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[2013] ZAKZPHC 54
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Fedsure Participation Mortage Bond Managers (Pty) Ltd and Another v Sandlundlu (Pty) Ltd (AR409/12) [2013] ZAKZPHC 54 (18 October 2013)
15
IN THE KWAZULU-NATAL
HIGH COURT, PIETERMARITZBURG
REPUBLIC OF SOUTH
AFRICA
CASE
NO:
AR409/12
In
the matter between:
FEDSURE
PARTICIPATION MORTGAGE
BOND
MANAGERS (PTY) LIMITED
..........................
FIRST APPELLANT
FEDBOND
NOMINEES (PTY) LIMITED
.................
SECOND
APPELLANT
and
SANDLUNDLU
(PTY) LIMITED
.......................................
RESPONDENT
JUDGMENT
Delivered on:18 October
2013
KRUGER
J
[1] The Appellants
(collectively referred to as “Fedbond”), having obtained
leave from the Supreme Court of Appeal,
appeal against the judgment
of van Heerden AJ granted on the 20
th
September 2011. The
order appealed against is one directing the Appellants, jointly and
severally, the one paying the other to
be absolved, to pay to the
Respondent:
The sum of
R2 584682,58;
Interest on the amount
of R3023832,41 calculated at the rate of 15,5% per annum from 23
rd
July 2007 to 8
th
February 2010;
Interest on the amount
of R2 584682,58 calculated at the rate of 15,5% per annum from
9
th
February 2010 to date of payment;
Costs of suit.
BACKGROUND
[2] Pursuant to a
written loan agreement, Fedbond loaned to the Respondent
(“Sandlundlu”) the sum of R5 600 000,00.
The loan
was secured by the registration of a first mortgage bond over the
property previously described as Lot 1094 Port Edward,
then owned by
Sandlundlu. This mortgage bond was registered, in favour of Fedbond,
on the 22
nd
January 1998. Sandlundlu was unable to meet
its obligations in terms of the said mortgage bond and, as a result,
Fedbond obtained
judgment against it for payment of the sum of
R7 855439,77 together with interest at the rate of 16,99% per
annum calculated
from 1
st
December 1999 to date of
payment. The aforesaid immovable property was also declared
executable.
[3] An agreement was
subsequently reached whereby the aforesaid property was sub-divided
on the 7
th
February 2002. The one portion of the
sub-division incorporated the land on which an existing hotel stood.
This was described as
Portion 1 of Lot 1094 Port Edward (the “hotel
property”). The other portion of the sub-division consisted of
land upon
which Sandlundlu was in the process of constructing a
number of chalets as part of a sectional title development. This
sub-division,
known as the Remainder of Lot 1094 Port Edward, was
registered in the name of Secprop (Pty) Limited (“Secprop”).
[4] Sandlundlu remained
the owner of the hotel property. The Secprop property was released
from the existing mortgage bond and a
new mortgage bond of
R5 000000,00 was registered, in favour of Fedbond, over this
property. It is common cause that simultaneously,
the existing
mortgage bond over the hotel property would be reduced by
R5 000000,00. Sandlundlu then became liable for payment
of the
balance of this mortgage bond.
[5] Sandlundlu leased
the hotel property to a company known as “Biz Afrika” for
a period of ten years. Simultaneously,
it had entered into an
agreement to sell the property to a company called “Slipknot
Investments”. Both Biz Afrika and
Slipknot Investments were
controlled by Messrs Kotter and Michaelides. Given Slipknot’s
refusal or procrastination in procuring
transfer of the property and
as a result of protracted litigation relating to the rental payable
by Biz Afrika, the mortgage bond
payments fell into arrears.Fedbond
foreclosed on the mortgage bond and obtained judgment, on the 5
th
August 2002, against Sundlundlu, in the sum of R8 865285,88
together with interest at the rate of 14.99% calculated from 1
st
June 2002 to date of payment. The immovable property was also
declared executable. It is common cause that the amount of
R8 865285,88
included the sum of R5 000000,00 in respect of
which Secprop had assumed liability.
[6] The property
however was not sold in execution as Biz Afrika, Slipknot and the
trustees of the Ark Trust (Kotter and Michaelides)
sought a
rescission of the judgment. These proceedings were protracted and
costly. It is common cause that during the course of
these legal
proceedings, Fedbond, from time to time, debited the legal fees
incurred against Sandlundlu’s mortgage bond account.
