Real estate finance law in South Africa

Yes, a mortgage can be granted to a foreign lender.

Yes, lenders can take a mortgage over land and/or buildings on the land.

Under South African law, land and buildings which are fixed to the land as a permanent feature are referred to as immovable property (see below). No distinction between the two is made in law. It is possible for a mortgage to be granted over immovable property. Accordingly, all buildings constitute immovable properties and are subject to the same mortgage as the plot of land on which they are built.

Buildings that are not permanently attached to the land on which they are built are considered movable properties.

The concept of mortgage certification as known under common law jurisdictions is not known under South African law. Instead, when a mortgage bond is registered, a lender does not receive a certificate but rather holds a registered real right over the property, recorded at the Deeds Registry Office. The costs will depend on the bond value which is often determined by the loan amount secured. Mortgage bonds are not freely transferable like bearer instruments; however, they can be assigned by the mortgagee (lender) to another party at the Deeds Registry Office.

Second ranking security can be taken. This happens in the same way that the prior ranking security was created, i.e. by way of registering a mortgage bond with the Deeds Registry Office. In the absence of an express statement on the ranking of lenders’ rights to the secured asset, the lender whose security is registered first will take priority.

No, in South Africa, the lender’s consent is required to transfer a property that is still subject to a registered mortgage bond.

Under South African law, preferent creditors are unsecured creditors who rank above concurrent creditors. Preferent creditors are paid out of the free residue of the estate before the claims of concurrent creditors. An example of a preferential creditor is an employee. Preferent creditors include:

• employee renumeration (up to a prescribed amount)
• South African Revenue Services.

Under South African Law a mortgage can be taken for all debts including future debts.ister.

Yes, the right to receive rent can be ceded by way of a cession in security in favour of the lender. Notice to the tenants is usually required, as tenants should be informed that they could, on the occurrence of an event of default, be required to pay the rent directly to the lender (cessionary).

It is possible for a lender to take security over the South African bank accounts of a borrower.

Lenders often place restrictions on withdrawals from the borrower’s bank accounts, more so where these bank accounts are opened for the purposes of the transaction. These restrictions are most often included in the loan agreements and sometimes may be effected by way of joint signing powers on the bank accounts themselves.

Transfers and ownership of land are given effect to by their registration in the relevant Deeds Registry Office having jurisdiction over where that land is located. Likewise, the perfection of security by way of a mortgage bond over land is given effect to by the registration of that mortgage bond in the relevant Deeds Registry Office.

If a mortgage bond is not registered with the Deeds Registry Office, there can be no valid transfer of title to the immovable property. Similarly, if a mortgage bond is not registered with the Deeds Registry Office, it does not create enforceable security.

In terms of section 88 of the Insolvency Act (1936), if a bond is not registered in the relevant Deeds Registry Office within two months from the date it was executed, the bond shall not grant any preference in favour of the secured creditor should the borrower be sequestrated or liquidated within a period of six months after lodgement of the bond

The creation of security over immovable property requires the execution of a power of attorney (PoA) and a mortgage bond. The PoA is given by the borrower (mortgagor) to a conveyancer (a real estate lawyer) to register the mortgage bond on the mortgagor’s behalf. The conveyancer thereafter signs the mortgage bond and lodges it for registration at the Deeds Registry Office to create enforceable security.

Conveyancers’ fees are based on a tariff guideline which references the amount of cover provided by the mortgage bond. Nominal registration feesare payable to the deeds office. Transfer duty is also payable on properties with a vale exceeding R1.21 million.

The PoA and mortgage bond must be registered within 3 months of execution.

South African law does not recognise the concept of a ‘security trustee’ holding security on trust for multiple creditors in the same way as jurisdictions like the UK.

In finance transactions in South Africa, a practice has developed to grant security in favour of a special purpose company (security SPV) for the benefit of the lenders.

Where a security SPV is used and the lenders change, no new security is required as the mortgage bonds are registered in favour of the security SPV which merely issues a guarantee to the lenders. A new lender will receive the benefit of the guarantee issued by the security SPV.

A tenant is not entitled to assign the lease unless agreed otherwise in the lease or with the permission of the landlord.

If the tenant is entitled to assign the lease then the new tenant would be bound by the lease on the same terms as was transferred to it.

South African law allows for contracting parties in commercial transactions to agree that either a foreign court or an arbitral tribunal shall be authorised to settle their disputes in cases with a multinational angle.

An arbitral award or foreign judgement would be recognised and enforced by the High Courts of South Africa without re-examination of the merits of the case, subject to the court having jurisdiction and subject to, among others, requirements and defences available under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of New York 1958.

If a debt is secured by a mortgage bond in favour of the mortgagee and the debtor fails to fulfil its payment obligations, the mortgagee will apply to court to have the mortgaged property declared executable. Once declared executable, a sheriff of the court will sell the property at a public auction, also known as a sale in execution.

A receiver or liquidator does not need to be appointed.

While the real estate is still owned by the borrower, the lender is not responsible for maintenance and insurance. Loan agreements and mortgage bonds in South Africa generally contain clauses entitling the lender to step in and undertake maintenance or pay insurance premiums.

