Agreements of sale: the “real agreement” vs the “underlying agreement”

Section 2 of the Alienation of Land Act 68 of 1981 (the “Act”) determines that no alienation of land shall be of any force or effect unless it is contained in a deed of alienation signed by both parties or their duly authorised agents. Therefore, concluding an agreement sale will always be the first step in the process of selling immovable property. The mere signing of such an agreement by the seller and purchaser, will not automatically give rise to the transfer of ownership in that immovable property.

Transfer of ownership in immovable property can only occur once the transaction is physically registered in a deeds registry, giving effect to the agreement between the parties. It can be said that transfer of ownership follows a two-step process:

AGREEMENT OF SALE                                     + REGISTRATION                              = TRANSFER OF OWNERSHIP

(the “underlying agreement”)

Our Courts are often confronted with the question of whether transfer of ownership in immovable property has occurred, especially in instances where the underlying agreement is defective. The Supreme Court of Appeal recently confirmed in Legator McKenna v Shea and Others 2010 (1) SA 35 (SCA) that the true determining factor to consider is whether a valid “real agreement” existed between the parties. The term “real agreement” is based on the abstract theory which requires one to look at the intention of the seller to give transfer of ownership together with the intention of the purchaser to become the owner of the property.

In the Legator case, a curator bonis of a person who suffered brain injuries, entered into an agreement for the sale of immovable property prior to being issued with the requisite Masters’ letters of executorship. For this reason the underlying agreement (agreement of sale/contract) was clearly invalid, however, before transfer of the property had been effected the curator bonis received the necessary letters of curatorship. Consequently, by the time the “real agreement” was entered into, the curator bonis was properly authorised. Since a valid “real agreement” existed, transfer of ownership did take place and the property could not be vindicated from the purchaser.

Similarly, in Kriel v Terblanche NO en Andere 2002 (6) SA 132 (NC), the trustees who entered into the agreement of sale had not yet been properly appointed by the Master. When they were later duly appointed and the transfer registered in the deeds office, the Court found that the parties had the intention to transfer ownership in the property and that a valid “real agreement” existed.

In Nedbank Limited v Mendelow NO (686/12) [2013] ZASCA 98 (5 September 2013) Mrs Valente was the owner of certain immovable property. A week before Mrs Valente passed away, one of her son’s, Riccardo, forged her signature on a deed of sale in terms whereof her property was sold to a company, U Valente Africa (Pty) Ltd (subsequently in liquidation and in which Mrs Valente and her sons Riccardo and Evan were directors). The executors of the estate applied to court for an order setting aside the transfer, alleging that the sale and subsequent transfer to the company, including the registration of the bond in favour of Nedbank had been vitiated by fraud as a result of the actions of Riccardo. Here the Court held that transfer of ownership could not have passed to the company because it was effected pursuant to fraud. Our system of deeds registration is a negative one: it does not guarantee the title that appears in the deeds register. Registration is intended to protect the real rights of those persons in whose names such rights are registered in a deeds registry. It is clear that there was no real intention to transfer ownership by the real owner of the property and because there was no valid “real agreement”, the subsequent registration in the deeds office had no effect.

One must keep in mind that the “real agreement” based on the abstract theory is only of importance once transactions have already been registered in the deeds registry. Unfortunately, more often than not, matters are referred to courts for adjudication long before they are registered in a deeds office. In such instances where disputes arise in connection with the underlying agreement itself, our courts are bound to decide purely on what is written in the document itself. The admissibility of extrinsic evidence is prohibited by the “parol evidence rule” as was confirmed by the Supreme Court of Appeal as far back as 1914 in Lowrey v Steedman AD 532: “When a contract has been reduced to writing, the writing is, in general regarded as the exclusive memorial of the transaction and in a suit between the parties no evidence to prove its terms may be given save the document or secondary evidence of its contents, nor may the contents of such document be contradicted, altered, added to or varied by parol evidence.” This shows the importance of ensuring that a proper agreement, with accurately drafted clauses are in place, firstly to ensure its compliance with the provisions of section 2(1) of the Act and further to make sure that the true agreement between the parties are easily interpreted from what is written down in the document itself.

Our Courts often distinguish between the essential terms (essentialia) and the material terms of an agreement. Both of which can cause great adversities if not drafted with sufficient accuracy and detail to give effect to the true intention of the parties.

