Rule 46A: Is the Bestbier judgment helpful?

Introduction

The decision in Jaftha was a watershed that imposed new constitutional checks on execution proceedings against residential immovable property. Among other things, the judgment established the broad principle that execution against immovable property – i.e. the process by which property is “attached” and sold to satisfy a judgment debt – if done without judicial oversight amounts to an unjustifiable limitation of the right to adequate housing in section 26 of the Constitution. Pursuant to Jaftha and various subsequent decisions, the Rules Board (which reviews the rules of court) introduced rule 46A into the high court rules to provide for mandatory judicial oversight over execution proceedings against residential immovable property owned and occupied by a judgment debtor. The rule has since become an entrenched feature of the law relating to property foreclosures and the sale in execution of immovable properties. However, recently, the Supreme Court of Appeal (SCA) in Bestbier and others v Nedbank Limited found that the range of persons deserving of the rule’s protection should be expanded. According to the court, the rule should not only apply to protect judgment debtors who own the property; in addition, where the judgment debtor is a juristic person, the rule should also apply in favour of natural persons who occupy the property as residential premises. In this article, we take a closer look at the Bestbier judgment and some of the uncertainties it inadvertently introduces. But before we do that, the reader should perhaps know a bit more about the original rule 46A and when our courts, prior to Bestbier, held that it should be applied.

Rule 46A

Rule 46A applies “whenever an execution creditor seeks to execute against the residential immovable property of a judgment debtor,” irrespective of whether the creditor is a mortgagee with real rights of security in the property. To comply with the rule, an execution creditor who seeks an order declaring the immovable property specially executable (that is, an order permitting a creditor to execute against immovable property without first having to execute against movable assets) must launch a formal application containing certain prescribed facts about the property. Rule 46A(2)(a) provides that a court considering such an application must establish whether the immovable property in question is the primary residence of the judgment debtor. If it is, rule 46A (2)(a)(ii) and (2)(b) enjoins the court to consider all relevant factors to determine whether execution is warranted or whether the judgment debtor has alternative means of satisfying the judgment debt. If execution is warranted, the court is further empowered to set a reserve price to “balance the misalignment between the banks and the debtors [so that] the debtor is not worse off due to unrealistically low prices being obtained and accepted at sales in execution.”

Prior to Bestbier, our courts refused to accept that rule 46A applied to residential immovable property owned by a juristic person, even if the property was occupied by persons for whom it constituted their only home. In First Rand Bank ltd v Folscher, the high court held that the term ‘judgment debtor’ referred to an individual, a person, and that ‘immovable property owned by a company, a close corporation, or a trust of which the member, shareholder, or beneficiary is the beneficial occupier is not protected by the amended rule requiring judicial oversight, even if the immovable property is the shareholder’s, member’s, or beneficiary’s only residence’.

This interpretation was confirmed by the high court in Investec Bank Ltd v Fraser N.O. and another, which concerned an application for an order of special executability against a property owned by a trust but occupied by the respondent trustee and her children. The respondent contended that rule 46A was applicable and should have been complied with by the applicant bank. The court, however, held that ‘upon an analysis of the rules and relevant cases, particularly since the seminal decision in Jaftha, it is clear that the constitutional considerations required to be taken into account for the protection of judgment debtors apply to individuals and natural persons only’. The court concluded, therefore, that since the provisions of rule 46A encapsulate the protections afforded to indigent debtors who risk being rendered homeless as a result of the execution process, the rule was not applicable to the property registered in the name of the trust, which was clearly not a natural person, and it was irrelevant that the trustee and her children resided on the property and considered it their home.

A similar finding was made in Segalo v Botha N.O. in relation to property owned by a company but occupied by its sole director and shareholder. There, the court held that section 386 of the Companies Act 61 of 1973, which empowers the liquidators of a company to execute against its immovable property, need not be subject to judicial oversight in terms of rule 46A. In this regard, the court endorsed the finding in Fraser that rule 46A applies to individuals and natural persons only. The court held that what ultimately matters is the identity of the legal owner of the property: as long as the owner was a legal person, be it a company, CC, or trust, the rule was inapplicable and did not protect those occupying the property as beneficial owners, even if they were related to the juristic person as shareholder, member, or beneficiary, and even if the property in question was such a person’s only home.

The Bestbier judgment

In Bestbier, the court had to decide whether the respondent bank was obliged to follow rule 46A in seeking an order declaring mortgaged property owned by a trust debtor specially executable. As security for the repayment of a loan obtained from the bank, the appellants, trustees of the trust, registered a number of mortgage bonds over immovable property in the respondent bank’s favour. When the appellants failed to comply with their repayment obligations, the parties entered into a settlement agreement in terms of which the appellants admitted their indebtedness to the bank and agreed that the property would become specially executable in the event they failed to pay the instalments as and when they became due. Consequent upon further defaults, the respondent launched an application for judgment by consent, including an order declaring the property specially executable. The high court granted judgment in favour of the bank without requiring compliance with rule 46A. On appeal to the SCA, the appellants contended that the high court had erred and that the rule was applicable since, although owned by the trust, the property in question was the primary residence of the trust beneficiaries as well as the trust employees and their families.

