This blog was co-authored by Adrienne Hendricks, candidate attorney at Norton Rose Fulbright South Africa

In August 2024, the High Court held that a bank was entitled to enforce the suretyship and mortgage bond granted in its favour, for purposes of an enrichment claim which arose in connection with a void and unenforceable loan agreement.  

In this matter, the bank as the lender entered into a loan agreement with the respondent borrower to provide financing for the purchase of immovable properties. The borrower caused a covering mortgage bond to be registered over three of its immovable properties as continuing covering security for any amount owed to the bank.  The second respondent bound himself as surety and co-principal debtor in favour of the bank.  The loan agreement was void and unenforceable because the bank’s signatory was not properly authorised to bind the bank to the loan agreement.

A mortgage bond is always accessory to a primary obligation. If the obligations secured, for example arising under a loan agreement, are unenforceable, then the mortgage bond is also unenforceable.However, the court confirmed that a bond may also secure a debt arising from an enrichment claim arising from the loan agreement, depending on the terms of the bond itself.

In this matter, the causa (underlying cause or ground) for the mortgage bond was broadly worded, covering the borrower’s obligations towards the bank “for any cause whatsoever”. The mortgage bond further provides that it is a continuing covering security for monies lent and advanced and to be lent and advanced, and for monies that the bank may from time to time in future lend and advance to the mortgagor, and generally for any existing or future debts that the mortgagor owed or might owe to the bank.

Accordingly, the court held that the terms of the mortgage bond were sufficiently broad to encompass indebtedness other than that arising directly and only from the loan agreement. This would include an amount owed by the borrower in relation to an enrichment claim. Therefore, the mortgage bond was enforceable for purposes of the bank’s enrichment claim arising from the voidness and unenforceability of the loan agreement.

The borrower and the surety argued that the suretyship (being an accessory obligation) was unenforceable because it was derived from the unlawful loan agreement.

The court confirmed that a suretyship in relation to an invalid agreement may stand in respect of an enrichment claim in connection with such invalid agreement, provided that the terms of such suretyship are wide enough to cover the enrichment claim. As the suretyship provided by the second respondent was in relation to “any amount owed” by the borrower, either at the time or in the future, it was clear that the parties intended that the terms of the suretyship should be interpreted to have as wide a meaning as possible. Accordingly, the bank’s enrichment claim against the borrower fell within the ambit of the suretyship.  

It is important for lenders to note that bonds and suretyships are accessory in nature. This case emphasises the importance to lenders that the causa of bonds and suretyships (and other security) granted in their favour extends beyond the obligations owed under a specific loan agreement itself, as limited drafting decreases the effectiveness and enforceability of such accessory security, particularly in the context of an invalid loan agreement.  Express language to include an enrichment claim can also be considered.

The Land and Agricultural Development Bank of South Africa v Kinros Estates (Pty) Ltd and Another

The full judgement can be accessed at https://www.saflii.org/za/cases/ZAECMKHC/2024/84.html