Banks beware: Reinstatement of mortgage loan agreements

July 1st, 2016
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Nkata v FirstRand Bank Ltd and Others (The Socio-Economic Rights Institute of South Africa as Amicus Curiae) (CC) (unreported case no CCT73/2015, 21-4-2016) (Moseneke DCJ)

By Gian Louw

The Constitutional Court (CC) recently delivered a judgment, which may hold dire consequences for banks and other credit providers, whose contractual dealings with its clients are governed by the National Credit Act 34 of 2005. At the core of the litigation between Mrs Nkata (Nkata) and FirstRand Bank Limited (the bank) was the validity of Nkata’s reinstatement of the mortgage loan agreement (the agreement) between the parties. Rogers J in the High Court held that the agreement had been reinstated (Nkata v FirstRand Bank Ltd and Others 2014 (2) SA 412 (WCC)). The Supreme Court of Appeal (SCA) overturned the High Court’s order (FirstRand Bank Ltd v Nkata [2015] 2 All SA 264 (SCA)). Different views were expressed by the justices of the CC. The view of the majority, namely that Nkata’s reinstatement was valid, is discussed in this case note.

Facts

Nkata purchased an undeveloped property in 2005. She developed it and moved into the house with her children in 2007. The purchase was financed by the bank subject to mortgage bonds being registered over the property.

In 2010 Nkata fell in arrears with her repayments to the bank. Default judgment was granted in September 2010 for the accelerated debt of almost R 1,5 million. The bank caused a writ of execution against the property to be issued. The property was attached and to be sold in execution in December 2010.

Nkata approached the High Court on an urgent basis for an order to rescind the judgment in November 2010. The parties settled the matter in accordance with a standard Quicksell agreement. This essentially entailed that the sale in execution would not proceed on condition that Nkata paid the arrears with costs on a monthly basis. The costs included wasted costs of the sale in execution together with costs of the application as taxed or agreed.

On 8 March 2011 Nkata paid all arrear amounts but fell into arrears again the following month and on 24 April 2013 the bank sold the property at a public auction. The transfer to the new owner was, however, suspended due to a fresh rescission application instituted by Nkata.

The CC’s decision

The first question was whether Nkata fulfilled the requirements of s 129(3).

Section 129(3) requires the consumer to pay three items in order to reinstate a credit agreement –

  • all overdue amounts (arrears);
  • the credit provider’s permitted default charges; and
  • the credit provider’s reasonable costs of enforcing the agreement up to reinstatement (enforcement costs).

When Nkata paid the arrears she did not pay the enforcement costs, which the bank had debited to her mortgage loan agreement in respect of the cancellation of the sale in execution and attorneys and counsel’s fees for the rescission application. The bank did not notify Nkata or demand payment from her of the enforcement costs. The CC found that the enforcement costs were not due and payable when Nkata paid the arrears. It held that enforcement costs only become due and payable when the costs are ‘reasonable, agreed or taxed and on due notice to the consumer’ (para 80). A consumer cannot be expected to take proactive steps to ascertain the exact enforcement costs before reinstatement can be effected nor to initiate taxation or reach agreement on the quantification of the enforcement costs. To the contrary, the credit provider has to take the appropriate steps to recover its enforcement costs.

The CC held that because the enforcement costs have not been taxed or agreed, it was not reasonable and thus not due and payable. Under those circumstances Nkata had to do no more than to pay the arrears to reinstate the agreement.

The second question was whether s 129(4) precluded reinstatement. The CC held that because the proceeds of the sale were not realised before Nkata paid the arrears she was entitled to reinstate the agreement, which the bank had not cancelled. Like the High Court, the CC found on the facts that neither the default judgment nor the writ of execution constituted an attachment order as envisaged by s 129(4). The CC further agreed with the High Court that ‘the barrier to a revival of the credit agreement applies only when proceeds of a sale in execution have been realised’ (para 131).

It is also noteworthy that this judgment settled the debate on whether a consumer is required to give notice of reinstatement to a credit provider. The CC held that: ‘The reinstatement occurs by operation of law’ (para 105), namely, reinstatement is triggered by payment of the required amounts. Notice is not required.

The CC issued a declaration in terms of which –

  • the agreement was lawfully reinstated;
  • the default judgment and writ of execution had no legal force from 8 March 2011;
  • the sale of the property was set aside; and
  • transfer of the property to the purchaser was precluded.

The bank was ordered to pay Nkata’s costs in the High Court, the SCA and the CC.

Conclusion

Banks will be well-advised to, before debiting clients’ accounts with enforcement costs, notify clients thereof and attempt to reach agreement in respect thereof. If enforcement costs are not agreed it should be taxed otherwise the bank bears the risk that the consumer may reinstate the credit agreement without making payment of the enforcement costs because the costs are not due and payable. Banks should be aware that a consumer may, under certain circumstances, reinstate a credit agreement after judgment, even up to such a late stage as after a sale in execution of the bonded property has taken place, provided the proceeds of the sale have not yet been realised.

 

 

Gian Louw Post Grad Dip Labour Law LLM (UJ) is an advocate at the Johannesburg Bar.

 

This article was first published in De Rebus in 2016 (July) DR 52.