Pledges and mortgages Flashcards
Define a Pledge
A pledge is defined as a limited real right which a creditor (pledgee) has over the movable property of another person (pledgor) for the purpose of securing the fulfilment of an obligation. Although it is not necessary for a pledge agreement to be in writing, it is advisable to reduce such an agreement to writing, as this will make it easier to prove the existence of such an agreement.
Requirements of a pledge
The pledgor and the pledgee must enter into an agreement of pledge, i.e. that the pledgor will grant the pledgee a limited real right over his movable property as security for the repayment of a debt.
Termination of a Pledge
- Repayment of the principal debt. Upon discharge of the debt, the debtor (pledgor) may demand return of the pledged asset.
- Renunciation of the pledge or debt by the pledgee (the bank).
- Novation – this is the replacement of an old debt with a new debt. The old debt is then extinguished, and so are any accessory obligations, such as a pledge to the old debt.
- Prescription of the principal debt.
- Total destruction of the hypothecated object. For example, the horse that is held in pledge dies.
- Generally, where the pledgee loses possession of the pledged object.
- By an order of Court and also where the pledged article is sold in execution pursuant to an order of Court.
Pledge of incorporeal
A pledge of incorporeal (non-material) rights may be written or verbal to be valid. An incorporeal is something which cannot be seen or touched, i.e. it does not have a ‘body’.
The rights of parties to pledges
The main right of the pledgee is to retain the security over the property until the principal debt has been paid and to have the property attached in the event of non-payment in preference to other creditors. The bank thus has first right to the monies realised from the sale as they have the security.
This right is not only effective and enforceable against the owner of the property but also against third parties. The fruits of any asset subject to a pledge are also subject to the same pledge.
Define MORTGAGES
A special mortgage operates over specified property of the debtor, while a general mortgage is one operating over all the property of the debtor.
The creditor is known as the mortgagee and the debtor as the mortgagor. These terms are normally used in relation to immovable property where the mortgagor keeps possession of the property and the bank’s security is achieved by the registration of the mortgage over the immovable property. However, in some instances a bond can be registered over movable property.
Formalities in executing mortgages
A mortgage bond is a written document which is registered against the title deed of the immovable property being mortgaged in order to give effect to a special mortgage.
Mortgage bonds are prepared and executed by a conveyancer in the presence of the Registrar of Deeds. The owner of the property over which the mortgage is being registered can execute the mortgage bond should he elect to do so (instead of appointing a conveyancer to execute on his behalf).
The rights of parties to mortgages
The mortgagee (creditor) obtains a real right in respect of the mortgage. This means that the right is in the property and is not only effective against the owner of the property (the mortgagor), but also against third parties. The primary right of the mortgagee is to keep the security over the property until such time as the mortgagor has repaid his debt.
Termination of a mortgage
Repayment of the debt: As previously mentioned, a mortgage is accessory to the principal debt.
Repayment of the principal debt thus enables the mortgagor to demand cancellation of the mortgage bond.
Renunciation by the mortgagee: A debtor is released of his obligation to pay the creditor where the creditor renounces his right of payment. Similarly, a mortgagee may renounce either the right of mortgage or the principal obligation and the mortgage simultaneously.
Novation: Novation is the replacement of an old debt with a new one. The old debt is made extinct in this manner. Any accessory obligations, such as mortgage, also disappear with the old debt.
Merger: The mortgage is extinguished when the mortgagee and the mortgagor becomes the same person. For example, a house that is subject to a mortgage in favour of X Bank is bought by X Bank.
Destruction: Where movable mortgaged property is destroyed, the mortgage is also destroyed. In the case of the destruction of immovable property, for example, a house, the mortgage will continue on the erf on which the house was situated. Banks normally take cession of insurance policies to cover themselves in these circumstances.
Prescription: A debt secured by mortgage bond prescribes after 30 years. Note, however, that prescription can be interrupted or delayed.
Order of Court: A court may order a mortgage to be set aside due to fraud. In terms of the Insolvency Act, a mortgage can, under certain circumstances, be set aside as an undue or voidable preference. (This will be discussed in the module dealing with insolvency.)