Essential terms of an agreement refers to the parties, the price and the property concerned, whereas the material terms can include any terms that are significant or of substance to the parties in order for them to reach consensus. Below follows a short discussion of some of these terms and the importance of clear and meticulous drafting thereof in agreements of sale:

Description of the Price
The purchase price of the property, if not fixed, should at the very least be ascertainable, either by the way it is described in the agreement or by means of applying a formula of some sort. In Dales v Rheeder and Others (AR 587/10) [2011] ZAKZPHC 13 (1 April 2011) the Court accepted the following price description as sufficient: “The purchase price will be approximately one-quarter of the price paid by you for the full piece of land that will exclude the pan-handle which Pierre de Villiers wishes to keep. The price for the portion that I wish to acquire will be approximately R150 000,00 (One hundred and fifty thousand Rand).” The seemingly vague purchase price did not render the agreement invalid as in this case the purchase price was still ascertainable when taking into account the parameters provided in the description.

Description of the Property
The description of the property being sold need not be identical to the description you’d find it in the title deed of the property, however, it must be described in such a way that one is able to identify the property without having to resort to any additional evidence or explanations apart from what is written down. Very recently in Kingswood Golf Estate (Pty) Ltd v Witts-Hewinson & another (223/13) [2013] ZASCA 187 (29 November 2013) the written agreement of sale failed to describe a golf estate clubhouse which was to be built some time in the future. Instead, the purchaser attempted to rely on a description given by the developer/seller in a newsletter that circulated after the agreement was already signed. The Court held that the subsequent newsletter could not bind the developer contractually as, amongst other reasons, it was not signed by the parties and could not be said to have been incorporated into the terms of the agreement. One should therefore take caution when contracting to purchase in such estates, and ensure that the “how and when” of building works still to be completed are adequately set out.

Manner of Payment of the Purchase Price
Many agreements have been held void by reasons of uncertainty of the manner in which the purchase price is payable. Often agreements of sale contain multiple ways of paying the purchase price and the parties are left to choose from those options provided. In Nelson Mandela Bay Metropolitan Municipaltiy v Fourie and Others (2958/09) [2010] ZAECPEHC 48 it was held that by stipulating two options for payment of the purchase price it is evident that the parties intended that the method of payment be an essential term, or at least a material term of the agreement and consequently such term had to be recorded in writing. It therefore meant that one of the two options had to be chosen by deleting the other one. In this case none were deleted, following that it was uncertain which agreement the parties had reached regarding the manner in which the purchase price had to be paid. It could not be said that the parties reached consensus as it wasn’t evident from the contract itself. The agreement was rendered invalid.

Time for Payment of the Purchase Price
In Slabbert and Others v Slabbert and others (A55/2011) [2011] ZAFSHC 165 the time and manner of payment of the purchase price were not mentioned in the agreement, instead it merely stated that the purchase price of R120 000,00 will be payable “as agreed”. The Court held that the time and manner of payment constitutes a material term of the agreement and because the oral agreement was not put into writing, the agreement was clearly void by virtue of its vagueness.

Signature of Agreements
In terms of the Act an agreement of sale must be signed by both parties to the agreement alternatively their agents acting on their written authority. If this requirement is not complied with, the agreement will be void. The Act does not state where on the document the parties’ signatures must appear, nor does it require the agreement to be signed by any witnesses. Over the years we have however adopted certain practices. In a standard agreement of sale the parties, together with witnesses, will normally sign at the end of the document. It must be noted that whenever the seller is married in community of property, the Matrimonial Property Act requires the spouse of such seller (if not already a party to the agreement) to consent to the sale in writing. Such written consent must be attested to by two competent witnesses.

Having regard to the Act, it is evident that the purpose of the Act is to avoid uncertainty and disputes regarding the content of contracts for the sale of immovable property. It is therefore trite that all the material terms of the sale must be in writing. The material terms not only refer to the essential terms (parties, price and property) but also includes all those other terms which are crucial for ensuring a complete and comprehensive agreement. In Roachbreakers and Parts (Pty) Ltd v Rolag Property Trading (Pty) Ltd (498/08) [2009] ZASCA 102 it was held that “For an agreement of sale to be valid its terms must be in writing and signed. That means that every term that is conceived by the parties to from part of the sale must comply with the prescribed statutory formalities. If any particular term does not so comply, the term itself is void and so is the sale as a whole…

May 27, 2014

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