My bond contracted COVID-19 after approval!

What now?

Even before the pandemic of 2020 it happened (although not frequently) that financial institutions, such as banks, withdrew from a bond approval due to a change in circumstances. It has however become more prevalent that financial institutions withdraw from bonds that were approved prior to lockdown because of a change in the buyer’s financial position, due to the COVID-19 pandemic.

Unless a transaction is a cash sale transaction it is usually structured in such a way that the deed of sale is subject to the purchaser obtaining finance through the granting of a bond by a financial institution, on the institution’s standard terms and conditions. This is referred to as a suspensive clause or condition in the deed of sale. A deed of sale subject to a suspensive condition, will only become binding and enforceable once the condition has been fulfilled. Once the bond has been granted the suspensive clause is fulfilled and the agreement becomes enforceable.

It is common practice for financial institutions to include, in their standard terms and conditions, the right to withdraw from the bond before registration. However, once the bond has been granted and the condition in the deed of sale has been met, the subsequent withdrawal of the bond will not return the agreement to its suspended state. The sale has become binding and the purchaser now bears the risk of the consequences of such a withdrawal of the bond.

If the purchaser cannot pay the purchase price due to the withdrawal of the bond, and the contract is cancelled because of this, the purchaser may be liable to pay damages. These damages might include inter alia the estate agent’s commission and the wasted costs of the transferring attorney. Furthermore, if the seller is unable to sell the property for the same or at a better purchase price, the purchaser will be liable for the difference in the purchase price if the property is then later sold for a lower purchase price.

The purchaser will have to claim that the intervention of an unforeseen event, Covid-19 and possibly the subsequent enforced lockdown, has made it impossible to perform and that this was not as a result of any fault his part. This force majeure (or vis major) event is an unforeseen and superior force, event, or circumstance, which is beyond the control of the

contracting parties, and which renders contractual performance impossible. This very controversial issue has not yet been clarified by the courts with relation to Covid-19 and its effect on the economy.

In the past the courts have ruled that the impossibility must be absolute and not relative, and it must be applicable to everyone and not personal to the defendant. If we look at this verdict it seems that when purchasing a property through financing the purchaser must assume the risk that the financial institution may withdraw from the bond. However the courts have also stated that the reasoning underlying the doctrine of impossibility of performance is that justice requires that the law excuses non-performance where not to do so would effectively be punishing a party who wants to, but cannot, perform its obligations through no fault or neglect of his/her/its own, and in conditions whereupon by exercising reasonable and prudent care ab initio that party could never have foreseen that circumstances preventing it from performing would come to prevail.

At this stage none of the financial institutions are able to provide any definitive guidelines around the tightening up on their credit policies as a result of the economic outlook for South Africa. The banks have advised that their current policies regarding the re-assessment of unregistered bonds could change, depending on the extent of the deterioration in economic conditions.

Banks are also expecting an increase in bonds not proceeded with because of financially distressed borrowers whose bonds have not yet registered, requesting banks to withdraw their approval. It is extremely important that purchasers discuss any drastic change in their financial position with their bond originator or with the financial institution, but purchasers should also be careful that they do not cause the impossibility to perform through their own fault. The possible excuse for non-performance due to force major, as referred to above, will not be available to a purchaser who has ‘buyer’s remorse’, and causes the financier to withdraw from the bond.

There is unfortunately no clear answer that will be applicable to every situation and we encourage you to discuss your transaction as it progresses with the team at NVS Inc. Please do not hesitate to contact us if you have questions regarding your obligations in terms the deed of sale.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)