Real Security: Pledge & Mortgage (Ch. 18)

Question 1

What are the 2 types of security?

Answer 1

1. Personal security

2. Real security

Question 2

Define ‘personal security’

Answer 2

Personal security implies that a creditor, on the basis of a performance due to him as a result of a creditor’s right against a debtor (the principal debt),
also acquires a creditor’s right against another person as security for the payment of the principal debt. (Eg. surety)

Question 3

Define ‘real security’

Answer 3

In the case of real security the creditor acquires a limited real right in the property of the debtor as security for the payment of the principal debt by the debtor to the creditor, until the payment of the principal debt.

Question 4

Name the 4 categories of real security

Answer 4

1. Pledge (in the case of movable property)
2. Mortgage (usually in the case of immovables)
3. Cession in securitatem debiti
4. Security granted by operation of law iro property of the debtor to the creditor.

Question 5

Name the 4 subcategories of the operation of law security

Answer 5

1. Tacit hypothecs of the landlord and credit grantor
2. Judicial pledge
3. Statutory security rights
4. Liens

Question 6

Discuss the general principles that apply iro real security (6)

Answer 6

1. The real security is enforceable only against the property of the debtor as long as the debtor owes the creditor an amount ito a valid principal debt (creditor’s right). If the principal debt lapses or is paid in full, the real security is terminated automatically. The real security is therefore ACCESSORY to the principal debt.
2. Ito the real security the creditor obtains a limited real right to the property of the debtor (the object of security) which is enforceable against the debtor personally and all third parties. Therefore a double legal relationship exists:
   a. A creditor’s right of the creditor against the debtor as a result of the principal debt between them;
   b. A limited real ight of the creditor to the movable or immovable property of the debtor as security for the principal debt.
3. If the debtor doesn’t settle the principal debt as agreed, the creditor has a preferential claim to the proceeds if the property is sold in execution or insolvency.
4. The real security exists iro the principal debt and all interest, except if otherwise agreed upon by the debtor and creditor.
5. The creditor does not usually acquire any entitlements of use and enjoyment iro the property, and may hold it only for the purpose of the security. Movable property must be returned to the debtor if the principal debt is paid. However, the parties may agree by means of an actio antichreseos that the creditor may enjoy the fruits of the encumbered property in lieu of the interest on the principal debt.
6. The property of the debtor is usually used as security for the principal debt, but it is also possible to use the property of a surety as security ito a contract or mortgage of surety.

Question 7

Define ‘pledge’

Answer 7

Corporeal or incorporeal movable property of a pledgor (the debtor or surety ito a valid principal debt),
given to a creditor in ledge as real security for the payment of the principal debt,
grants the pledgee (creditor ito the principal debt) a limited real right to the property as security until the principal debt has been paid in full.

Question 8

What is required to establish and retain security in the form of a limited real right to the pledgor’s property?

Answer 8

The object of the pledge must be delivered to the pledgee and controlled by him.

Question 9

What are the recognised methods of delivery? (2)

Answer 9

Real delivery (traditio vera) 
Delivery with the short hand (traditio brevi manu)

Question 10

What form of delivery is not recognised as delivery to establish a pledge?

Answer 10

Costitutum possessorium (since the property remains in the control of the owner)

Question 11

What must the pledgee do to retain his limited real right?

Answer 11

Continuously exercise control iro the property (mobilia non habent sequelam)

Question 12

What happens if the pledgee willingly loses control of the property?

Answer 12

His limited real right is terminated.

Question 13

What happens if te property is removed from the pledgee’s control without his permission?

Answer 13

He can still exercise his limited real right to the property.

Question 14

Is it enough for a contract of pledge without delivery of the object to establish a limited real right?

Answer 14

No. If the property is alienated bona fide to a third party after conclusion of the contrat but before delivery, the creditor of the principal debt has no remedy against the third party.
- If the third party was aware of the agreement, he must, because of the doctrine of notice, deliver the property to the creditor so that pledge can be established.

Question 15

Name & discuss the 5 rights of the pledgee

Answer 15

1. The pledgee obtains a limited real right to the pledge object as security for the payment of the principal debt and interest by the pledgor. This right exists as long as the pledgee controls the property and a part of the principal debt remains unpaid.
2. If the pledgor does not pay the principal as agreed, the pledgee, after summons, judgment and the issuing of a warrant of execution by the court, has a preferential claim to the proceeds of the pledge object at the sale in execution.
3. If the pledgor’s estate is sequestrated, the pledgee has, ito the Insolvency Act, a preferential claim to the proceeds of the pledge object ito a judicial sale.
4. The pledgee can institute an enrichment claim against the pledgor for all NECESSARY expenses for the conservation or mainteance of the object, as well as for USEFUL expenses that enhance the market value of the property. If the principal debt is paid in full and the pledgee’s right is terminated, the pledgee can exercise an enrichment lien iro the property as security for payment of the enrichment claim.
5. The principle of prior in tempore, potior in iure (earlier in time, stronger in law) is also applicable in the case of pledge.

