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When do personal rights become real?

Author: Hopewell SathekgeDirector


Personal rights in terms of long-term lease agreements came under the spotlight in the recent Constitutional Court judgement in University of Johannesburg v Auckland Park Theological Seminary and Another [2021] ZACC 13 – a judgement which may have significant implications for long-term leaseholders and commercial banks holding those leases as security against mortgage bonds.



Background

A personal right stem from a relationship between two people, the one having an obligation for performance in favour of the other. On the other hand, a real right constitutes a relationship between a person and a legal object over which they have a right. In simple terms, a real right is a right that a person has to an object, whereas a personal right is a right that a person has against another. A simple solution to distinguishing between personal and real rights is that only real rights are capable of registration in the Deeds Office. In terms of section 63(1) of the Deeds Registries Act 47 of 1937, no deed or condition creating or embodying personal rights, nor any condition that does not restrict the exercise of any right of ownership in land, shall be registrable.


With regards to a lease agreement, a limited real right only flows when a Notarial Deed of Lease is registered which is capable of being sold (ceded) or mortgaged, meaning that the rights in the lease are immovable property. The basis of this right, however, is seen in relation to the right in the underlying lease agreement. As such, it is important to differentiate between a personal right and a real right, and to understand the interplay between the two. When rights in a lease agreement, which become real rights upon registration of a Notarial Deed of Lease, are declared personal – are there consequences in relation to the registered real rights?


Intention matters

Beyond determining the registrability of rights in the Deeds Office, the intention of the parties will also be relevant in deciding whether a right is real or personal. In the matter Cape Explosive Works Ltd v Denel (Pty) Ltd [2001] 3 All SA 321 (A), the Supreme Court of Appeal (SCA) made the point that “the intention of the person who creates the real right must be to bind not only the present owner of the land, but also his successors in title…”. Intention is particularly important when it comes to a lease agreement that is then notarised and registered.


A registered owner of land may enter into a lease agreement with another person to lease premises, which personal rights flow from the agreement. Thereafter, the parties may notarise the lease agreement and have it registered. On registration, the personal rights in terms of the lease agreement convert to real rights by operation of the law. In terms of the Deeds Registries Act, immovable property is defined as “any registered lease of land which, when entered into, was for a period of not less than ten years or for the natural life of the lessee or any other person mentioned in the lease”. By its nature, immovable property is capable of being sold or mortgaged. That being so, parties who notarise and register a lease agreement that they have entered into clearly have the intention of creating immovable property that is capable of being sold or mortgaged.


The matter at hand

The importance of distinguishing between real and personal rights arises when rights in a long-term lease are considered personal in nature and incapable of cession without having regard to the registered real rights.


On 11 June 2021, the Constitutional Court delivered judgment in the matter University of Johannesburg v Auckland Park Theological Seminary and Another [2021] ZACC 13, ruling that rights in a long-term lease can be personal in nature and incapable of cession.


The issue in this matter related to a written long-term lease agreement concluded in December 1996 between what was then Rand Afrikaans University as the landlord and Auckland Park Theological Seminary as the tenant, over Portion 1 of Erf 809 Auckland Park for a period of 30 years. What is to be noted, which the Constitutional Court did not focus on, is that the lease agreement was notarised and registered against the Title Deed of the property. At the crux of the matter, which the Constitutional Court did focus on, is that the tenant leased the premises to establish a theological college.


Some 15 years later, by when the tenant had not yet established a theological college, the rights in the lease agreement, unbeknown to the landlord, were ceded by the tenant to a third party by means of a written cession which was then registered in the Johannesburg Deeds Office by means of a Notarial Deed of Cession. When the landlord came to know of the cession, it took the view that the rights in the lease agreement were personal to the tenant and as such could not be ceded to anyone else. The landlord took the stance that when the tenant purported to cede its rights to a third party it had repudiated the lease agreement, and the landlord accordingly cancelled the lease agreement.


The tenant and the third party disputed the landlord’s cancellation of the lease agreement. In response, the landlord launched an application in the High Court for orders to cancel registration of the Notarial Deed of Lease and evict both the tenant and the third party from the premises. The High Court found in favour of the landlord to the effect that the relationship between the landlord and tenant was personal in nature and so the rights could not be ceded, and ordered cancellation of the agreement. The tenant and the third party were ordered to vacate the premises and the Registrar of the Johannesburg Deeds Office was ordered to cancel the Notarial Deed of Lease.


Dissatisfied, the tenant appealed the High Court orders to a full bench, which dismissed the appeal. The tenant and third party then launched an appeal to the SCA.


The appeal to the SCA was upheld in favour of the tenant and the orders of the High Court were replaced with an order dismissing the landlord’s claim. The reason given by the SCA for dismissing the landlord’s claim was that all contractual rights may be ceded unless their nature is personal, or unless a contract specifies that the rights may not be ceded. The SCA held that there was nothing in the lease agreement that indicated that the tenant’s rights were not intended to be ceded. As a result of the SCA’s findings, the landlord applied to the Constitutional Court for leave to appeal.


In the Constitutional Court, the legal issue focused on the nature of the rights held by the tenant, which, when they are personal, may not be ceded. In arriving at its conclusion that rights in a long-term lease can be personal in nature and incapable of cession, the Constitutional Court held that the determination of whether rights in a contract are personal is always a matter of contractual interpretation. “This means that parties will invariably have to adduce evidence to establish the context and purpose of the relevant contractual provisions.”


The Constitutional Court accepted the landlord’s evidence that the parties intended that the landlord’s premises would be used by the tenant for its theological college. The Constitutional Court then held that “it could never have been intended by the parties at the time of conclusion of the lease agreement that [the tenant] could simply cede its rights to use the property to another in exchange for profit”. On that basis, the Constitutional Court upheld the landlord’s appeal and ordered that the SCA’s order in favour of the tenant be set aside.


Commentary

It may be that the parties never intended at the time of concluding the lease agreement that the tenant could cede its right to use the property to another. However, the moment that the Notarial Deed of Lease was registered, the intention and the nature of the rights shifted. The Constitutional Court’s reasoning in deciding that the nature of the rights in the underlying lease agreement were personal cannot be faulted. The fault lies in the fact that the Justices did not consider at all the fact that once the personal rights in the lease agreement were registered, by means of a Notarial Deed of Lease, the nature of the rights converted to real rights by operation of the law. The conversion established the long-term lease as immovable property, to which real rights attach.


A great deal of registered long-term leases, such as those in the Waterfall area where land is occupied by means of 99-year leases, are mortgaged in favour of commercial banks on the strength that the leases are immovable property capable of being sold. As additional security, some banks would insist on step-in rights that enable them to take over the lease should the borrower be in default. Having regard to the latest Constitutional Court judgement, there is nothing preventing anyone from approaching the High Court to prove that their registered long-term lease is personal and as such incapable of being sold. If such a right may not be sold, step-in rights will not be of any force nor may banks be able to perfect their security in the event of a breach.


Clarity will need to be sought to ensure that registered securities held by commercial banks are not in jeopardy, particularly with matters having similar facts to those of this recent Constitutional Court judgment.

 

Lawtons Africa is a South African law firm. With roots that grew out of seeds sown in down-town Johannesburg in 1892, our history features various changes and different names. Our team of lawyers, including directors, consultants, associates and candidate attorneys is highly qualified, market-recognised and skilled. For further information, visit www.lawtonsafrica.com

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