Notarial bonds as a form of security

This article unpacks what notarial bonds are and how notarial bonds come about. We also look at it as a form of credit security and various other related aspects such as what property it encumbers, the protection afforded to the creditor and the cost of registering a notarial bond.

What is a notarial bond and how does it come about?

A notarial bond is a form of security held by a creditor (“the creditor”/“the mortgagee”) against a debtor’s (“the debtor”/“the mortgagor”) movable property, as opposed to a mortgage bond which is a form of security held by a creditor against a debtor’s immovable property. The necessity to execute a notarial bond usually arises in situations of monies lent and advanced wherein the mortgagee requires assurance in the form of security that amounts owed to it will be repaid. As such, unless there is an original or principal obligation (such as a loan agreement) there can be no notarial bond. Furthermore, only so much of the mortgagor’s movable property, as is enough to secure the amounts owed in terms of the notarial bond, may be bonded.

Movable property such as vehicles, artwork and jewellery may be bonded. This is not an exhaustive list. As a form of security, notarial bonds offer both the mortgagor and mortgagee convenience in that the mortgagee has guaranteed security for the repayment of monies owed to them while the mortgagor gets to keep and is not required to hand over such bonded movable property to the mortgagee (unless the mortgagor subsequently defaults on payment, but this is a different aspect of notarial bonds not discussed herein).

Section 102 of the Deeds Registries Act 47 of 1937, as amended (“the Act”), defines a notarial bond as a bond attested by a notary public, hypothecating (pledging) movable property generally or specifically (own emphasis). This definition will be looked at later on in this article.

The relevant notarial bond is drafted by a notary and executed in front of such notary by only the mortgagor. As such, it is a unilateral document. Once registered in the Deeds Office, the notarial bond enables the mortgagee, in the event of default by the mortgagor, to have the mortgaged movable property sold in satisfaction of its claim against the mortgagor.

What movable property can a bond hypothecate and additional amounts?

As outlined above, section 102 of the Act defines a notarial bond as a bond attested by a notary public, hypothecating (pledging) movable property generally or specifically. This means that when executing a notarial bond, a mortgagor may hypothecate all of his movable property wheresoever situate in the Republic (generally) or he may hypothecate only certain of his movable property (specifically). A notarial bond may, as a matter of course, hypothecate both the mortgagor’s movable property generally and specifically thereby affording the mortgagee the best security.

The mortgagor need hypothecate only so much of his movable property as is enough to secure the amounts owed in terms of the notarial bond. This amount will include what is termed an “additional amount” which is basically a specified amount secured by the mortgagee (from the mortgagor) in respect of costs and expenses incurred in preserving and realising the hypothecated movable property.

Ranking

Upon the registration of the notarial bond, the mortgagee acquires a real right of security in the movable property specified in the notarial bond. Should the mortgagor default on payment to the mortgagee, the mortgagee could have the mortgaged movable property sold and could receive payment of the debt out of the proceeds in preference to the mortgagor’s other creditors. The same scenario applies in the event of the mortgagor’s insolvency.

Cost

The cost of executing and having a notarial bond registered, which cost includes the notary’s fee and cost of registration at the Deeds Office, is determined on a tariff basis determined by the value of the underlying loan agreement/amount so bonded by the notarial bond. As such cost of execution and having the notarial bond registered is usually borne by the mortgagor, this form of security may prove attractive to lenders.

Conclusion

Notarial bonds offer security to a lender for the repayment of monies lent where the mortgagor has no immovable property to put up as security. As such, lenders may wish to consider securing their loans by means of a notarial bond.

Please note that the above article has been authored for information purposes only and does not constitute legal advice. The reader is therefore advised to consult with an attorney and notary where necessary.