Arbitrary deprivation: Sectional title endowments

Some sectional title schemes have a management rule preventing the sale of a unit without a clearance certificate relating to an ‘endowment’. [For an example see below]. The clearance certificate will only be provided upon proof of payment of an ‘endowment’ to the body corporate. Usually the endowment is at least 5% of the difference between the final selling price and the original purchase price of the unit, and some capital improvements. A number of important issues arise, including the constitutionality of such a provision. In terms of s 25(1) of the Constitution, 1996 citizens cannot be “deprived of property except in terms of law of general application, and no law may permit arbitrary deprivation of property”. What is immediately apparent is that depriving an owner of such ‘endowment’ is not a levy. It only applies to owners when they sell and it is not determined by the owners or the trustees. In addition it does not amount to an ‘expropriation’.

Issues

What is meant by law of general application ?
Whether money forfeited constitutes property;
If so, whether it amounts to deprivation;
If so, whether the deprivation is arbitrary;
Whether a claim based on unjustified enrichment nullifies arbitrariness; and
Whether any limitation is justifiable in terms of s 36(1) of the Constitution.

Discussion

Such ‘endowments’ must be regarded as property and the payment constitutes a deprivation. As will be shown below the common law is regarded as ‘law of general application’. Legislation regulating sectional titles does not provide for such a deprivation. But legislation does envisage management and conduct rules. So it is arguable that a management rule is covered by ‘law of general application’ when providing for such an embargo and that a clearance certificate will only be issued on proof that the endowment will be paid.

Arbitrary deprivation

In this regard see National Credit Regulator v Opperman 2013 (2) BCLR 170 (CC) and Chevron SA (Pty) Ltd v Wilson t/a Wilson’s Transport 2015 (10) BCLR 1158 (CC). It was held that a deprivation of property is “arbitrary” within the meaning of sec 25 if the “law”:

fails to provide sufficient reason for the deprivation; or
is procedurally unfair.

In the Chevron case the reason was accepted as being sufficient. But a court hearing such a matter was not given any discretion when ordering forfeiture. That meant there was an arbitrary deprivation of property and being procedurally unfair it rendered any deprivation under that law as arbitrary.

Unjust enrichment

It was also held that an enrichment claim did not neutralise the arbitrary nature of the deprivation as the claim still had to be proven and it may succeed or fail. Restitution was not guaranteed and the debtor might not be able to pay.

Unjustifiable limitation

The arbitrary deprivation constituted an unjustifiable limitation of the property right because there were less restrictive means to achieve the purpose of preventing and punishing unlawful credit agreements to protect consumers. Less restrictive means to achieve the same end included granting a discretion to a court to make a just and equitable order, depending on the circumstances of each individual case.

Endowments – application of constitutional law

Unless the management rule provides for the exercise of some discretion on the part of the trustees or owners when enforcing the rule it can be argued that the rule is procedurally unfair and constitutionally invalid. Since the judgment in Barkhuizen v Napier 2007 (7) BCLR 691 (CC) it is very clear that the enforcement of unreasonable or unfair management rules may be contrary to public policy, which includes notions of fairness, justice, equity and reasonableness.

Surely a management rule that has the effect of forcing an owner to pay a portion of the selling price without any right to be heard is unconstitutional? Not only can the purpose of having the rule be questioned, but more particularly it amounts to an arbitrary deprivation.

Some excerpts from that judgment seem to support that argument.

Public policy

“Notions of fairness, justice and equity, and reasonableness cannot be separated from public policy. Public policy takes into account the necessity to do simple justice between individuals.33 [Footnote omitted] Public policy is informed by the concept of ubuntu”. [para 51]

“Public policy imports the notions of fairness, justice and reasonableness. Public policy would preclude the enforcement of a contractual term if its enforcement would be unjust or unfair. Public policy, it should be recalled “is the general sense of justice of the community, the boni mores, manifested in public opinion”. [para 73]

Fairness

In Barkhuizen v Napier it was stressed that two questions need to be asked in determining fairness.

whether the clause itself is unreasonable; and
if the clause is reasonable, whether it should be enforced given the circumstances that prevented compliance with it [such as a time limitation clause].

