Chapter 18: pledge and mortgage

A creditor who has obtained a creditor right against a debtor has only a claim against
the debtor in his personal capacity.

• The amount due by the debtor to the creditor is called the principal debt.

• There are two types of security, namely:

- Personal security;

- Real security.

Personal security

- Implies that a creditor, on the basis of a performance due to him as a result of a

creditor’s right against a debtor (principal debt), also acquires a creditors’ right
against someone else as security for the payment of the principal debt
- Suretyship is an example of a personal right
- In terms of a contract of surety between the creditor and a third party, the 3 rd
party undertakes to perform the debtors obligation in terms of the principal debt
to the creditor if the debtor should fail to do so

Real security

- The creditor acquires a limited real right in the property of the debtor as security
for the payment of the principal debt by the debtor to the creditor, until payment
of the principal debt
- Various kind of real security exist
- Most important distinction is based on the nature of object of security, namely
movable or immovable

General principles regarding real security

- The real security is enforceable only in respect of a debtor's property .

- There is a double legal relationship:
 - A claim of the creditor towards the debtor arising from the principal debt
between them;
- A limited property right of the creditor on a movable or immovable property of
the debtor to cover the principal debt.
- If the debtor does not redeem the principal debt as agreed, it gives the creditor
a preference for the proceeds of the property in the event of an execution or
insolvency sale .
- The real security usually consists of the principal debt and all interest thereon.
- The creditor usually does not acquire pleasure or use in respect of the security
object, but may only keep or use it for security purposes.

Pledge

Definition

Corporeal or incorporeal movable property of a pledgor (debtor or surety), given to a

creditor in pledge as real security for the payment of the principal debt, grants the
pledgee (creditor in terms of principal thing) a limited real right to the property as
security until the principal debt has been paid in full

The pledge object

Requirements of the object:

1. Only movable property can be pledged

2. In case of corporeal movable property, single or collective objects can be
pledged
3. Incorporeal movable property, like shares in a company can be used as
security
4. Fruits of an object, form part of the object of pledge, if the right of use of the
fruits have been given to pledgee he may use or consume them
Delivery

- To establish and maintain security in the form of a limited real right to the
pledgor’s property, the object must be delivered to the pledgee and controlled
by him
- Recognised forms of delivery is real delivery (tradition vera) and delivery with
the short hand (taditio brevi manu)
- Constitutum possessorium is not a recognised method of delivery to establish
a pledge
- To avoid Constitutum possessorium parties usually represents the pledge as a
simulated contract of sale, this was declared void and null
- Pledgee must continuously exercise control over the property in order to
retain his limited real right to the property
- If he willingly loses control over object = termination of limited real right
- If property is removed from his control, without his permission, and he gets it
back with or without legal procedures he retains the limited real right
- A contract of pledge without delivery of the object is not enough to establish a
limited real right in respect of the property
- If property is alienated bona fide to a third party after the conclusion of the
contract but before delivery, the creditor of the principal debt has no remedy
against the third party.
- If third party was aware of the agreement, he must because of doctrine of
notice, deliver the object to the creditor so that the pledge can be established

Right of pledgee

a) The pledgee acquires a limited property right on the property as security for
the principal debt and interest by the pledgor.
b) If the pledgor does not pay the principal debt as agreed, the pledgee will,
after summons, judgement and the issuing of a warrant by court, obtain a
preference claim to the proceeds of the pledge object at the sale in
execution, if the proceeds are not enough to cover the debt and interest,
then pledgee has claim against the proceeds of other assets of pledgor.
 c) If pledgor’s estate is sequestrated, the pledgee has, in term of section 95 of
the Insolvency Act a preference for the proceeds of the pledge object in
terms of an judicial sale. If this is not enough to cover the debt and interest,
the pledgee has a concurrent claim against the remains of pledgor’s estate
d) The pledgee can institute an enrichment claim against the pledgor for all
necessary expenses for the conservation and maintenance of the object, as
well as useful expenses that increase the market value of the object.
e) If principal debt has been paid and pledgees right to object is terminated,
the pledgee can exercise an enrichment lien. In case of luxurious expenses,
the pledgee has no enrichment claim or lien.
f) The prior in tempore, potior in iure (the right to first-place preference) is also
applicable in the case of pledge. Any limited real right to property established
later is subject to the pledge of the pledgee
g) If pledge objct is removed from pledgee’s control without his permission and
pledged to another person, the first pledgees right has preferential status if
his physical control if re-established