At the
conclusion of these proceedings, these legal costs amounted to the
sum of R686 934,90. Thereafter Sandlundlu requested a
settlement
figure in order to discharge and cancel the bond. A dispute arose and
Sandlundlu ultimately paid what Fedbond demanded
“under
protest”, in order to secure cancellation of the bond.
[7] Sandlundlu then
instituted an action to recover the amounts it alleged it had
overpaid. Judgment was accordingly granted in
its favour as set out
in paragraph 1 supra.
[8] In the judgment,
Van Heerden AJ dealt with five issues, viz:
The Secprop issue –
this related to the assumption of R5 000000,00 by Secprop and
the failure by Fedbond to reduce
Sandlundlu’s indebtedness in
respect of the hotel property. The Court
a quo
ultimately
found that the sum of R585 819,87 had been overpaid by
Sandlundlu as a result of Fedbond’s failure to credit
the
account and the resultant interest which had then accrued. The
Appellants have accepted the Court
a quo’s
findings and
do not appeal against this issue.
The second issue
relates to the costs incurred in the rescission application. The
Court
a quo
held that Fedbond was entitled to recover these
costs from Sandlundlu. However, it held further that Fedbond was
only entitled
to debit Sandlundlu’s mortgage bond account
after a demand for payment was made and payment not being effected.
It is against
this finding that the Appellants have appealed.
The third issue is
termed the “FS Trust Issue”. This related to the rate of
interest Sandlundlu was entitled to receive
on monies which it paid
to Fedbond and which, by agreement, was not reflected as a credit on
the mortgage bond statements. The
Court
a quo
determined this
issue in favour of the Respondents. The Appellants appeal against
this finding as well.
The Fourth issue
relates to the interest charged by Fedbond after it had obtained
judgment against Sandlundlu on the 5
th
August 2002. The
Court
a quo
held that the interest was simple interest and
that Fedbond did not have the right to vary the rate of interest or
to compound
or capitalise same. The Appellants appeal against this
finding as well.
The final issue
concerned the costs of the application proceedings before and
reserved by Nicholson J. The Court
a quo
held that these
costs be borne by Sandlundlu. Sandlundlu has accepted this finding
and there is no cross-appeal.
[9] I turn now to
consider the issues on appeal.
COSTS
[10] As stated earlier
in this judgment, the appeal on this issue is limited to whether
Fedbond ought to have demanded payment of
the legal costs from
Sandlundlu prior to debiting the mortgage bond account.
[11] In its plea,
Fedbond averred that “the Defendants (Fedbond) were entitled to
so debit these legal costs to the Sandlundlu
No. 2 account in terms
of Clause 8.1 of the Port Edward Bond.” In answer to a question
posed in terms of Rule 37(4), whether
demand was made to pay these
costs, Fedbond responded that “no demand was made. The
Defendant acted in terms of the provisions
of Clause 8 of the
mortgage bond”.
[12] The relevant
provisions of Clause 8 are:
“
8.
Legal
Work and Expenses
8.1 Mortgagor shall
pay, on demand, to the mortgagee all the costs of and incidental to –
…
..
8.1.6 In general all
costs (including costs between attorney and client) which might arise
out of or in connection with the mortgagors
indebtedness to the
mortgagee hereunder, this bond and/or the mortgaged property.
8.2 Should the
mortgagor fail to pay any of the costs referred to in 8.1, the
mortgagee shall be entitled to pay such costs and
recover such costs
so paid from the mortgagor together with interest as provided in 5.
…..”
[13] It is patently
clear from the afore-quoted provisions that a demand is a
pre-requisite before a mortgage bond account may be
debited with
legal costs. This is particularly spelt out in Clause 8.2 which
confers upon the mortgagee the right to debit a mortgage
bond account
with these costs. Therefore, until such time as the mortgagee informs
the mortgagor that such costs have been incurred
and are due and
payable and the mortgagor has been given an opportunity to pay such
costs, the mortgagee is not entitled to claim
same from the mortgagor
by means of a debit entry against the mortgage bond account. Mr
Pammenter SC, on behalf of the Appellants
has, during argument,
conceded that no formal demand for payment of the legal costs was
made prior to same being debited against
the mortgage bond account.