Question 16

Name & discuss the 5 obligations of the pledgee towards the pledgor

Answer 16

1. The pledgee must take care of the property like a reasonable man and, on termination of the pledge, return it to the pledgor.
2. The pledgee does not have the right to use, enjoy or alienate the property. The right to consume or alienate fruit comes into being only if the pledgor granted the right to the fruit to the pledgee (pactum antichreseos).
3. The pledgor can require that the pledgee provide security in the case of neglect of the property.
4. The pledgee is liable to pay compensation to the pledgor if the property is damaged or destroyed as a result of his intentional or negligent actions. If the damage is not the result of his intentional or negligent actions or omissions, the pledgee is not liable.
5. Ito the National Credit Act the pledgee has the following liabilities:
   a. The date on which the credit agreement ends must be specified.
   b. The pledged goods are held by the pledgee at his own risk and must be handed back to the pledgor on the termination of the credit agreement.
   c. If the pledged goods are damaged or destroyed by an intervening cause outside the control of the pledgee, the pledgee must pay the pledgor an amount equal to the fair market value of the goods, less the settlement value at the time of the failure to deliver those goods. In any other case of failure to deliver the property to the pledgor, the pledgee must pay the pledgor an amount equal to double the fair market value of the goods minus the settlement value at the time of failure.

Question 17

Define ‘mortgage’

Answer 17

A mortgage registered iro the movable or immovable property of the mortgagor (debtor), grants the mortgagee (creditor) a limited real right to the movable or immovable property as object of security until the principal debt has been paid in full.

Question 18

What are the mortgage registration requirements? (5)

Answer 18

1. The creditor acquires a limited real right to the object of the mortgage after registration of the mortgage bond in the deeds registry.
2. In the case of movables a notarial bond is registered and a limited real right is established without delivery to the creditor.
3. Immovable property is mortgaged by means of a registered mortgage bond.
4. Immovable property encumbered with a mortgage can be transferred to a new owener only after cancellation of all existing mortgages. If the property is transferred without cancellation of existing mortgages the mortgage does not lapse. Because the registered mortgage grants the creditor a limited real right to the property ito the principal debt, the mortgage is enforceable against the new owner. Although the owner is not a party to the principal debt, the mortgage serves as real security until the principal debt is paid in full.
5. Various mortgages can be granted to different mortgagees by the mortgagor at the same time iro the same property. Ito the principle of prior in tempre, potior in iure the time of registration of the mortgage determines the order of real security granted to the mortgagee.

Question 19

What did the court decide in Thienhaus NO v Metje & Ziegler?

Answer 19

• A mortgage bond performs the following functions:
  a. It serves as confirmation of the limited real right of the creditor to the property as security for the payment of the principal debt
  b. It serves as written acknowledgement of the principal debt
  c. It serves as record regarding the conditions pertaining to the interest, payment, term and default of the principal debt.

Question 20

What is the main category of mortgage used?

Answer 20

A kustingsbrief.

Question 21

Define a ‘kustingsbrief’

Answer 21

A kustingsbrief is a mortgage in favour of a seller of land as security for the unpaid balance of the purchase price or in favour of any other person or financial institution who advanced the balance of the purchase price to the buyer.

Question 22

Define ‘money lent and advanced’

Answer 22

A mortgage for money lent and advanced is registered as security for money let and advanced by the mortgagee to the mortgagor for other purposes than payment of the balance of the purchase price.

Question 23

Define ‘covering bond’

Answer 23

A covering bond is a mortgage registered as security for an amount that will be lent or advanced to the mortgagor by the mortgagee in future or for future debts in general. It serves as continuous covering security to the maximum amount mentioned in the mortgage bond.

Question 24

Define a ‘notarial bond’

Answer 24

A notarial bond is registered against specific movable property of the mortgagor as security for the payment of the principal debt to the mortgagee and, after registration, this grants the mortgagee a limited real right to the objects of the security without these objects being delivered to the mortgagee.

Question 25

Name & discuss the rights of the mortgagee (5)

Answer 25

1. The mortgagee does not usually acquire physical control of the encumbered property, but the mortgagor controls the property subject to the limited real security right of the mortgagee.
2. A mortgage bond is a liquid document. This means that, based on the registered bond, the mortgagee can get a provisional sentence against the mortgagor in the high court. If the mortgagor cannot prove that the principal debt has been paid or that it is not yet claimable or no longer claimable on return day, the judgment becomes final and a warrant of execution regarding the object is issued by the high court. Provisional sentence cannot be granted by the magistrate’s court.
3. Ito the principle of prior in tempore, potior in iure, in the case of various mortgages, priority is given in the order of their registration.
4. In the case of a sale in execution, priority is given to the claims of mortgagees in the order that their mortgages were registered. As soon as the principal debt (and interest) of the first mortgage has been paid in full, the rest is paid out to the second mortgagee, etc.
5. In the case of insolvency of the mortgagor, the encumbered property becomes part of the insolvent estate. Ito prior in tempore, potior in iure, the mortgagees acquire a preferent claim in order of registration.

Question 26

Name the 2 unenforceable conditions

Answer 26

1. Pactum commissorium

2. Execution without recourse to court (parate executie)

Question 27

Define pactum commissorium

Answer 27

A condition in an agreement of pledge or mortgage ito which the ownership of the object of security passes to the creditor if the principal debt is not paid in full.

Question 28

Define parate executie

Answer 28

A condition that execution may take place without recourse to the court indicates that the pledgee or mortgagee may, on default, sell the object of security without recourse to the court and be entitled to the proceeds thereof.

Question 29

Name the ways in which a pledge or mortgage is terminated (7)

Answer 29

1. Destruction of the property
2. Payment of principal debt
3. Loss of physical control (pledge)
4. Cancellation of bond (mortgage)
5. Sale of the security object
6. Credit becomes owner of security object
7. Court order