Obligations of the pledgee towards pledgor

a) The pledgee must take care of the object as a reasonable man and return to the
pledge upon termination of the pledge.
b) The pledgee does not have the right to use, utilize or alienate the property. Right
to consume or alienate fruits comes only Into being if the pledgor granted the
pledgee this right
c) The pledgor may require the pledgee to provide security in case of neglect of the
property.
d) The pledgee is liable for compensation to the pledgor if the property is damaged
or destroyed by intentional or negligent action of pledgee.
e) In accordance with section 99 of the National Credit Act 34 of 2005 the pledgee
has the following liabilities:
o Date of termination of credit agreement must be specified
 o The property is kept at own risk by the pledgee and must be returned to
the pledgor on termination of the credit agreement.
o If the property has been lost or damaged by an intervening cause outside
pledgees control, pledgee must pay pledgor an amount equal to the
market value of the goods, less the settlement value at the time of the
failure to deliver those goods

Mortgage

A mortgage registered in respect of movable or immovable property of the

mortgagor (debtor or surety) grants the mortgagee (creditor) a limited real right to
the movable or immovable property as object of security until the principal debt has
been paid in full

The object

The object of security must meet the following requirements:

a) The security object in the case of movable property is a single or a collection of

corporeal property in terms of section 1(1) of the Security By Means of Movable
Property Act 57 of 1993.
b) The Security by Means of Movable Property Act 57 or 1339 provides for the
registration of a notarial bond on defined and specified movable property of the
debtor without the requirement that it be delivered to the creditor. Object of
security cannot be the merchandise of a dealer in general, which is not specified
or defined
c) In the case of immovable property as security object, a mortgage can be
registered in terms of corporeal and incorporeal property. Examples of
incorporeal immovable property that can be encumbered to a mortgage are a
registered long-term lease over immovable property and a right of extension in
terms of section 25 of the sectional titles Act 95 of 1986 Lief, NO v Dettmann
1964.
d) The fruit of a movable or immovable property is also part of the mortgage
object, except in the case where a right to fruit is granted to the mortgagee in
 terms of a pactum antichreseos. If the mortgagee is in control of the property
and gathers fruit, she must report to the owner regarding the value of gathered
fruit – Bisnath NO v ABSA Bank LTD 2008
e) In case of immovable property all attachments by means of accession form part
of the object of the mortgage

Registration Requirements

a) Creditor acquires a limited real right of the object of the mortgage after
registration of the mortgage bond in the deeds registry
b) Movable property = notarial bond is registered and a limited real right is
established without deliver to the creditor – section 1(1)(b) of the Security by
means of Movable Property Act 57 of 1993
c) Immovable property is mortgaged by means of a registered mortgage bond.
I. Functions of mortgage bond
II. In Thienhaus NO v Metje and Ziegler 1965 = mortgage bond performs the
following functions:
1. Confirmation of the limited real right of the creditor to the
property as security for payment of principal debt
2. Written acknowledgement or principal debt
3. Record regarding the conditions pertaining to the interest,
payment, term and default of principal debt
d) Mortgage bond is drawn up by a conveyancer and contain the following
information:
I. Prescribed description of the mortgagor and mortgagee. Natural persons:
person’s name, ID number and marital status. Legal person: registered
name and registration number
II. Complete description of the immovable property as prescribed in deeds
regulation
III. Admission that the principal debt is owing, reason for principal debt +
requirements regarding amount owing, rate of interest ad term of payment
 IV. Any other conditions of the contract of mortgage (loan agreement) such as
location of payment, official address of parties, consequences of default
are registered in terms of 63(2) of the deeds registries act 47 of 1937
e) Mortgage is noted in the mortgage register and endorsed on the deeds transfer
of the encumbered immovable property after the owner of the land has signed it
and it is attested to by the registrat or deeds
f) If mortgage is not endorsed on the deed of transfer after registration, mortgage
is still valid and enforceable as a limited real right - Standard Band SA v
Breitenbach 1977
g) Unregistered agreement to mortgage property does not grant creditor a limited
ral right to the property. But if the property is alienated to a third party who had
real or conclusive knowledge of the registered agreement to mortgage property,
such person is compelled to co-operate in the registration of mortgage
h) Immovable property encumbered with a mortgage can be transferred to a new
owner only after cancellation of all existing mortgages. Section 56(1) of the Deed
Registries Act 47 of 1937. If property is transferred without cancellation of
existing mortgages the mortgage does not lapse
i) Various mortgages can be granted to different mortgagees by the mortgagor at
the same time in respect of the same property. In terms principle prior in
tempore, potior in iure the time or registration determines the order or real
security granted to mortgagee. Mortgage registered first, gives relevant
mortgagee a preferential claim in case of insolvency of mortgagor
Categories of mortgages

A. Kustingsbrief
- Definition: mortgage in favour of a seller of land as security for the unpaid
balance of purchase price or in favour of any other person or financial
institution who advanced the balance of the purchase price to the buyer
- Registered simultaneously with the transfer of the property to buyer, this is
the strongest kind of mortgage as real security in terms of the prior tempore,
potior iure
- In favour of financial institutions which advance money to buyer in respect or
the balance or the purchased price are registered as this

