General and Special Notarial Bonds

Bonds are registered to secure an obligation by a debtor to a creditor, for example, to secure the repayment of money. If a debtor does not fulfill his/her obligations to the creditor, the bond enables the creditor (the mortgagee) to have the mortgaged property attached and sold to satisfy the mortgagee's claim against the debtor (the mortgagor).

A notarial bond hypothecates the movable assets of a debtor, whereas a mortgage bond is registered against the immovable property of a mortgagor. Movable assets that can be held as security can be in the form of corporeal, e.g. furniture, vehicles, the goods of a business, etc., and/or incorporeal movable property, e.g. an unregistered long lease, a short-term lease or sublease of immovable property, etc.

A general notarial bond hypothecates ALL the movable assets of the mortgagor as security, whereas a special notarial bond hypothecates SPECIFIC movable assets of the mortgagor (as specified and described in the bond) as security. It is also possible to hypothecate as security, special movables PLUS movables generally (excluding the special movables) in one notarial bond¹, and by doing so affording the creditor the best possible security.

The expression ‘mortgage’, in a more restricted sense, is used to describe security over immovable property and can be distinguished from a ‘pledge’ which describes security over movable property.

A pledge of movable property requires the delivery of the movable property pledged. According to our common law, unless the mortgagee is in possession of the movable property hypothecated by means of a notarial bond, the mortgagee does not have any real rights of security in respect of the hypothecated movable property.

In other words, if the mortgagee of a general notarial bond is not in possession of the movable property hypothecated thereby, then the mortgagee does not acquire a real right of security in respect thereof. To acquire a real right and perfect its security, delivery of the movable property pledged is required, i.e. the mortgagee will have to obtain a court order directing that the property be attached and entitling the mortgagee to take possession of the property.

The value of acquiring a real right of security lies in the protection it offers to the mortgagee, namely that other creditors cannot attach the hypothecated property and that, in the case of the mortgagor’s insolvency, the mortgagee will have a preferential claim which shares in the free residue prior to concurrent claims². It must however be noted that should a mortgage bond (other than a kustingsbrief) be registered to secure the payment of a debt not previously secured, and such bond is not lodged within two months after incurring the debt, the mortgagee will not be entitled to a preferential claim if the mortgagor is declared insolvent within six months after lodgement³.

Before 7 May 1993 the Notarial Bonds Act (Natal) 18 of 1932 (which was only applicable to special notarial bonds registered in KwaZulu-Natal) provided that even if a mortgagee is not in possession of the special movable property hypothecated under the notarial bond, the mortgagee still acquired real rights of security therein as if the movable property had been delivered to the mortgagee in pledge.

The common law position in respect of special notarial bonds hypothecating corporeal movable property changed on commencement of the Security by means of Movable Property Act (the “Act”), which came into operation on the 7th May 1993. The Act stipulates that when the corporeal movable property is specified and described in a manner that renders it readily recognisable and is registered after the commencement of the Act in accordance with the Deeds Registries Act 47 of 1937, such property shall, subject to any encumbrance over it on date of registration of the bond, be deemed to have been pledged to the mortgagee notwithstanding the fact that the mortgagee is not in possession of the property⁴thereby placing the mortgagee on an equal footing with that of a pledgee⁵.

Special notarial bonds registered before 7 May 1993 (save for special notarial bonds registered in Natal) and general notarial bonds are still consistent with the common law, in that the mortgagee does not acquire a real right of security in the movable property hypothecated thereby unless the mortgagee is in possession thereof.

Where a debtor has no immovable property to utilise as security, a creditor may wish to consider securing the loan by means of a notarial bond. The above factors should be taken into consideration when deciding how best to secure the debtor's obligation to the creditor.

Citations:

¹ Reeskens v Registrar of Deeds 1964 (4) SA 369 (N)
²Van der Merwe, FE, Notarial Practice, Butterworths, Durban, 2001 at 168
³Section 88 of the Insolvency Act No. 24 of 1936
⁴ Section 1(1) of the Security by means of Movable Property Act 57 of 1993
⁵ Van der Merwe, FE, Notarial Practice, Butterworths, Durban, 2001 at 166

References:

De Rebus (https://www.derebus.org.za/Mortgage of immovable property – a first step to alienation? - De Rebus - Mortgage of immovable property – a first step to alienation

Course in Notarial Practice Part 1 – Explanatory Notes – compiled by Gawie le Roux, Erinda Frantzen, Ilse Pretorius – Chapter 5