The SCA observed that the aim of rule 46A is to assist the court in considering whether the section 26 rights of the judgment debtor would be violated if his or her house were to be sold in execution. Referring to the text of the rule, the court held that, to determine whether rule 46A is applicable, it is necessary to first inquire whether the property (of the judgment debtor) is used as “residential immovable property”. This inquiry should be directed at establishing whether the persons occupying the property are “of the Jaftha–kind.” If, in the case of a trust, it is established by the creditor that the beneficiaries of that trust occupy the property as residential immovable property, the creditor is obliged to bring a rule 46A application.

Accordingly, and contrary to the line of cases that suggest otherwise, the court held that for rule 46A to apply, it was not a necessary condition that the owner of the property occupied as residential immovable property must be a natural person; it was sufficient, at least in the case of property owned by a trust, that the occupiers were beneficiaries of the trust and occupied the property as their primary residence. On the facts, however, the court found that, although rule 46A applied, the applicability of rule 46A did not assist the appellants because they had failed to establish that the matter could be categorised as being “of the Jaftha-kind,” that is, they had failed to prove that the beneficiaries of the trust would, as a result of indigence, be left vulnerable to homelessness if the property in question were sold in execution.

Bestbier: analysed

The SCA’s judgment is not a model of clarity, however laudable its aims may be. Its principal weakness relates to the uncertainty of its ratio. To recap, the crisp issue concerned the applicability of Rule 46A to immovable property occupied by trust beneficiaries. But one could be forgiven for thinking the court decided a much wider issue, namely the applicability of rule 46A to immovable property occupied as residential premises. As explained below, the reasoning of the court could be construed along either line. However, each of these interpretations of what the court decided suffers from its own shortcomings. In the latter case, the problem is one of overbreadth: the rule as developed casts its net too wide and, as a result, fails to keep step with the stated rationale for its development. As to the narrower interpretation, arguably the court does less than it should to justify why the fact that an occupier is a trust beneficiary is a sufficient reason for rule 46A to find application. Common to both shortcomings are the unresolved tension between the purpose of rule 46A – protecting vulnerable occupiers whose constitutional right to adequate housing hangs in the balance – and tailoring a suitable threshold test for the rule’s application, which extends the net of protection no wider than is justified by that purpose. Because the judgment does not recognise, and therefore grapples with, this tension, the decision introduces a large measure of legal uncertainty for execution creditors and has fostered a belts-and-braces approach to foreclosures that substantially increases the overall cost of debt recovery.

A rule unfit for its purpose?

The SCA’s rationale for developing rule 46A lies in the requirement that judicial oversight is necessary whenever a person stands to lose their home as a consequence of a sale in execution. The development is based, therefore, on the court’s recognition that the person who could stand to lose their home may not always be the same person as the owner of the property. And so rather than restrict the rule’s application to homeowners, be they natural or juristic persons, the court intends for its developed rule to cover a broader class of people, namely those whom the rule was all along meant to protect, indigent occupiers who are in danger of being left homeless, or what the court refers to as occupiers “of the Jaftha–kind.” However, the court does not say that, for the rule to apply, it must first be established that the occupiers in question are of the Jaftha–kind. Although affording protection to such occupiers is the court’s justification for developing the rule, the ”threshold test” for the rule’s application – i.e. the facts and circumstances that trigger the rule and make it mandatory for a creditor to comply with its provisions – is determining whether or not the property owned by the judgment debtor is occupied as residential premises. As the court notes: “The text of rule 46A(1) reveals that the rule applies whenever an execution creditor seeks to execute against residential immovable property of a judgment debtor”; and, reiterating that a paragraph later, continues: “it is clear from a plain reading of the entire text of rule 46A that it is important to have a preceding inquiry in all cases where the immovable property of the judgment debtor is used as residential immovable property”. This explains why, when referring to hypothetical facts similar to the kind before it, the court remarks: “As I see it, a creditor seeking to execute against immovable property owned by a trust would have to establish whether beneficiaries of that trust occupy the immoveable property in question. Where that has been established, rule 46A would have to be followed.” Indeed, it also explains why, on the actual facts before it, the court finds that although the trust beneficiaries were not ”of the Jaftha–kind,” rule 46A was nevertheless applicable.

