INSTALMENT SALE FORFEITURE CLAUSE UNFAIR

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1 INSTALMENT SALE FORFEITURE CLAUSE UNFAIR Botha and Another v Rich N.O. and Others (CCT 89/13) [2014] ZACC 11 (17 April 2014) This is an important judgment in which the Constitutional Court held that where a purchaser has paid more than 50% of the purchase price under an instalment sale, she may claim transfer of the land as provided for in the Alienation of Land Act by registering a bond in favour of the seller for the balance, despite being in arrears with instalments. The purchaser must however make up the arrears on transfer. In addition, a forfeiture clause that entitles the seller to retain all amounts paid thus far was, in the circumstances, unfair and therefore unenforceable. The Judgment can be viewed here. FACTS In November 2003, Ms Botha entered into an instalment sale agreement with the trustees of the JJW Hendricks Trust ( the Trust ) for the purchase of immovable property. Towards the end of 2007, after having paid more than half of the purchase price, she began to default in her monthly instalments. The agreement provided, amongst other things, that should the purchaser breach the provisions of the agreement, the seller would be entitled to cancel the agreement and, in that event, the purchaser would forfeit all payments made thus far ( the forfeiture clause ). In April 2008, the Trust successfully initiated proceedings for cancellation of the agreement and for the eviction of Ms Botha from the property. In May 2008, however, Ms Botha lodged an appeal against the judgment and obtained an interdict that entitled her to resume occupation of the property. She also sent a written demand for transfer of the property to her from the Trust in terms of section 27 of the Alienation of Land Act 68 of 1981 ('the ALA'). (Section 27 of the ALA gives purchasers the right to demand transfer of property into their names once they have paid more than half of the purchase price.) The letter of demand did not, however, offer payment of the arrear amounts and the interest that accrued in respect thereof, nor did it offer the arrears that have become payable in respect of municipal rates and taxes and service fees. Judgment, which was subsequently abandoned by the Trust, was granted against Ms Botha. 1 // 5 The Trust thereafter instituted motion proceedings in the High Court for an order cancelling the agreement, alternatively declaring it cancelled. Ms Botha made a counterapplication to compel the Trust to transfer the property to her. The High Court dismissed the counter-application and held in favour of the Trust.

2 Ms Botha then applied for leave to appeal to the Constitutional Court. The application was dismissed. Following a successful petition, the Supreme Court of Appeal remitted the matter to the Full Bench of the High Court for determination. In March 2013, the Full Bench dismissed Ms Botha s appeal and held that her counter-application in the High Court had no merit. She then appealed to the Constitutional Court. The law Sections 27 and 28 of the Alienation of Land Act 68 of 1981 ( the ALA ) reads as follows: (1) Any purchaser who in terms of a deed of alienation has undertaken to pay the purchase price of land in specified instalments over a period in the future and who has paid to the seller in such instalments not less than 50 per cent of the purchase price, shall, if the land is registrable, be entitled to demand from the seller transfer of the land on condition that simultaneously with the registration of the transfer there shall be registered in favour of the seller a first mortgage bond over the land to secure the balance of the purchase price and interest in terms of the deed of alienation. (2) (3) If for whatever reason the seller is unable, fails or refuses to tender transfer within three months of the receipt of the demand referred to in subsection (1), the purchaser may cancel the relevant deed of alienation, in which case the parties are entitled to the relief provided for in section 28(1): Provided that nothing contained in this subsection shall detract from any additional claim for damages which the purchaser may have. (Our emphasis) Issue before the court The primary issue was whether, under section 27(1), the Trustees were obliged to register the property in Ms Botha s name against registration of a mortgage bond in their favour. In the alternative the question was whether enforcement of the forfeiture clause was unreasonable, unfair and unconstitutional in the present circumstances where more than 50% of the purchase price has been paid, and if so, whether Ms Botha was entitled to restitution of the money paid. HELD Public policy, background and purpose of section 27 (ALA) Public policy requires that parties should in general comply with contractual obligations that have been freely and voluntarily undertaken. Statutory interpretation under our constitutional order also requires that all statutes must be interpreted through the prism of the Bill of Rights. Accordingly, when section 27(1) of the ALA is interpreted, a court must promote the spirit, purport and objects of the Bill of Rights. 2 // 5

