such right which becomes real upon registration thereof. It is important that the bondholder’s security interest in the property to be mortgaged be expressed in monetary terms.
These mortgage bonds can arise out of an agreement between the owner of the property (sometimes referred to as mortgagor) and the creditor (referred to as mortgagee) or by operation of law. From the definition of mortgage bond, it is clear that any property which is deemed in law to be immovable such as a registered long term lease or an undivided share in land will be amenable to this kind of bond except those that have been specifically excluded by legislation or judicial pronouncements.
This definition includes servitudes in the sense that they are rights in another’s land and some of them like personal servitudes, become real rights upon registration.
Effect of a bond
Once registered, a mortgage bond accords certain rights to the bondholder. The first effect is that the property mortgaged cannot be transferred to another or dealt with, without the consent of the holder of the mortgage bond. The Deeds Registries Act, however, specifies certain instances in which the property will be capable of transfer despite lack of consent from the bondholder. These instances are mostly the so-called forced sales where the property is sold as a result of a court order of under insolvency law, etc.
This right of veto is very important in that it gives the bondholder the right to approve or disapprove the sale of the property if the rights secured thereby have not been satisfied or adequately guaranteed.
Any further rights over the property awarded to third parties would also require approval of the bondholder. Servitudes subject to mortgage will also fall under the same right of veto should the holder of such servitude wish to cede it to another.
The second effect of the registration of the bond is to grant the bondholder the right to cause the property to be sold in satisfaction of the secured obligation should the owner thereof default in his or her obligations towards the bondholder.
This will usually be preceded by a court action to declare such property attached and especially executable.
The sheriff of the court will sell such property to the highest bidder and the proceeds of such sale are paid to the bondholders in the order of their ranking in law and then the balance, if any, will be paid to the owner of the property.
This is the instance where the thought of a mortgaged servitude being sold becomes a problem to examiners especially since some of them like the so-called common law personal servitudes are in law, incapable of being ceded to anyone else except back to the owner of the land (s66 of the Deeds Registries Act 47 of 1937).
This is usually the argument of the examiner to the conveyancer whenever servitudes are sought to be mortgaged.
It is submitted that this argument can only hold against common law personal servitudes standing alone as security under a mortgage bond precisely because s66 prohibits the cession thereof for any reason to anybody else than the owner of the land in question.
So, any attempt to sell such servitude in execution of judgment would be a nullity. However, s69 (3) provides as follows:
‘The owner of land subject to a personal servitude and the holder of that servitude may together mortgage the land to the full extent of their respective rights therein”, and s69bis (3) has a similar provision to wit ‘The owner of land subject to a fideicommissum and the fideicommissary, if the latter is competent so to do, may together mortgage the land to the full extent of their respective rights therein.’
This is a clear demonstration that the legislature did not intend a blanket prohibition of mortgage of personal servitudes.
The prohibition in respect of the s66 personal servitudes is tacitly implied when mortgaged on their own without the bare dominium, hence, the prohibition of their cession to anyone else but the owner of the land only.
Mortgaged together with the bare dominium, the bondholder acquires the totality of the land as security and if it can come to the point where the property has to be sold, it can be sold in its entirety including such personal servitude.
It must be noted that where the servitude holder is not a co-debtor under the principal obligation he/ she may still mortgage his/her servitude as surety under the same bond or under separate surety bond.
In this instance the bondholder will still have the totality of the rights in the property under mortgage albeit by separate instruments.
The third effect of registration of a mortgage is to grant the holder preference to the proceeds of the forced sale of the property over other creditors be it a case of insolvency or execution by the bondholder self or of another bondholder.
In a case of insolvency the bondholder will be able to assert his/her rights as a secured creditor before and above the other class of creditors. This will be the case where a servitude holder whose rights under the servitude had been mortgaged becomes insolvent.
The bondholder will rank as a secured creditor to the estate of the servitude holder. In a foreclosure by the bondholder self or by another, the highest ranking bondholder will be entitled to be preferred first before the other creditors can be paid out of the proceeds of the forced sale.
Another consideration towards securitisation of servitudes is that obligations being sought to be secured thereby are not always obligations to pay money. A bond can secure an obligation to render certain performance towards the bondholder. In such an instance the object of mortgaging the property is not to eventually sell it to recoup an amount outstanding but to secure a position of preference over and acquire some form of control of the property.
So from a deeds examination point of view, it is important to note that the fact that the servitude on face value is not a viable security does not disqualify it to serve as such because the Deeds Registries Act or other legislation does not prohibit it.
It must be considered that the bondholder would have done his/her due diligence before agreeing to accept the servitude as security under the bond.
Also, it must be considered that the object of mortgaging the servitude may not necessarily have been to eventually sell it but it can also be used to obtain leverage over other creditors of the servitude holder in the instance of insolvency and also to gain control over other real rights that can be sought to be registered over the property.
Registrars Conference has also expressed the view in RCR15/2003 that a personal servitude can be ceded to another if the conditions thereof do not prohibit such.
So, deeds may not be rejected outright solely because a servitude is being mortgaged. It is not much of a concern to the registrar that the security under the bond is not conventional or relatively strong as long as it is not in conflict with the Deeds Registries Act or other relevant legislation.