He has however submitted that Mr Reardon, Sandlundlu’s
representative, understood from the bond
statements that Fedbond
required Sandlundlu to pay the legal costs. He accordingly realised
that a demand for payment of same was
being made. Mr Pammenter’s
submission, as I understand it, arises from Mr Reardon’s
response during cross-examination.
Mr Reardon testified that when he
saw that Sandlundulu’s bond was being debited with legal costs,
he telephonedFedbond and
was informed that the costs were in respect
of the Kotter and Michaelides litigation and that in terms of the
mortgage bond he
had to pay same.
[14] I do not agree
with this submission. The fact that Mr Reardon and thereby Sandlundlu
was informed of the legal costs after
he queried same and after the
costs had already been debited to the mortgage bond account seemed to
have escaped Mr Pammenter.
This course of action was clearly in
conflict with the provisions of Clause 8 of the mortgage bond.
[15] I accordingly
agree with the finding of the Court
a quo
that although the
costs were owing by Sandlundlu to Fedbond, in the absence of a proper
demand, these costs never became due and
payable. The appeal in
respect of this issue must therefore fail.
(b)
THE FS TRUST
ISSUE
[16] One of the
consequences of the protracted rescission proceedings was that no
payments were being made or effected to service
the mortgage bond.
Fedbond, via its Managing Director, Mr Field, was concerned as the
indebtedness was increasing due to monthly
interest payments that
were due. They were also concerned as Fedbond was obliged to pay
their investors from the monthly interest
payments and in the absence
of such payments, had to fund the payments to their investors
themselves. This placed a financial burden
on Fedbond. Finally,
Fedbond was concerned as it was not receiving its share, calculated
at 3.5% of the monthly interest payments.
[17] As a result, and
in December 2002, a meeting was held with Mr Field and Mr Reardon. Mr
Field expressed his concerns as outlined
above and Mr Reardon assured
him that payments would be effected. It was also agreed that
Sandlundlu (Mr Reardon) would effect
payment of R50 000,00 per
month. These payments commenced in January 2003.
[18] Given the concerns
which Mr Reardon expressed regarding the possible outcomes of the
rescission application, the parties (Mr
Field and Mr Reardon) agreed
that the monthly payments of R50 000,00 would not be reflected
on Sandlundlu’smortgage
bond statements.
[19] Sandlundlu
honoured its undertakings in terms of this agreement with Fedbond and
it is common cause that eleven payments of
R50 000,00 were made.
However, instead of crediting the monthly payments against the
mortgage bond, Fedbond deposited these
monthly payments into an
account referred to as the “FS Trust”. It is common cause
that the interest earned on money
deposited into the FS Trust was
approximately 6% per annum. As a consequence Sundlundlu’s
mortgage bond indebtedness continued
to increase (at approximately
16% per annum) despite the monthly payments of R50 000,00 which
it was effecting. On the 7
th
January 2004 Fedbond credited
Sundlundlu’s mortgage bond account in the sum of R579 945,92
in respect of the eleven
payments and interest that it received.
Sundlundlu accordingly claimed the difference between the two
interest rates and the effect
it had on the mortgage bond account.
[20] Mr Field testified
that it was agreed that the money would be placed in a trust account
whereas Mr Reardon denied that such
an agreement existed. The Court
a
quo
held that a legally enforceable agreement did not come into
existence because the parties were never
ad idem
on the
interest rate that the monthly payments would earn. This view has
been supported by Mr Pammenter in his submissions on appeal.
I
however do not agree. To conclude that the parties were not
ad
idem
as regards the rate of interest would, in my opinion, mean
that the parties agreed that either the money would be invested
elsewhere
or that the payments would not be
credited
to the
bond account. None of these circumstances existed. I have drawn the
distinction between the payments not being credited
to the mortgage
bond account (as contended for by Mr Pammenter) as opposed to the
payments not being
reflected
on the bank statements. In this
regard the evidence clearly points to and favours the latter.
