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This article is important to you if you are about to lend money to (or do business with) someone who says “don’t worry, I’m good for it, I own a valuable house.” Or perhaps you have a claim against a recalcitrant debtor and have finally managed to take judgment so you can sell the debtor’s house. Maybe you, or a friend or relative, live in a house threatened with sale in execution. The “owned by a trust” angle (more on that in the article) could also be relevant to you if you are wondering whether to put a residential property into your own name or into a trust (or perhaps a company).

We discuss, with reference to a recent Supreme Court of Appeal decision, why taking judgment against a debtor doesn’t automatically clear you to sell it in execution. Even if the house is owned by a trust or a company.

“A court shall not authorise execution against immovable property which is the primary residence of a judgment debtor unless the court having considered all relevant factors, considers that execution against such property is warranted” (High Court Rules)

Selling a house in execution is not as simple as getting judgment and sending the Sheriff of the Court off to arrange a sale.

This article is important to you if –

• You are about to lend money to, or do business with, an individual (or a trust or company) that you feel comfortable dealing with because they own a substantial asset in the form of a house.
• You are trying to enforce a judgment against a recalcitrant debtor by selling the debtor’s house.
• You live in a house threatened with sale in execution (or are trying to help a friend or relative in that position).
• The “owned by a trust” angle (more on that below) will also be relevant to you if you are wondering whether to buy a residential property in your own name or in a trust or company.

The “judicial oversight” rule means delay and risk for the creditor

High Court Rules provide that “A court shall not authorise execution against immovable property which is the primary residence of a judgment debtor unless the court having considered all relevant factors, considers that execution against such property is warranted.”

This is to give effect to the right to have access to adequate housing which is enshrined in section 26 of our Constitution, and the court will look at whether the property is the primary residence of the debtor, at whether there may be an alternative means of satisfying the judgment debt, and at a host of other relevant factors.

Bottom line is that the court will not order an execution sale if it concludes that execution isn’t warranted or will deprive the debtor of adequate housing. Even a successful application for execution will involve cost and delay, whilst an unsuccessful one will be a body blow to the creditor’s prospects of recovering the debt.

That’s clearly a factor to bear in mind when lending to, or transacting with, an individual. But what if the house is owned by a trust or company?

The case of the trust-owned wine farm

• A bank loaned R8.5m to a trust operating as a wine farm, wine cellar, wine merchant and restaurateur. The loans were secured by mortgage bonds over the property. Trustees, trust beneficiaries and trust employees occupied the house and cottages.
• When the trust failed to repay the loans, the bank took judgment against it and applied for an order to sell the property in execution, an application vigorously opposed by the trustees.
• The High Court held that the judicial oversight procedure only applies when a property is the debtor’s primary residence. In other words, it wouldn’t apply in a case such as this where, although the debtor is a trust, the actual occupants are individuals.
• Not so, held the Supreme Court of Appeal on appeal: “Due regard must be had to the impact that the sale in execution is likely to have on vulnerable and poor beneficiaries who are occupying the immovable property owned by the judgment debtor, who are at risk of losing their only homes.” Moreover, the fact that the farm was used commercially did not deprive the occupants of constitutional protection.
• “Judicial oversight” was accordingly necessary despite the properties being owned by a trust and not by the occupants themselves. Note that there are indications in the judgment that although this case concerns trust-owned property, the oversight principle is likely to apply equally to the occupants of company-owned properties.
• On the facts however, the trustees had failed to show that “as a result of indigence, the beneficiaries will be left vulnerable to homelessness if the farm in question is sold in execution. On the contrary, the farm is valued at between R35 million and R40 million, and the reserve price was fixed at a minimum of R21 million; the ability to acquire alternative accommodation is unquestionable.” Also relevant – at one stage of negotiations, the trustees had actually consented to the judgment and to the property being declared executable.

The practical result is a win for the bank and the farm can now be sold in execution. But the principle remains – don’t assume that lending money to, or transacting with, a home-owning trust or company is a safe bet because of the value in the property. It carries the same risk as if the property were owned and occupied by an individual debtor.

Property can provide much more than just a roof over your head – it can also be an excellent investment for you, your family, and your business. But it’s becoming increasingly expensive, and for some first-time buyers the only way to bring it within reach is to pool resources and buy jointly with a friend or partner.

Joint ownership will also appeal to many couples and business partners as a practical way of sharing in a property’s costs and upside potential. But beware, it has its risks.

We discuss the two types of co-ownership and the risks inherent in any form of joint ownership before discussing how to lessen these risks in the context of a recent High Court fight between “romantic partners” who split up then came to blows over their 50/50 owned property.