3 Effect of section 27(1) Section 27(1) seeks to protect the rights of a purchaser who has paid at least 50% of the purchase price. Section 27(1) should however not be read in isolation. Section 27(3) provides further protection in that the purchaser may cancel the deed of alienation in terms of section 27(3) and recover from the seller, among other things, that which she has paid plus interest on any payment made (in terms of section 28(1)). Cancellation is however not the purchaser s only remedy. At common law a contracting party is entitled to specific performance or cancellation in respect of any contractual right, and section 27(1) does not detract from this. Section 27(1) clarifies and adds significant content to the right of cancellation by (i) inserting circumstances in which the purchaser s right to cancel arises (i.e., 3 months after the receipt of the demand by the seller), which adds urgency to the seller s obligation to transfer; (ii) providing that in case of cancellation, the parties are entitled to the relief provided for in section 28(1); and (iii), highlighting the right to cancellation had section 27(3) not been enacted. (It would otherwise not be obvious that cancellation arises in this context at all. This was because, at common law, cancellation is available as a remedy only where the breach is material. Whether a particular breach is material often proves to be a difficult and contested question. Section 27(3) answers this aspect, plainly for the purchaser s benefit.) Section 27(3) thus serves 3 important purposes relating to the exercise of the purchaser s right to cancel, but does not limit the purchaser s remedies to cancellation, and cannot be interpreted to exclude specific performance. Rather, it must be interpreted as adding to the purchaser s arsenal of remedies, without taking anything out of it. Ms Botha elected to invoke section 27(1) and indeed persisted with her demand for the transfer of the property. The Full Court was accordingly incorrect in holding that section 27(1) did not afford her that remedy, i.e. specific performance. Was Ms Botha entitled to specific performance even though she was in arrears? The fact that Ms Botha was in arrears at the time of demand, and had not rectified her breach before the demand, clashes with the accepted principle of our law that where a contract creates reciprocal obligations, own performance or tender of own performance by a claimant is a requirement for the enforceability of her claim for counter-performance by the other party. This is an instance of the principle of 3 // 5

4 reciprocity. The other side of the coin is that the party from whom performance is claimed may raise the failure of counter-performance as a defence, the defence being the well known exception of a non-performed contract (exceptio non adimpleti contractus). As such, on principle, the trustees could raise the exceptio non adimpleti contractus a defence to Ms Botha s demand for transfer as the provisions of the ALA does not allow the purchaser to obtain rights in the property unless she first purges her arrears. To the extent that the rigid application of the principle of reciprocity may in particular circumstances lead to injustice, our law of contract, based as it is on the principle of good faith, contains the necessary flexibility to ensure fairness - the concepts of justice, reasonableness and fairness historically constitutes good faith in contract. The present facts showed that Ms Botha s demand in terms of section 27(1) was made with the statutorily tendered condition that, simultaneously with the registration of the transfer, there would be registration in favour of the Trust of a first mortgage bond over the land to secure the balance of the purchase price plus interest thereon. This would not cure the breaches of arrear payments, but it would have appreciable ameliorative effects for the Trust. In the context though, it had to be noted that Ms Botha did make a written tender for payment of the balance of the purchase price with interest and the tender was on condition that the balance (including the outstanding municipal rates, taxes and service fees) would be paid on the date of registration of the property in her name. However, to deprive Ms Botha of the opportunity to have the property transferred to her under section 27(1) and in the process cure her breach in regard to the arrears, would be a disproportionate sanction in relation to the considerable portion of the purchase price she has already paid and would thus be unfair. It would however be equally disproportionate (from the Trust s point of view) to allow registration of transfer, without making that registration conditional upon payment of the arrears and the outstanding amounts levied in municipal rates, taxes and service fees. Accordingly, the court would include such provision in its order, which would constitute an equitable exercise of the discretion a court has to avoid undue hardship to the Trustees. Forfeiture clause and cancellation 4 // 5 A further manifestation of the principle of reciprocity is that where a contract has

5 been lawfully cancelled, mutual obligations arise to restore the respective performances. Relying on the forfeiture clause in the agreement, the Trust made no tender of repayment of what it had received as it relied on the forfeiture clause. Ms Botha argued that the forfeiture clause was unfair and unconstitutional, alternatively that it is a disproportionate penalty that falls to be equitably reduced in terms of the Conventional Penalties Act 15 of 1962 ( the CPA ). The CPA provides at section 3 that (i)f upon the hearing of a claim for a penalty, it appears to the court that such penalty is out of proportion to the prejudice suffered by the creditor by reason of the act or omission in respect of which the penalty was stipulated, the court may reduce the penalty Provided that in determining the extent of such prejudice the court shall take into consideration not only the creditor s proprietary interest, but every other rightful interest which may be affected by the act or omission in question. For the same reasons mentioned above, granting cancellation and therefore, in this case, forfeiture in circumstances where more than half of the purchase price has already been paid would be a disproportionate penalty for the breach. The forfeiture clause can therefore not be upheld, were the agreement to be cancelled as argued by the Trust. The Court accordingly held that she was entitled to transfer, having tendered payment of the balance owing by way fo a mortgage bond registered in favour of the seller, and provided that all arrears were brought up to date on or before transfer. 3 // 4 CONTACT US CAPE TOWN Tel: SOMERSET MALL Tel: ILLOVO Tel: CLAREMONT Tel: TABLE VIEW Tel: CENTURION Tel: // 5 FISH HOEK Tel: TYGERVALLEY Tel: BEDFORDVIEW Tel: // // 37