What is a cession agreement?
A cession agreement is a transfer agreement, which transfers personal rights from the current holder of the right (the cedent) to the prospective holder of the right (the cessionary). A cessation of rights does not happen in isolation but is based on an underlying obligatory agreement (the legal cause), which gives rise to the duty to transfer the right. In the context of property finance, the underlying cause is typically the mortgage bond.
Types & purpose of cession agreements
There are two main forms of cessions in South African law:
1. Out-and-out cession; and
2. Cession in securitatem debiti
Out-and-out cession (fiduciary security cession)
In an out-and-out cession, the cedent permanently and completely transfers their right to the cessionary. The cedent is fully divested of the right, which now vests in the cessionary who may enforce it freely. In certain cases, the parties may agree that the right be re-ceded when the debt is repaid. This agreement is described as a fiduciary security cession outlining the parties’ “pact of confidence.”
Cession in securitatem debiti
Cession in securitatem debiti (security cession) is a right that is transferred to secure the fulfilment of a debt. The effect being that the cedent is divested of the right to recover the ceded debt for as long as it remains the object of security, retaining only a “reversionary interest” therein. Upon the debt/obligation being satisfied, this right automatically reverts back to the cedent, and no additional agreement is needed to “re-cede” the right back to the cedent. This type of cession has been construed by our courts as being a pledge of a personal right.
Security cession in mortgage bonds
A mortgage bond secures a loan through the registration of a real right of security over immovable property in favour of the mortgagee (the bank). In a mortgage bond the mortgagor agrees to bind his/her immovable property as security for the fulfilment of obligations he/she has towards the mortgagee. The mortgagee is conferred with a real right of security against the immovable property, entitling them to foreclose on the mortgage bond, in the event that the mortgagor defaults.
Cession agreements have become somewhat standard in mortgage loan agreements, whereby the mortgagor surrenders and in so doing transfers certain rights, title and interest linked to the property to the mortgagee as “additional” security to secure his/her indebtedness.
Why use a security cession if a mortgage bond already secures the obligations of the mortgagor?
A bond vests the mortgagee with a real right of security against the immovable property of the mortgagor. A cession agreement may still be necessary because while a mortgage bond hypothecates immovable property as security, it does not secure the mortgagor’s personal rights (claims) to certain proceeds that arise from the property. These are intangible rights that cannot be hypothecated by mortgage but still holds commercial value, such as;
· Proceeds from any and all short-term and long-term insurance policies over the mortgaged property;
· rental income payable to the mortgagor (as landlord) under existing or future lease agreements;
· any other claims accruing to the mortgagor.
A security cession compliments the bond by transferring those personal rights to the mortgagee for the duration of the loan. This ensures that the bank’s security is comprehensive, covering not only physical property but also relates to claims and benefits in respect of the property.
Conclusion
A cession agreement constitutes a legal mechanism through which personal rights are transferred from the cedent to the cessionary. Whether in the form of an out-and-out cession or a cession in securitatem debiti, it’s purpose and legal effect arises from the underlying cause that justifies the transfer.
In the context of mortgage bonds, cession agreements serve an important supplementary purpose. Although a mortgage bond confers the mortgagee with a real right of security over immovable property, it does not extend to personal rights or incorporeal assets such as insurance proceeds, rental income, or other claims relating to the property. Therefore, in a mortgage bond, a cession in securitatem debiti ensures that these intangible assets are placed at the disposal of the mortgagee in the event of the mortgagor’s default.
Written by: Andrew Louw
Supervised by: Thabang Ditshego