“Co-ownership is the mother of disputes” (old Roman law maxim)

There can be big advantages to buying property jointly but be aware of the risks and take steps to lessen them before you put pen to paper.

The problem comes if there is a falling-out with your co-owner. Perhaps you come to blows on your usage of the property, or on the incurring of expenses, or on whether it is time to sell, or perhaps you are splitting from each other entirely. That could be a business partnership terminating, or a marriage ending in divorce, or (as in the case we discuss below) a failed romantic relationship. Our courts must regularly resolve bitter joint-ownership disputes between ex-spouses, ex-friends, ex-colleagues, siblings, and close relatives – none of whom dreamed they might ever come to blows when they first hatched plans to buy property jointly.

If a dispute does arise, how will you resolve it? And if you split up, who keeps the property? Or do you sell it jointly, and if so how, and when? How will the bond and other property debts be settled?

The good news is that by and large the risk of dispute can be reduced with a bit of foresight and planning. Preferably with professional advice and assistance – this is after all likely to be an important asset in both your estates.

Let’s have a look at a recent High Court case to illustrate –

A breakup and a fight

• A couple in a “romantic relationship” co-habited in a house of which they were the joint registered owners in undivided half shares.
• When the relationship broke down irretrievably, the partners were unable to agree on a method of ending the property ownership. One partner moved out and the other, after changing the locks, applied to the High Court for an order terminating the joint ownership and appointing a receiver/liquidator to sell it.
• The other party fought this application, contending that the couple had, in addition to being in a personal relationship, also been in a “universal partnership” which still existed.

A co-owner can normally insist on partition of the property at any time

The general rule in our law is this: “No co-owner is normally obliged to remain a co-owner against his will.” Thus “every co-owner of property may insist on a partition of the property at any time. Even if there is an agreement to constitute perpetual joint ownership, the co-owner may demand partition at any time. If the co-owners cannot agree on the way the property is to be divided, then the Court is empowered to make an order which appears to be fair and equitable.”

That opens the door to a wide range of options for the court, but often it means an order for sale of the property (possibly by public or private auction) and division of the net proceeds between the joint owners.

But is it “bound” or “free” co-ownership?

But it’s more complicated than that. Our law recognizes two types of co-ownership –

1. In a “free” co-ownership, the co-ownership is the only legal relationship between the co-owners. In this event, the rule above applies – either joint owner can insist on division at any time.
2. In a “bound” co-ownership however “there is a separate and distinct legal relationship between them of which the co-ownership is but one consequence. Co-ownership is not the primary or sole purpose of their relationship”.In this event, the co-ownership can only be dissolved when the primary relationship is terminated. In this case, the party opposing the court application said that no order of division could be made until the “universal partnership” between the parties had ended.

The Court found that there had indeed been a universal partnership in existence, in other words that this had been a case of “bound” co-ownership. But it also held (on the facts) that both the romantic relationship and the universal partnership had ended when the parties stopped living together. The romantic relationship was the ‘tie’ between the parties and when it came to an end, any situation of bound co-ownership became a free co-ownership to which the “end at any time” rule applied.

The result – the Court ordered the joint ownership terminated and appointed a receiver and liquidator to sell the property, pay all the property debts, and divide the proceeds between the parties.

The remedy

So the risk is finding yourself in the same unhappy position as the ex-partners in this case, having to ask the High Court to sort out your dispute for you.

Happily however there is a simple remedy. Before you buy property jointly, have a professional draw you a full agreement setting out (at the very minimum) –

• The nature of your relationship. In a co-habitation scenario you should probably also have a full “co-habitation” agreement, whilst a business scenario should be linked to your existing arrangement.
• The best vehicle for co-ownership – for some, a simple “let’s put the house in both our names” will be enough, for others a company or a trust may be better.
• Who will own what percentage of the property.
• Who will contribute what to the costs of purchase and to the property expenses and upkeep.
• Who will have what use of the property.
• What will happen if one or both of you wants to leave the relationship, dies, or is incapacitated.
• And so on – every situation will be unique.

If the parties in this case had put such an agreement in place, they might well have saved themselves the stress, wasted time and legal costs of a protracted and complex dispute. The liquidator/receiver’s charges for selling the property and paying out their shares to them will no doubt rub a lot of salt into all those wounds.

A final thought: Having a formal contract in place is not a forecast that things will go wrong between you – on the contrary, it should greatly reduce the risk of any dispute or unhappiness arising in the first place.