Reasonableness – objective test

The first question involves the weighing-up of two considerations that express the constitutional values that must inform even common-law principles of contract:

public policy as informed by the Constitution requires in general that parties should comply with contractual obligations that have been freely and voluntarily undertaken. “Self-autonomy, or the ability to regulate one’s own affairs, even to one’s own detriment, is the very essence of freedom and a vital part of dignity. The extent to which the contract was freely and voluntarily concluded is clearly a vital factor as it will determine the weight that should be afforded to the values of freedom and dignity”; and
all persons have a right to seek judicial redress.

Circumstances – subjective test

The second question involves an inquiry into the circumstances that prevented compliance with the clause. “What this means in practical terms is that once it is accepted that the clause does not violate public policy and non-compliance with it is established, the claimant is required to show that, in the circumstances of the case there was a good reason why there was a failure to comply”.

Two independent questions

“ . . . the first inquiry must be directed at the objective terms of the contract. If it is found that the objective terms are not inconsistent with public policy on their face, the further question will then arise which is whether the terms are contrary to public policy in the light of the relative situation of the contracting parties. . . . . that the relative situation of the contracting parties is a relevant consideration in determining whether a contractual term is contrary to public policy. I endorse this principle. This is an important principle in a society as unequal as ours”. [para 59]

Example of a management rule

Endowment

Owners unequivocally accept and acknowledge that –

(1) if they wish to sell, donate, or otherwise dispose of their units, save only to their spouse, a condition will invariably be imposed by the body corporate, when granting such consent, requiring them to pay to the body corporate a cash endowment equivalent to 5%, save and except in the event of owners reselling their units within 6 months of the date of purchase by them, in which event such cash endowment shall be levied at an increased rate of 20%, of the amount by which the net proposed selling price (that is to say the gross selling price less only the commission or brokerage actually paid or legally payable to a estate agent in respect of such sale) or the amount at which the unit is valued for transfer duty purposes, exceeds the sum of:

(a) the purchase price originally paid by owners as reflected in the conveyancer’s certificate in terms of section 11(4) of the Act, in pursuance of which the relevant certificate of registered sectional title to such unit was endorsed in their favour; and

(b) the aggregate of the capital costs actually incurred by such owners in the improvement of the section comprised in their units by way of the permanent addition, fixture or fitting of carpets, cupboards, lights, stoves, ovens and the like, provided that such additions, fixtures or fittings are sold and transferred by them with such unit; and evidence, acceptable to the trustees, of the capital cost incurred by such owners shall have been produced by them within a reasonable time of the date on which such costs were incurred; and

(2) The trustees of the body corporate shall be entitled to withhold the issue of their section 11(4)(b) certificate until such time as such endowment has been properly paid or a guarantee, acceptable to them, of payment thereof has been received by them.

(3) Notwithstanding these provisions it shall be accepted without proof that any owners selling units, will have incurred capital costs amounting to R50,000.00 in the improvement of the section comprised in their units, for the purposes of this management rule.

GilesFiles on July 12, 2016 at 9:13 am

Brisley v Drotsky 2002 (12) BCLR 1229 (SCA)

Excerpt from headnote

“Cameron JA concurred in the joint judgment of Harms, Streicher and Brand JJA but desired to add some observations.

All law presently enforced in South Africa and applied by the courts derived its force from the Constitution. All law was therefore subject to constitutional control, and all law inconsistent with the Constitution was invalid. That included the common-law of contract, which was subject to the supreme law of the Constitution.

In addition, the Constitution required the courts, when developing the common-law of contract, to promote the spirit, purport and objects of the Bill of Rights. The Shifren decision had represented a doctrinal and policy choice which, on balance, was sound. That choice in itself remained sound. Constitutional considerations of equality did not detract from that.

In addition to an exception for instances of fraud, there might be circumstances in which an agreement, unobjectionable in itself, would not be enforced because the object it sought to achieve was contrary to public policy. Public policy in any event nullified agreements offensive in themselves. In its modern guise, “public policy” was now rooted in the Constitution and the fundamental values it enshrined. These included human dignity, the achievement of equality and the advancement of human rights and freedoms, non-racialism and non-sexism.