Casts the net too wide

Even though justified by what the court actually held, the problem with this threshold test is that it casts the net too wide. Caught within it are persons whom the rule was never intended to protect. These could include, for example, well-to-do tenants, persons with rights of habitatio (right of habitation), usufructuaries, bona fide possessors with real liens over the property, so-called “precarious occupiers”, and even those who, while not indigent, occupy unlawfully. Of course, it is trite that, at least for some of these categories, the courts will invariably find that even if the rule notionally applies, it cannot apply in favour of such persons. The reason is that where there exist some other set of laws that protect rights to adequate housing, our courts have held that these will prevail over and instead of rule 46A. Tenants, for example, are sufficiently protected by the huur gaat voor koop doctrine and the Prevention of Illegal Eviction from and Unlawful Occupation of Land Act 19 of 1998, whereas farmworkers’ rights to adequate housing enjoy protection under the Extension of Security of Tenure Act 62 of 1997 (“ESTA”). The SCA in Bestbier acknowledges this hierarchy of protection but seemingly papers over the inconsistency entailed by its expanded rule 46A. For the latter will oblige execution creditors to bring an application under rule 46A as long as the immovable property is occupied as residential premises, and that is so irrespective of the nature of the right of occupation (or lack thereof) held by the occupiers in question, irrespective of whether such persons match the Jaftha profile, and, most perplexingly, regardless of whether execution creditors know in advance that, given the nature of the right of occupation and the un-Jaftha-esque profile of the occupier, there would be little doubt that any application seeking special executability would be granted. To put it differently, in developing the rule to protect the vulnerable, the court expanded the rule’s reach far wider than was justified by the reasons for its expansion, even though the court appears dimly aware of this fact.

Draft amendment of Rule 46(A)(1)

For those doubtful that such a wide interpretation of the rule’s threshold test is viable on a faithful reading of the judgment, consider that it was the very one adopted by the Rules Board in its latest proposed revision of rule 46A. The proposed draft amendment, in particular of rule 46A(1), reads as follows:

(1) This rule applies whenever an execution creditor seeks to execute against—

(a) the residential immovable property of a judgment debtor; or

(b) residential immovable property owned by a judgment debtor where the whole or part of such property is occupied by any person other than the judgment debtor, as such person’s primary residence

So, if the net of rule 46A is cast anytime ‘any person other than the judgment debtor’ occupies immovable property as such person’s primary residence, it is surely cast too wide, or so I would argue.

Rationale of the judgment

On the other hand, others argue that there is a difference between what a court says and what it actually does. Persons in this camp may claim that the rationale of the judgment, in respect of the applicability of rule 46A, extends no further than the boundary established by the particular facts of the case. In other words, they would argue that the court’s finding that the rule applied to the trust beneficiaries is not authority for the broader proposition that the rule applies to occupiers of any kind, however they came to occupy the property, and whatever the nature of the rights of occupation involved. Instead, as the argument might go, the decision is authority for a more limited proposition, namely that rule 46A applies to trust beneficiaries and only trust beneficiaries who occupy the property as their primary residence.

The counter to this interpretation is that it does not accurately reflect the court’s reasons for concluding that the rule applied to the trust beneficiaries. The court based its conclusion, in part, on its rejection of previous authority to the effect that the rule does not apply where the owner is a juristic person (even if the occupiers are in some way specially related to that juristic person). The notion that the effect of the judgment was to develop the rule to protect trust beneficiaries only is therefore hard to square with the court’s express rejection of the claim that “the person to be protected by rule 46A is, in the tradition of Jaftha and Gundwana, a natural person and not a legal persona such as a company or a close corporation, nor an institution such as a trust… even if the immovable property is the shareholder’s, member’s, or beneficiary’s only residence.” Indeed, the court clearly states that “a blanket approach that considers all immovable property held in the name of a juristic person to fall outside the protection of rule 46A is too narrow.” So, it looks more as though the finding that the rule applied to trust beneficiaries was incidental, or secondary, to the true ambit of the ratio, which seems to include occupiers specially related to the juristic persons whose property they occupy; occupiers, that is, such as trustees and beneficiaries (of trusts), shareholders (of companies), and members (of close corporations).

Although this solves the problem of overbreadth and more accurately captures the reasons for the court’s conclusion on the facts, the judgment offers no justification as to why this class of occupier, and not others, like persons with rights of habitatio, usufructuaries, bona fide possessors with real liens over the property, “precarious occupiers,” and so on, mentioned above, deserve the special judicial oversight protection afforded by the rule. Missing from the judgment, then, is a coherent and doctrinally sound explanation for why “related persons” should have an entitlement to greater legal protection than occupiers “unrelated” to such juristic entities. Such an explanation should speak to the hierarchy of protection that the law affords to different classes of occupiers. And, most importantly for the legal profession, it should do so in a manner that elucidates, rather than obfuscates, the factual grounds that ought to be established to trigger the rule’s application. Merely invoking the epithet “occupiers of the Jaftha-kind” is surely not enough to establish the missing link.

Fostered uncertainty

As it stands, the judgment has fostered uncertainty as to the rule’s applicability, which will encourage execution creditors to bring rule 46A applications as a matter of course. This belts-and-braces approach to execution proceedings occupies the court’s time unnecessarily and can only drive up the cost of foreclosures. The increased administrative burden borne by mortgage lenders in complying with the requirements of rule 46A and the additional cost incurred may well serve to inhibit the granting of credit to deserving applicants in an already risk-averse mortgage lending environment.