The Applicant wanted to donate his farm to his grandchildren, but in order to avoid the tax implications thereof, he established a trust to which the farm was transferred. The agreement for the purchase of the farm was signed by one of the trustees prior to either of them being authorised to act as such. At the time of the registration of the transfer pursuant to the sale, the trustees had been properly authorised to act as such by the Master. The Applicant applied for the cancellation of the registration, on the basis that the original sale agreement was invalid, and accordingly, the subsequent registration should also be invalid.
Section 6(1) of the Trust Property Control Act (the “Act”) provides that: “any person whose appointment as Trustee in terms of a trust instrument or court order, comes into effect after the commencement of this Act, shall act in that capacity only if authorised thereto in writing by the Master”.
Section 6(1) of the Act is indicative of a definitive prohibition from acting as a Trustee until authorised thereto. It is a precondition of a Trustee’s right to act as such, that he will be authorised to do so in terms of section 6(1) of the Act.
The court in Kriel v Terblanche distinguished between the two theories of passing ownership, namely, the causal theory and the abstract theory.
In terms of the abstract theory, the validity of the transfer of ownership is not dependent upon the validity of the underlying transaction, whereas the causal theory requires a valid underlying legal transaction or iusta causa as a pre-requisite for the valid transfer of ownership. In terms of the abstract theory, the transfer of ownership can take place even if the underlying agreement is defective (or even void) so long as the real agreement is valid.
The courts had long ago adopted the abstract theory in preference to the causal theory in respect of the transfer of movable property in Commissioner of Customs and Excise v Randles Brothers and Hudson Ltd and Dreyer and Another NNO v AXZS Industries (Pty) Ltd, however, uncertainty remained with regard to the transfer of immovable property.
South Africa follows the registration of deeds (negative) system. The importance of which system of registration is in place is its effect on third parties relying on the information in the register.
The judge acknowledged that the sale agreement was void in that the trustees lacked the requisite authority in terms of 6(1) of the Act but found that this did not preclude the transfer from taking place.
The court held that the abstract theory consists of two legal acts, namely on delivery (effected by registration) and a real agreement.
Further, the court held that the true determining factor is to consider whether a valid “real agreement” existed between the parties, and this forms the basis of the abstract theory. A “real agreement” requires one to look at the intention of the seller to give transfer of ownership together with the intention of the purchaser to become owner of the property.
Although the Applicant contended that applying the abstract theory would create uncertainty, since it may assign different consequences to the underlying agreement than the law ordinarily does, the court rejected this argument and held that the abstract system is complementary to South Africa’s negative system of registration and therefore reduces uncertainty. It is argued to be complementary in that there is no need to rely on an underlying causa and therefore, third parties relying in good faith on the data in the deeds office will not be prejudiced by the preceding.
Prior to the case of Kriel v Terblanche, the approach of the courts to section 6(1) of the Act when dealing with the acquisition of property by the trustee on the Trust’s behalf prior to their appointment as trustee by the Master, brought about uncertainty to the registration of such acquisitions.
The Kriel decision illustrates that the application of the abstract theory has a role regarding the validity of transactions relating to the transfer of ownership. These transactions would be valid provided that the trustees were properly authorised when registration of the transfer took place.
The court’s decision in Kriel v Terblanche removed the uncertainty as to whether or not the abstract theory was applicable to immovable property as the court accepted that the abstract theory applies to movable property and immovable property alike.
The decision of the High Court in Kriel v Terblanche has been confirmed in the Supreme Court of Appeal in Legator McKenna Inc v Shea wherein it was held that: “the time has come for this court too add its stamp of approval to the viewpoint that the abstract theory of transfer applies to immovable property as well”.