[21] The commencement
point is, as outlined earlier in this judgment, the concerns of
Fedbond as a result of the non-payment of
the monthly interest by
Sandlundlu. Despite these concerns and the fact that Fedbond was now
receiving interest payments in the
sum of R50 000,00 Mr Field
was quite prepared to continue funding the monthly payments to his
investors, thereby perpetuating
the financial burden on Fedbond. This
decision does not make business sense as is the contention by Mr
Field that Mr Reardon was
willing and agreed to receive interest on
his monthly payments at the rate of approximately 6% per annum
whereas he was paying
interest on a mortgage bond at approximately
16% per annum.
[22] The probabilities
favour the Court
a quo
’s findings that the arrangement
between the parties was that the monthly payments of R50 000,00
would not be reflected
on the mortgage bond statements. I agree with
the Court
a quo’s
findings that this arrangement was
purely administrative in nature and did not affect the contractual
relationship between the
parties. Mr Field conceded, during
cross-examination, that the monthly payments of R50 000,00 were
made under Sandlundlu’s
contractual obligation to pay interest
under the mortgage bond. He also conceded that in the absence of any
such payments, Sandlundlu’s
indebtedness would increase (as it
did prior to the commencement of the monthly payments of R50 000,00)
as the interest would
accumulate in arrears. It is therefore
remarkable that notwithstanding payment, he still allowed the
interest arrears to accumulate.
[23] Mr Reardon’s
version that he was honouring Sandlundlu’s obligations and
expected and believed that the said monthly
payments were discharging
Sandlundlu’s interest obligations in terms of the mortgage bond
is accordingly more probable.
[24] I accordingly
agree with the Court
a quo’s
finding that the payments
are to be treated as payments in reduction of the mortgage bond. The
appeal in respect of this issue
must therefore fail.
(c)
THE INTEREST
ISSUE
[25] On the 5
th
August 2002 the following order was granted, in the Durban and Coast
Local Division of the High Court, in favour of Fedbond:
“
1(a)
That judgment is granted in favour of the Second Applicant against
the Respondent (Sandlundlu) in the sum of R8 865385,88
plus
interest at the rate of 14.99% per annum calculated from the 1
st
June 2002 to date of payment.
(b) That the First
Respondents (sic) immovable property, Portion 1 of Erf 1094 Port
Edward, Registration Division ET, Province of
KwaZulu-Natal, is
declared executable.
2. That the Respondent
is to pay the costs of the application on the scale as between
attorney and client.
3. Further and/or
alternative relief.”
[26] It is common cause
that Fedbond compounded interest from that day and it also varied the
interest rates in accordance with
the provisions of the mortgage
bond. It claimed to do so by virtue of the provisions of Clause 5 of
the mortgage bond. In seeking
to justify this, Mr Pammenter submitted
that the aforesaid judgment did not novate the mortgage bond in so
far as it related to
the question of interest. In support of this
submission he relied on the judgment of Farlam JA in
MV
Tirupati; MV Ivory Tirupati and Another v BadanUrusanLogistik (aka
Bulog)
2003(3) SA104 (SCA)
. At paragraph 28, Farlam JA
held that a judgment “does not terminate the antecedent
obligations or those things that were
accessory to it, such as
pledges, sureties and interest.” At paragraph 30 he held that:
“
Although
an original cause of action may continue to exist in a reinforced and
strengthened form, a judgment … may also give
rise to a new
and independent cause of action enforceable between the same parties
in another court”.
In
Trust Bank of
Africa Limited v Dhooma
1970(3) SA304 (N)
, Fannin J
held, at 310 A-C:
“
It
does seem to me to be a somewhat artificial view of the position to
regard a judgment as, in all circumstances, having the effect
of a
novation. In some cases of course, it does have precisely that
effect, where, for example, a Plaintiff obtains a judgment
for
cancellation of a contract and for damages. Thus, in this case, had
the judgment been one declaring the contract between the
parties to
have been at an end, with an order that the Defendant return the
vehicle to the Plaintiff and pay the Defendant a sum
of money, it
could quite realistically be said that the judgment wholly replaced
and thus novated the contractual rights and liabilities
of the
parties inter-se. But in a case like the present, where the only
purpose of the judgment is to enable the Plaintiff to enforce
certain
rights, by means of execution if need be, without in any way
affecting other rights arising out of the contract, it seems
more
realistic to regard the judgment not as novating the former, but as
strengthening or reinforcing them. The right of action
will have been
replaced by a right to execute, but the enforceable right remains the
same.”