Contracts offending these fundamental aspects of the new social compact would be struck down as offensive to public policy. They would be struck down because the Constitution required it. The decisions that proclaimed that the limits of contractual sanctity lay at the borders of public policy would therefore receive enhanced force and clarity in the light of the Constitution and the values embodied in the Bill of Rights. But over-hasty or unreflective importation into the field of contract law of the concept of “boni mores” was undesirable.

The “legal convictions of the community” – a concept open to misinterpretation and misapplication – was better replaced, as the Constitutional Court itself had suggested, by the “appropriate norms of the objective value system embodied in the Constitution”. Neither the Constitution nor the value system it embodied gave the courts a general jurisdiction to invalidate contracts on the basis of judicially perceived notions of unjustness or to determine their enforceability on the basis of imprecise notions of good faith.

The Constitution required that its values be employed to achieve a careful balance between the unacceptable excesses of contractual “freedom”, and securing a framework within which the ability to contract enhanced rather than diminished self-respect and dignity. The issues in the instant appeal did not imperil that balance.

3 Comments

GilesFiles on January 18, 2016 at 11:50 am

Concerning public policy and simple justice between persons see also
Settlement agreement: Alleged undue influence at CCMA
and the cases cited therein.
GilesFiles on February 22, 2016 at 10:27 am

See also Arbitrary-deprivation-absence-of-sufficient-reason-and-fair-procedure concerning clearance certificates and the judgment of Mkontwana v Nelson Mandela Metropolitan Municipality (CCT 57/03) [2004] ZACC 9; 2005 (1) SA 530 (CC); 2005 (2) BCLR 150 (CC) (6 October 2004)
GilesFiles on July 12, 2016 at 9:13 am

Brisley v Drotsky 2002 (12) BCLR 1229 (SCA)

Excerpt from headnote

“Cameron JA concurred in the joint judgment of Harms, Streicher and Brand JJA but desired to add some observations.

All law presently enforced in South Africa and applied by the courts derived its force from the Constitution. All law was therefore subject to constitutional control, and all law inconsistent with the Constitution was invalid. That included the common-law of contract, which was subject to the supreme law of the Constitution.

In addition, the Constitution required the courts, when developing the common-law of contract, to promote the spirit, purport and objects of the Bill of Rights. The Shifren decision had represented a doctrinal and policy choice which, on balance, was sound. That choice in itself remained sound. Constitutional considerations of equality did not detract from that.

In addition to an exception for instances of fraud, there might be circumstances in which an agreement, unobjectionable in itself, would not be enforced because the object it sought to achieve was contrary to public policy. Public policy in any event nullified agreements offensive in themselves. In its modern guise, “public policy” was now rooted in the Constitution and the fundamental values it enshrined. These included human dignity, the achievement of equality and the advancement of human rights and freedoms, non-racialism and non-sexism.

Contracts offending these fundamental aspects of the new social compact would be struck down as offensive to public policy. They would be struck down because the Constitution required it. The decisions that proclaimed that the limits of contractual sanctity lay at the borders of public policy would therefore receive enhanced force and clarity in the light of the Constitution and the values embodied in the Bill of Rights. But over-hasty or unreflective importation into the field of contract law of the concept of “boni mores” was undesirable.

The “legal convictions of the community” – a concept open to misinterpretation and misapplication – was better replaced, as the Constitutional Court itself had suggested, by the “appropriate norms of the objective value system embodied in the Constitution”. Neither the Constitution nor the value system it embodied gave the courts a general jurisdiction to invalidate contracts on the basis of judicially perceived notions of unjustness or to determine their enforceability on the basis of imprecise notions of good faith.

The Constitution required that its values be employed to achieve a careful balance between the unacceptable excesses of contractual “freedom”, and securing a framework within which the ability to contract enhanced rather than diminished self-respect and dignity. The issues in the instant appeal did not imperil that balance.

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