Section 57 Substitution of Debtors under a Bond – What Are They And How Do They Work?

What is a Section 57 substitution?

An application in terms of Section 57 of the Deeds Registries Act is an application to substitute the debtor on a bond i.e. an application to “remove someone from the bond”. The application is brought by the new owner of the land who will become the new debtor under the bond once the substitution is registered.

Once the substitution is registered, an endorsement in the form of a stamp is placed on the bond by the Deeds Office stating that the debtor has been substituted either for someone entirely different or if it is a joint bond, for his co-debtor. This effectively releases the debtor from all his obligations under the bond.

What does Section 57 say?
Section 57 states:

“If the owner (in this section referred to as the transferor) of land which is hypothecated under a registered mortgage bond other than a mortgage bond to secure the obligations of a surety (not being a person referred to in paragraph (b) of sub‑section (1) of section fifty six) transfers to another person the whole of the land hypothecated there under, and has not reserved any real right in such land, the registrar may, notwithstanding the provisions of sub‑section (1) of the said section, register the transfer and substitute the transferee for the transferor as debtor in respect of the bond: Provided that there is produced to him, in duplicate, the written consent in the prescribed form of the holder of the bond and the transferee to the substitution of the transferee for the transferor as the debtor in respect of the bond for the amount of the debt disclosed therein or for a lesser amount.”

 

What does all of that mean?

  • The bond can’t be a surety bond.
  • The debtor must transfer the whole land or
  • The debtor must transfer the whole of his share in the land.
  • The debtor must transfer all the land bonded under the bond.
  • The Bank must consent to the substitution.
  • The new owner / debtor must consent to the substitution.
  • The debtor cannot have reserved a real right over the land.
  • The new owner / debtor must be someone capable of bonding land.

Below are some of the common scenarios that you will encounter which will illustrate how and when Section 57 will or will not apply.

When does Section 57 apply?

Section 57 substitutions will apply to the following situations:

Example 1

A owns the land.

A sells the land to B. B can be substituted as the debtor under the bond.

Why? A is selling the whole of his land.

Example 2

2.1          C & D own the land jointly.

C sells his share to D. D can be substituted as the debtor under the bond.

Why? C is selling the whole of his share in the land.

2.2          C & D own the land jointly.

C sells his share to E. E can be substituted as the debtor under the bond, provided that D consents to E becoming a co-owner and co-debtor with D.

Why? C is selling the whole of his share in the land with D’s consent to the substitution.

2.3          C & D own the land jointly and are married to each other out of community of property.

C & D divorce and D is awarded the property in terms of the divorce order. D can be substituted as the debtor under the bond.

Why? C is transferring the whole of his share in the land.

2.4          C & D own the land jointly and are married to each other out of community of property.

C is deceased and D is his heir in terms of his Will. D can be substituted as the debtor under the bond.

Why? C’s estate is transferring the whole of his share in the land.

Example 3

F owns land X and land Y and both properties are bonded under the same bond.

F sells land X and land Y to G. G can be substituted as the debtor under the bond.

Why? F is selling all of the land that is bonded.

When does Section 57 not apply?

Section 57 will not apply to the following situations:

Example 1

A owns the land.

A sells a half share in the land to B. B cannot be substituted as the debtor under the bond.

Why? A must sell the whole of the land. In this example he is not selling the whole of the land, only a part of it.

Example 2

C & D own the land jointly.

C sells a quarter share to E. E cannot be substituted as the debtor under the bond.

Why? C must sell the whole of his share in the land. In this example he is not selling the whole of his share, only a part of it.

Example 3

F owns land X and land Y and both properties are bonded under the same bond.

F sells land X to G. G cannot be substituted as the debtor under the bond.

Why? F must sell all the land bonded. In this example he is not selling both properties, only 1 of them.

Example 4

A owns the land.

A sells the land to B but reserves a usufruct in the land for himself. B cannot be substituted as the debtor under the bond.

Why? A usufruct is a real right and Section 57 does not apply if the owner reserves a real right as part of the sale.

Example 5

Section 57 will not apply to certain persons who are not capable in law of bonding land e.g.

  • Trustees of insolvent estates
  • Liquidators of companies that are being wound up
  • Minor children without the necessary consent

Once you have established the type of transfer scenario you are faced with and have determined whether or not Section 57 applies to it, the next step is to obtain the bank’s consent.

If Section 57 does apply, the new debtor must apply to the bank for a Section 57 substitution consent. Different banks will deal with this application in different ways. Some merely update their system while others will allocate a new home loan account number and require formal bond documents to be signed. All the banks will do a full credit assessment to ensure that the new debtor qualifies for the bond.

Once this is completed and the bank is satisfied that the new debtor qualifies for the bond, they will instruct an attorney to register the Section 57 substitution at the Deeds Office.

If Section 57 does not apply, the existing bond will have to be cancelled and depending on the type of transfer scenario, the new debtor will have to register a new bond in his own name.

Please bear in mind that not all banks will allow a Section 57 substitution of debtor. Depending on the bank’s own internal rules, they may not allow you to substitute a debtor, even though it is allowed in terms of the provisions of the Act. In such cases the existing bond will have to be cancelled and depending on the type of transfer scenario, the new debtor will have to register a new bond in his own name.

Simultaneous transfer

As has become obvious from the discussion above, the Section 57 substitution is linked to a transfer of land. It cannot exist in isolation. To “remove someone from the bond” also means that they must be removed from the title deed to the land and this can only be done by way of a transfer.

The transfer will take place simultaneously with the registration of the Section 57 substitution at the Deeds Office.

Unless the transfer is taking place as a result of a divorce or from a deceased estate, there must be a sale agreement drawn up to give effect to the transfer.

The value of the property will need to be determined for purposes of calculating possible transfer duty payable to SARS and the transfer costs payable. In divorce transfers and transfers from a deceased estate, the municipal value of the land can be used. In all other transfers the value of the land must be determined with reference to 2 estate agent’s valuations or the valuation of a sworn valuator.

How much will this process cost?

Section 57 substitution

The costs are based on 75% of the amount of the bond, as it was originally registered in the Deeds Office. The same tariff is used as for new bond registrations.

Deeds Office fees and other disbursements will also apply.

Transfer

Depending on the type of transfer and the value of the property, transfer duty may apply. However, there is a significant saving in certain circumstances, where transfer duty is exempted.

Transfer costs will be based on the value of the property.

Deeds Office fees and other disbursements will also apply.

A rates clearance must be obtained and if the property is situated in a body corporate or Home Owners Association, levy clearance will have to be obtained.

Our office is always open to assist you in determining if Section 57 is applicable to your transfer scenario and to provide quotes for all costs involved as well as draft any sale agreements that may be necessary.

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