[27] This judgment was
cited with approval in
Swadiff (Pty) Ltd v Dyke, NO
1978(1) SA928 (AD)
. At 944 F Trengrove AJA (as he then was)
held:
“
I
respectfully agree with the views expressed by Fannin J, in
Trust
Bank of Africa Limited v Dhooma
… in the passage quoted above. In a case like the present,
where the only purpose of taking judgment was to enable the judgment
creditor to enforce his right to payment of the debt under the
mortgage bond by means of execution, if need be, it seems realistic
and in accordance with the views of the Roman Dutch writers to regard
the judgment not as novating the obligation under the bond,
but
rather as strengthening or re-enforcing it. The right of action, as
Fannin J puts it, is replaced by the right to execute,
but the
enforceable right remains the same.”
[28] In both the Trust
Bank and Swadiff cases, the relief sought was for specific
performance of obligations in terms of a contract.
Hence the
exception referred to by Fannin J did not apply. It is however noted
that
in casu
Fedbond expressly cancelled the loan agreement.
This is precisely what was referred to in the Trust Bank and Swadiff
cases. Accordingly
the judgment of 5
th
August 2002
novatedFedbond’s contractual rights. As a result, Fedbond had
no right to vary the rate of interest nor did it
have the right to
capitalize any interest in the absence of a Court order permitting
same.
[29] Although not
referred to in his heads of argument, Mr Pammenter submitted that the
mortgage bond was not cancelled or terminated.
As I understand his
submission, it was only the underlying loan agreement that was
cancelled. Cancellation of the mortgage bond
was only effected in the
Deeds Registry Office once payment in full had been received by or
secured in favour of Fedbond. As Fedbond
were claiming their rights
under the mortgage bond and as these rights had not been cancelled,
the right to vary the interest rate
and to compound interest was not
novated.
[30] This submission is
without merit. The loan agreement is the foundation of the
contractual obligations of the parties. The mortgage
bond records and
acknowledges the existence of and primacy of the loan agreement –
Grobler v Scholtz
1953(3) SA175 (2) at 179 C-D
;
Lief, NO v Dettmann
1964(2) SA253 (AD) at 259
;
Thienhaus NO v Metje and Ziegler Limited and Another
1965(3) SA25 (AD)
. Accordingly Fedbond’s rights are
found in the loan agreement which was cancelled or terminated by
Fedbond.
[31] The order of court
provided for the payment of interest at the rate of 14.99% per annum
with effect from 1
st
June 2002. As the order is silent on
whether this interest is compound or simple, it is a longstanding
practice that unless compound
interest has been claimed and granted,
the interest is simple interest. Mr Pammenter appeared to have
conceded this during argument.
[32] I agree with the
findings of the Court
a quo
and the appeal on this ground must
also fail.
QUANTUM
[33] Although the
parties gave the Court
a quo
the assurance that the
calculations performed by the accountants were arithmethicaly sound
(and this assurance was relied upon
by the Court
a quo
) Mr
Pammenter submitted that there was a patent error in Mr Clamp’s
(Sandlundlu’s accountant) calculations. I have,
subsequent to
the hearing of the appeal, received a recalculated schedule from the
Appellant. The parties have agreed that the
judgment of the Court
a
quo be amended as hereinafter set out.
CONCLUSION
[34] In conclusion the
following order is made:
The appeal is
dismissed with costs.
The order of the court
a quo
is amended to read as follows:
The First and Second
Defendant, jointly and severally, the one paying the other to be
absolved, are ordered to pay to the First
Plaintiff:
The sum of
R1 702 465,61;
Interest on the amount
of R2 141 615,44 calculated at the rate of 15.5% per annum
from 23
rd
July 2007 to 8 February 2010;
Interest on the amount
of R1 702 465,61 calculated at the rate of 15.5% per annum
from 9
th
February 2010 to date of payment’
Costs of suit.
NDLOVU J
I agree
MADONDO J
CAV ON: 5 August 2013
DELIVERED ON: 18
October 2013
COUNSEL FOR THE
APPELLANT: Pammenter SC
INSTRUCTED BY: Gideon
Pretorius Inc.
COUNSEL FOR THE
RESPONDENT: Smithers SC
INSTRUCTED BY: de
Villiers, Evans & Petit