During a recent signing session of bond documents there emerged one clause which troubled Mr. X, the prospective mortgagor, to no end: the “additional sum” appearing in the bank’s draft bond. Despite my thorough explanations, Mr. X insisted on trying to get hold of an attorney he knew and trusted in order to confirm what I said and to ally his fears regarding signing for this significant amount which he had no foreknowledge of. Eventually he suspended the signing session and only resumed days later after having spoken to his personal attorney.
Clients are as a rule confused or even suspicious when encountering the “cost clause” in the mortgage bond, also known as the “additional sum” or “additional amount”. What is it, and why is it there?
In a typical mortgage bond (or notarial bond) the cost clause normally follows at some point after recital of the capital amount and the causa (the paragraph briefly setting out the cause of the debt). It states an amount for which the mortgagor will be liable in addition to the capital amount. An example of a typical phrasing would be: X amount in respect of costs and similar causes, such as service fees, commission, costs of legal proceedings (plus VAT) for recovery of the capital, all monies disbursed in respect of stand licenses Government and Municipal rates and taxes and other charges in respect of the mortgaged property, insurance premiums and costs of repairs and maintenance, and in general all costs of maintaining and realising the property under the mortgage bond. The wording of this clause differs from financier to financier, and it may include more or less details, however it has a wide ambit in practice, even if not stipulated expressly.
The basic function of the cost clause is to ensure that the mortgagee (the bank) will have a preferent claim (ranking first in the arena of insolvency) for reimbursement of all expenses incurred in and leading up to realizing (selling off) the security (the movable or immovable property under the bond). It also includes the costs of maintenance of security reasonably incurred before the security is realized. The bank must in other words be able to out-compete other creditors to recover their expenses and legal costs from the proceeds of the property mortgaged.
The cost clause has nothing to do with future capital debts covered by a covering mortgage bond – section 51(2) of the Deeds Registries Act, 47 of 1937 provides that if a bond “…purports to secure payment… of the costs of preserving and realizing the security or of fire insurance premiums, cost of notice or bank exchange, such costs and charges shall not be deemed to be future debts within the meaning of subsection (1).”
The basic principle of the cost clause, namely that a mortgagee (or any person holding a lien) should be entitled to reclaim the costs of maintenance and the realizing of such security, predates the Deeds Registries Act, 47 of 1937. In Ford v. Reed Bros. 1922 TPD 266 it fell to be determined by the Transvaal Provincial Division whether the expenses incurred in feeding and keeping horses held as security for debt, could be recouped under a lien. In comparing English law and Roman-Dutch law, the court found that under Roman-Dutch law “…the legal costs of enforcing a mortgage bond or even of a lien are added to and form part of the principal (debt)”. Incidentally, the appellant was (partly successfully) represented by MacRobert & de Villiers.
The above principle is echoed by section 89(1) of the Insolvency Act, 24 of 1936, which states in the context of the mortgagor’s insolvency that “the cost of maintaining, conserving, and realizing any property shall be paid out of the proceeds of that property, if sufficient…” (and if insufficient, by the secured creditors who proved their claims), and also by section 66(2) of the Magistrates Court Act, 32 of 1944.
In First Rand Bank Ltd v Body Corporate of Geoy Villa, 2004 (1) SA 362, the Supreme Court of Appeal had no problem finding that, since the mortgagor’s estate wasn’t sequestrated in that case, the mortgagee’s claim was preferent to that of the body corporate for costs of realization where it was actually the body corporate who sold the property in execution.
On perusing the law reports, it becomes clear that the mortgagee’s preferent claim for costs of realization is not a contentious issue before the courts.
It is normal practice that the amount of the cost clause is 20 – 25% of the capital amount in the bond. This however seems to be a mere deeds practice convention. Writer once registered a mortgage bond with a cost clause amounting to 50%, at the insistence of a mortgagee who was a private financier and who foresaw litigation against the mortgagor in the future. Whether it is advisable to deviate from the norm might depend on the circumstances.
Back to Mr. X – did he have anything to worry about? Not as long as he keeps servicing that bond…
