Most developers of security estates tend to include a condition in the agreement of sale when selling vacant land, that the new owner should commence and/or complete building operations within a specific period of time. The intention is obvious – the developer wishes to complete the development as soon as possible and in addition thereto, the more houses being built, the better the sales of the land still owned by the developer.
The aforesaid usually stipulates that, should the new owner not comply with the condition, the property may be re-transferred, at the developer’s option, to the developer against payment of the initial purchase price. Such provision is referred to as a reversionary right in favour of the developer.
A reversionary right is defined as a condition which provides that, on the happening of a prescribed event, ownership of a property will revert to the previous owner, or if so expressed, to the heirs of such previous owner, if since deceased, or their successors in title.
Reversionary rights can be classified into two types, namely, a reversionary right binding successors in title and a reversionary right not binding successors in title.
Reversionary right not binding successors in title
If a title deed contains a reversionary right binding only the transferee, such right is a personal right. The obligation to act in a prescribed manner is placed on the transferee only, which obligation does not rest upon subsequent owners of property. Such reversionary right will automatically lapse on the death of the owner of the property.
In terms of Section 63 of the Deeds Registries Act 47 of 1937 (hereinafter “the Act”) a personal right may only be registered if it is, in the Registrar of Deeds’ opinion, complementary or otherwise ancillary to a registrable condition. Reversionary rights not binding successors in title are deemed ancillary to registrable conditions and therefore registrable. However, registration of a personal right does not automatically transform such right into a real right.
Reversionary right binding successors in title
There is no prohibition against registering a reversionary right binding successors in title, as such reversionary right constitute a real right.
Once the condition which triggers the reversionary right, has not been complied with, the holder of the reversionary right could exercise or waive his right. In contrast thereto, if the condition has been fulfilled, the Registrar of Deeds should be satisfied thereof upon the subsequent transfer of the property. The owner should then, simultaneously with the transfer of the property, apply for the cancellation of the lapsed/fulfilled title deed condition in terms of Section 68(1) of the Act, accompanied by a consent from the holder of the reversionary right.
Reversionary right and mortgage bonds
Land held subject to a reversionary right binding successors in title, can be mortgaged by either making the mortgage bond subject to a reversionary right, or have the holder thereof waive preference of the reversionary right in favour of the holder of the mortgage bond to be registered.
Prior to 2011, the holder of a reversionary right, be it binding successors in title or not, had the choice to either waive preference as provided for in Regulation 41(7) of the Act or to consent to the registration of a mortgage bond as is required in Section 53(2) of the Act. It was prevalent amongst holders of reversionary rights to provide the consent as provided for in Section 53(2) of the Act, as opposed to waiving preference of his reversionary right. After registration of the Section 53(2) consent, the holder of the reversionary right then provided the mortgagee with a waiver of preference of the reversionary right. This waiver of preference was only applicable inter partes, i.e. between the developer and the mortgagee, as it was not registered at the Deeds Office. The effect being that the mortgage bond was registered subject to the holder’s reversionary right.
A bond which is passed subject to a reversionary right will have the effect that the reversionary right will rank prior to the bond. Hence, the mortgagee, usually a bank, runs the risk of losing the security afforded by the mortgage bond. Naturally, this may be detrimental to the mortgagee. By way of example, A purchases a vacant stand from B, a developer. A condition of the agreement of sale (and the title deed) is that A or his successors in title should commence building operations on the land within 12 months from the date of the first transfer from B and complete such building operations within 12 months thereafter, failing which, at B’s option the property shall revert to B at the original purchase price. Simultaneously with the transfer, A registers a mortgage bond in favour of C, the bank, to finance the construction. This bond is subject to the reversionary in favour of B. A commences construction in time, but fails to complete the dwelling in time. B now has the right to enforce its reversionary right by demanding transfer of the property (with its improvements). C will not be able to avail itself to the land in order to recover the outstanding debt from A, thus losing the security on which it relied. However, if B had waived preference of its reversionary right in favour of C, C would have had preference and retained its security.
At the Registrars’ Conference of 2011, the Registrars sought to create a uniform practice and came to the conclusion (RCR 27/2011) that Section 53(2) should only apply to reversionary rights not binding successors in title. Thus, where a reversionary right binds successors in title, the mortgagee can insist that such a reversionary right is waived in favour of the mortgagee, as approval of finance can be granted conditional to the said waiver. This will force developers to waive their reversionary rights to ensure that they sell land in their development.
The holder of a reversionary right should waive his right in accordance with Regulation 41(7) of the Act. This regulation provides that the waiver should be registered notarially. Alternatively, if the mortgage bond has not yet been registered, the waiver should be included in the mortgage bond document itself together with a power of attorney authorising such waiver to be effected.
It is evident from the above that banks and attorneys acting on their behalf should ensure that the holder of a reversionary right waives preference in favour of the bank to ensure that their mortgage bond ranks prior to such a reversionary right. Failure to do so may have severe consequences and renders the security of the mortgagee at the mercy of the reversionary right holder.
Rudy R Haywood