2 September 2011

Is a title deed valid if the underlying agreement is invalid?

Is a title deed registered in terms of an invalid underlying agreement also invalid? This question was raised (and answered) in the Supreme Court of Appeal's (SCA) judgment in the case of Legator McKenna Inc and another v Shea and others 2010(1) SA 35 (SCA).

The relevant facts were as follows: Mr McKenna was appointed as curator bonis for Ms Shea who was severely injured in a motor vehicle accident. After his appointment, but before letters of curatorship were issued to him, Mr McKenna received an offer to purchase Shea's house from a Mr and Mrs Erskine. He accepted the offer but inserted the words "subject to the consent of the Master".

The property was then transferred to the Erskines. Contrary to expectations, Shea recovered from her injuries and claimed the house back against refund of the purchase price, on the basis that the sale was invalid in that it was concluded by McKenna before the Master had issued him with letters of curatorship in terms of section 72(1)(d) of the Administration of Estates Act 66 of 1965 (the Act).

The court a quo decided in Shea's favour and McKenna appealed.

In its judgment, the SCA found that by adding the words "subject to the consent of the Master", McKenna made a counter offer to the Erskines. Although it can be argued that the offer was implicitly accepted by the Erskines when they signed transfer documents, it still did not comply with the formalities set out in section 2 of the Alienation of Land Act 68 0f 1981 and therefore it was invalid.

Consequently, it was not necessary to decide whether a conditional agreement of sale, subject to the approval of the Master would constitute a contravention of section 71 of the Act.

The SCA then examined the abstract and causal theories of transfer. According to the abstract theory, the validity of the transfer of ownership is not dependent on the validity of the underlying transaction such as in this case, the sale agreement. The causal theory of transfer requires a valid underlying legal transaction as a prerequisite for the valid transfer of ownership.

After considering a number of cases and articles, the SCA came to the conclusion that the abstract theory of ownership applies to moveable and immoveable property alike. In terms of this theory, the requirements for the passing of ownership are twofold.

These are:

  • delivery, which in the case of immoveable property is effected by registration in the Deeds Office, and
  • so-called real agreement, the essential elements of which are an intention on the part of the transferor to transfer ownership and the intention of the transferee to become owner of the property.

Both requirements must be complied with: ownership will not pass if there is a defect in the real agreement.

The SCA found that, although no valid underlying agreement exists, in terms of the abstract theory that there were no defects in the real agreement and therefore the house was validly transferred.

In so far as a possible claim for unjust enrichment is concerned, the SCA also confirmed the so-called "rule in Wilken v Kohler" (1913 AD 135) which provides that if both parties to an invalid agreement had performed in full, neither party can recover his or her performance purely on the basis that the agreement was invalid. However, the rule cannot apply where the purpose of the transaction is prohibited by law. Therefore, this rule will not be available against a claim brought under the condictio ob turpem vel iniustam causam.

The SCA found that this condictio is not applicable in this instance since McKenna did not enter into an illegal agreement. If it is argued that he did not enter into an agreement at all, the Wilken v Kohler rule would be applicable. On the other hand, if it is argued that he entered into an invalid agreement because the formalities prescribed by section 2(1) of the Act were not complied with (as the SCA had found), the situation is governed by section 28(2) of the same Act, which provides that an alienation which does not comply with the formalities set out in the Act shall in all respects be valid ab initio if the alienee had performed in full and the land in question had been transferred to the alienee.

The appeal was upheld with costs.

An invalid underlying agreement does not affect the validity of the title deed, provided that both parties performed in full and that the lawful purpose of the transaction, common to both, has been achieved.

Len Kruger

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