B. Money lent and advanced

- Definition: mortgage registered as security for money lent and advanced by
the mortgagee to the mortgagor for other purposes than the payment of the
balance of the purchase price
- Fact that mortgage serves as security for money lent and advanced must be
mentioned in mortgage bond, amount should also be mentioned

C. Covering Bond
- Definition: mortgage bond registered as security for an amount that will be
lent or advanced to the mortgagor by the mortgagee in the future or for
future debts in general. Continuous covering security to the maximum amount
- This is an exception to the requirement that a valid principal debt must exist
before a mortgage can be registered as security
- Section 51(1)(a) of Deeds Registries Act 47 of 1937 following must be
mentioned in mortgage bond:
o Mortgage serves as security for future debts
o The maximum amount of future debt for wich the mortgage serves as
security (Kursan v Eastern Province Building Society and
another 1996)
 - Covering bond Can be registered as a mortgage bond for immovables or a
notrial bond for movables
- Gives security from date of registration (not when principal debt comes into
being)
- Must prove that principal debt came into being after registration

D. Surety bond
- Definition: Registered against the property of a surety of the debtor, who
undertakes to give security to the creditor for the payment of the principal
debt by the debtor
- Such bond is granted by the surety (mortgagor) over his movable or
immovable property in favour of the creditor (mortgagee)
- cause of mortgage must be mentioned in surety bond
-
E. Participation bond
- Definition: Registered in term of the requirements of Collective Investment
Schemes Control Act 45 of 2002, in favour of participants in a collective
investment scheme, in the name of the nominee company as mortgagee over
immovables of mortgagor who was granted a loan by nominee company
- The money acquired by the nominated company as a loan is by investors from
a collective investment scheme of the nominated company.
- The assets are held in the form of participation bonds in respect of which the
participants acquire an interest in the scheme in accordance with the rules of
the scheme. Without mentioning the participant's name in the participation.
- The debt secured by participation bond is owed to the participants of the
investment scheme and not the nominated company.
- It is expressly stated in the mortgage deed that it is a participation bond and
that the nominated company acts as representative of the participants.
F. Notarial bond
- Definition: registered against specific corporeal movable property of the
mortgagor as security for the payment of the principal debt to the mortgagee
and, after registration, this grants the mortgagee a limited real right to the
objects of the security without these objects being delivered to the mortgagee
- Provide limited real rights of security over corporeal movables of mortgagor if
it is described in the mortgage bond as such a way that it can be recognised.
- This is done without delivery, the mortgagee obtains security right similar to
a pledge
- Can register a notarial bond over the debtors incorporeal property, or
movables in general, but it won’t provide the mortgagee real security as
provided in the act. (in such cases the property must be delivered to
mortgagee before insolvency or mortagog) Chesterfin v Contract
Forwarding 2003
- Notarial bond in terms of the Act gives the creditor a limited real right to the
debtor's defined movable property without property being delivered to the
creditor. – Bokomo v Standard Bank of SA 1996

G. Land bank mortgages

- Definition: serve as security for money advanced to farmers by the land bank
for agriculture purposes. Only agriculture land can serve as object of security.
- In terms of the Land and Agricultural Development Bank Act 15 of 2002 these
requirements must be met for this mortgage:
o Only registered in respect of agricultural land
o Has to be a first bond except in cases listed below (bullet point 5)
o Agriculture land must be usefully cultivated, except if it is used for
gazing
o Mortgagor must be owner of land. Exception: where mortgagor is a
tenant of state land in terms of registered long-term lease
o Holder of existing bonds must waive their preferential right, with the
exception of a mortgage in favour of the R.S.A to ensure the balance of
purchase due to the state for the purchase of land or another land.
Rights of the mortgagee

A. Mortgagee not physical control over the mortgaged thing, but the mortgagor
control the matter subject to the limited real security of the mortgagee.
B. Mortgage bond is a liquid document. The mortgagee can get a provisional
sentence against the mortgagor in the High court. This is a final verdict and a
warrant for the removal of the case is issued by the High Court, if the mortgagor
cannot prove that the principal debt has been paid or that it is not yet claimable
or no longer claimable on the return date (read on page 303 B the rest of B )
C. In terms of the principle of prior in tempore potior in iure, in case of various
mortgages, priority is given in the order of their registration. if second mortgage
is foreclosed because of non-payment of principal debt, the limited real right of
first mortgagor has priority over subsequent mortgages
D. In case in execution, priority is given to the claims of mortgagees in the order
their mortgages were registered. As soon as principle debt of first mortgage has
been paid in full, the rest is payed out to second mortgage and so forth
E. The insolvency of the mortgagor the encumbered property falls into the insolvent
estate. The mortgagees acquire a preferential claim against the insolvent estate
in terms of the prior period in principle for the proceeds of the case in the order
of the registered mortgages

Unenforceable conditions