Nelson Borman & Partners legal firm has highlighted the risks of keeping a sale alive through the bond clause, or as it is often referred to, the subject to sale. This bond clause refers to buyers securing a loan to pay for the purchase price of the property that they want to buy – and within a certain timeframe – and sometimes this refers to the sale of an existing property owned by the buyer.
The bond clause is very common in Offers to Purchase property, but they must be worded accurately to avoid any of them being misconstrued. Here are two examples of what can happen when there is ambiguity:
Case One
In the High Court Case of Phepeng and Another v Estate Late Ame Combrinck and Others (2017(4) 266(FB)), evidence shows that the purchaser had 30 days to obtain a loan, quotation and pre-agreement. However, nowhere in the Offer to Purchase did it state that the relevant documents needed to be lodged with the seller.
The purchaser, however, had obtained a loan from a bank, accepted it in time and communicated this with the seller. However, thereafter the purchaser asked the seller if she could negotiate a better interest rate with a different bank, which was denied by the seller, who also made the decision that the bond clause had not been fulfilled in time. The seller, based on this fact, had actually accepted a better offer.
The purchaser made an appeal to the High Court, to interdict the transfer to the other purchaser, wishing the sale to revert to her. The court agreed with the purchaser that the wording of the bond clause required her to simply obtain the loan offer without the need to lodge that documentation to the seller, and ordered the seller to transfer the property to the original purchaser.
What is clear from this is that both the seller and the purchaser had interpreted of the obligations imposed by the bond clause differently. The purchaser believed she had fulfilled the condition, but the seller argued she had not based on not formally receiving the loan offer, quotation, or pre-agreement within the 30-day period.
Nelson Borman gives another, more recent example:
Case Two:
Just before the Covid-19 pandemic lockdown struck, the buyer bought a house for his daughter and her family for R4.95-million. He paid a R1-million deposit into a trust account and undertook to pay the balance on transfer. The sale agreement included a standard bond clause.
The buyer applied for a bond and was granted one, but, critically, this only happened after the expiry of the deadline set out in the bond clause. Meanwhile, a conveyancing secretary wrote an email advising that “…we have spoken to the purchaser and the purchaser advised that he will make payment of the full purchase price… He will be buying the property cash.”
The daughter and her family were given early occupation as they were keen to get going with repairs, alterations and landscaping, all of which was halted when the architect discovered that there were no plans for parts of the building and that it was thus illegal. The daughter returned the keys, and her father demanded a refund of his deposit. The seller refused, claiming that the buyer had both waived his right to rely on the bond clause and repudiated (renounced) the sale. His deposit would therefore be retained to cover the seller’s damages claim against him.
The buyer’s argument was that he had never waived his rights under the bond clause as per the waiver email sent by the agent of the conveyancer, and that the whole sale was null and void from midnight on the date of expiry of the bond clause deadline. That, argued the buyer, entitled him to the return of his R1m deposit.
The High Court agreed with the buyer that the sale had lapsed and ordered that he be repaid his R1-million. The SCA also refused the seller’s application to appeal against this decision, holding that there is a factual presumption against waiver in our law. The onus was, therefore, on the seller to prove that the buyer had waived his rights to the bond clause. He needed to provide “clear proof” of a “valid and unequivocal waiver” showing that “[the buyer] was aware of those rights, intended to waive them and did do so”. The Court said he had failed to prove this.
The agreement required (as is standard) “that any waiver of any right arising from or in connection to the agreement be in writing and signed by the party to the agreement.” Given there was no proof of that, and the seller’s suggestion that the conveyancer had acted as the buyer’s agent in writing the disputed “waiver” email, the Court held that the seller had failed to prove that the conveyancer “was duly authorised to waive those rights, of which [the buyer] was fully aware, and that [the conveyancer] knew all the relevant facts, was aware of those rights and intended to waive them.”
“Most agreements provide that the bond clause is there for the sole benefit of the buyer,” says the Nelson Borman article, “who is thus entitled to waive it, i.e. to tell the seller on the basis that ‘I no longer need a bond and I’ll pay the purchase price in cash so the sale can proceed.’ The sale died when the bond clause deadline expired. It was, as Monty Python might have put it, deceased, expired, and bereft of life. The buyer gets his R1m back!”
A well-drafted bond clause
There are innumerable cases to demonstrate how significant the wording of a bond clause can make or break a court decision. The lesson to be learned is that an Offer to Purchase must explicitly make provision for any or all potential actions of a bond clause and that the wording thereof should be drafted accordingly, leaving no wriggle room for either the seller of buyer. There is no one-size-fits-all bond clause so the advice is consult with a legal expert when a bond clause is required, to ensure that every potential scenario is catered for.