See How can that security be enforced? above.

Yes, security over shares can be granted to a foreign lender.

Yes, second ranking security over shares can be taken. In the South African context, shares can be issued in either:

• certificated form (evidenced by a physical share certificate) – security can be created by way of a security cession agreement (often referred to as a pledge)
• uncertificated form (transfer thereof takes place by way of electronic entry in a central securities depository) – the pledge will be noted in the pledgor’s securities account.

The principle of prior in tempore, potior in iure, which means “first in time, greater in right”, is applicable to share pledges. As such, the security interest of the first cessionary will not rank pari passu with the security interests of any subsequent lender, who will have a reversionary interest.

Certificated shares

There are no formal requirements. As a practical step to enable the enforcement of security, the share certificates, together with a share transfer form signed by the pledgor (and left blank as to transferee), are delivered to the lender. A secured creditor would typically also require a board resolution of the company whose shares are being ceded to acknowledge the pledge and agree to give effect to a transfer of the shares.

Uncertificated shares

In accordance with the Financial Markets Act, 2012, a pledge over uncertificated shares is established by way of electronic entry in the securities account where the shares are held, and an outright transfer occurs by debiting the transferor’s account and crediting the transferee’s account.

Certificated shares

While there are no formal requirements, to the extent that the share certificates, together with a share transfer form signed by the pledgor (and left blank as to transferee) are not delivered, a lender may face the risk of losing priority and other enforcement challenges.

Uncertificated shares

If the pledge is not noted in the securities account, the security interest may be unenforceable against third parties.

See above under What are the mechanisms…?

No additional costs are payable.

No. 

A security cession will typically cater for certain realisation rights which allow the cessionary to realise or exercise certain rights in respect of the pledged shares on the occurrence of an event of default. Typical realisation rights will include:

• disposing by way of private sale at a fair value
• disposing by way of public auction
• exercise all or any of the rights, including voting rights attached to the shares.

None of these require any court involvement: no receiver or liquidator needs to be appointed and the exercise of such rights does not need a court order.

In the South African market, it is common practice to contractually subordinate such loans to any other loans by way of a subordination agreement or an intercreditor agreement.

Office/Industrial/Retail

The typical range is between 3-5 years, but shorter and longer options are not unheard of.

See above. No maximum length.

Office/Industrial/Retail

In South Africa, a long-term lease (i.e. exceeding 10 years) must be registered in the Deeds Registry Office to be enforceable against third parties and new property owners. However, generally, unless the lease agreement expressly provides for renewal options, the landlord is under no obligation to extend it. Further, courts generally do not have the power to grant new leases. South African commercial leases are less standardised than their residential counterparts and therefore there is a fair amount of variation between them – in the context of a fixed-term lease agreement without the option to renew, it is common to have a tenant placed on a month-to-month tenancy subject to market-related escalations; more sophisticated commercial or anchor tenants will have renewal options.

If a lease is entered into for a fixed period of time it will not be possible for the tenant or the landlord to terminate the lease prematurely, with the exception of termination by mutual consent; the termination or breach clause may include notice periods and any penalties for early termination.

In the South African market, commercial tenants do not have equivalent security of tenure protections as residential or agricultural tenants – this is because commercial leases are primarily governed by contract law.

Usually the rent will be paid monthly in advance.

Rent reviews are often done annually.

Commercial leases may have a fixed annual escalation or a market rent increase subject to the consumer prices index (CPI).

In South Africa, all details pertaining to rental increases for a commercial property should be stipulated in the lease agreement.

The lease agreement should outline who is responsible for what aspects of property maintenance and repairs.

The lease agreement should outline who is responsible for what aspects of property maintenance and repairs. In practice, the landlord will be responsible for the maintenance and upkeep of common areas and structural repairs.

Landlords are usually responsible for structural repairs. The tenant must not modify the structural parts of the premises/building without the landlord’s prior approval (typically to be provided in writing).

Either party can insure the premises, although it is common for the landlord to insure property structure, while the tenants insure their own contents, equipment and inventory within the property.

A landlord may levy VAT on the rental and other service charges.

The payment of municipal rates outgoings will be determined by the type of commercial lease agreement. In practice, tenants are often required to pay municipal rates.

In addition to service charges, the parties can agree that the tenant must pay other ancillary costs, such as premiums for insurance taken out by the landlord.

The ability to recover any landlord outgoings will be determined by the type of commercial lease agreement, for example:

• gross lease – the landlord will be responsible for all operational and maintenance expenses
• net lease – the landlord will cover the cost of maintenance and operations for the common areas of the building
• triple net lease – the landlord will distribute all costs for the common areas across all tenants.

Yes.

Yes, in South Africa all property valuations must be performed by a valuer registered with the South African Council of the Property Valuers Profession.

Yes, an environmental consultant may be appointed to undertake a range of different investigations and reports.

In South Africa, lenders are generally not directly liable for environmental law breaches simply because they hold a mortgage over real estate. However, if a lender enforces the mortgage bond and assumes ownership, it may become liable, among other provisions, under the National Environmental Management Act and the National Water Act.