SA Property Law - The Validity of Title Deeds where the underlying sale agreement is invalid

From the Law Bench

A question that has sometimes arisen is whether a title deed (or deed of transfer) registered at the deeds office pursuant to an invalid underlying agreement remains valid or whether that title deed is also invalid. This very question was pertinently considered by the Supreme Court of Appeal when considering the matter of Legator McKenna Inc. and another VShea and others.

The underlying facts of the case, briefly put, were as follows:

• Mr McKenna was appointed as the curator bonis of Ms Shea after she had been severely injured in a motor vehicle accident;
• After his appointment, but prior to the issue of Letters of Curatorship by the Master of the High Court, Mr McKenna received and considered an offer from a certain Mr and Mrs Erskine to purchase the property owned by Ms Shea;
• Mr McKenna, after having inserted the words ‘subject to the consent of the Master’ into the offer to purchase, accepted that offer;
• The property was, thereafter, duly transferred from Ms. Shea into the names of Mr and Mrs Erskine;
• Ms Shea, contrary to all expectations, recovered from her injuries;
• Ms Shea then claimed re-transfer of the house into her name, against the refund of the purchase price paid by Mr and Mrs Erskine, arguing that the sale to the Erskines was invalid since it had been concluded by McKenna before the Master of the High Court had issued the necessary Letters of Curatorship that were required pursuant to section 72(1) (d) of the Administration of Estates Act, 66 of 1965.

After the High Court had initially found in favour of Ms Shea, Mr McKenna appealed against that decision to the Supreme Court of Appeal. The Supreme Court of Appeal found that Mr McKenna, by adding the words ‘subject to the consent of the Master’ to the offer to purchase, had effectively made a counter-offer to Mr and Mrs Erskine.

While it could be argued that Mr and Mrs Erskine had implicitly accepted this counter-offer when signing the necessary documents for the transfer of the property into their names, the fact nevertheless remained that there had been a patent non-compliance with the formalities established by section 2 of the Alienation of Land Act, 68 of 1981. Section 2(1) of the Alienation of Land Act provides as follows:

“No alienation of land after the commencement of this section shall, subject to the provisions of section 28, be of any force or effect unless it is contained in a deed of alienation signed by the parties thereto or by their agents acting on their written authority.” Section 28 deals with the consequences of deeds of alienation which are void or are terminated.

The result of this non-compliance was that the sale agreement was invalid. It was, consequently, unnecessary for the Court to decide whether or not a conditional sale agreement, that is to say, a sale concluded subject to the approval of the Master, constituted a contravention of section 71 of the Administration of Estates Act.

The Court then considered the abstract and causal theories of transfer.

• The abstract theory the transfer of ownership holds that the validity of the transfer of ownership does not depend on the validity of the underlying transaction which, in the present case, is the sale agreement concluded between Mr McKenna and Mr and Mrs Erskine;
• The causal theory of transfer, on the other hand, requires that there a valid underlying legal transaction as a prerequisite for the valid transfer of ownership.

The Court, after due consideration, concluded that the abstract theory of ownership was applicable to both moveable and immoveable property. The Court held, furthermore that, in terms of the abstract theory, two essential requirements were necessary for the valid passing of ownership, namely,

• delivery which, in the case of immoveable property, is effected by registration in the relevant deeds office; as well as
• a so-called ‘real agreement’, the essential elements of which are an intention on the part of the transferor to transfer ownership of the property to the transferee and the intention of the transferee to acquire ownership of that property from the transferor.

Both of these requirements must be complied with for ownership to pass. Ownership will, however, not pass if there was a defect in the real agreement serving as the underlying cause of the transfer. The Court found that, although no valid underlying agreement actually existed, no defects were to be found in the real agreement according to the abstract theory. The Court held that the property had, therefore, been validly transferred to the Erskines. Insofar as any possible claim for unjust enrichment was concerned, the Court confirmed the so-called ‘rule in Wilken v Kohler’ 1913 AD 135.

That rule provides that if both parties to an invalid agreement have performed in full neither of the parties will be able to recover their performance purely on the basis that the agreement was invalid. The rule does, of course, not apply where the purpose of the transaction was prohibited by law. The rule, similarly, cannot be a valid defence to a claim brought under the condictio ob turpem vel iniustam causam. The requirements of the condictio ob turpem vel iniustam causam are:

• The ownership of the property must have passed with transfer;
• The transfer must have taken place in terms of an illegal agreement, that is an agreement whose conclusion, performance or objective is prohibited by law or is contrary to good morals or public policy;

The Court reiterated that the condictio ob turpem was not applicable in the present matter since Mr McKennna had not entered into an illegal agreement. The Wilken v Kohler rule would have applied under circumstances where it was argued that Mr McKenna had not entered into any agreement at all. If, on the other hand, it had been argued that Mr McKenna had entered into an invalid agreement as a result of the non-compliance with the formalities required by section 2(1) of the Alienation of Land Act, as was found to be the position by the Court, the situation would then be governed by the provisions of section 28(2) of the Act.

In the end result, since the appeal was upheld, one may conclude that an invalid underlying sale agreement does not affect the validity of the title deed provided that both parties to the sale agreement had performed in full and that the lawful purpose of the transaction, common to both of the parties, was achieved. If both parties had performed in full, furthermore, neither party could recover performance from the other simply because the sale agreement was found to be invalid due to non-compliance with prescribed statutory formalities.

Courtesy: The EAAB - Estate Agency Affairs Board

“Redressing the Past, Building the Future and Guiding the Real Estate Business towards Professionalism”