The recent Supreme Court of Appeal judgment dated April 15, 2024, in the case of 68 Wolmarans Street Jhb (Pty) Ltd and others v TUFH Ltd, scrutinized the legal doctrine of pacta sunt servanda. This principle was tested in a dispute arising from the non-payment of municipal charges, leading to the acceleration of a loan agreement.

Background: 

TUFH Ltd operates in the business of providing loans to facilitate financing for the acquisition and renovation of inner-city buildings. Wolmarans is the registered proprietor of the property at 68 Wolmarans Street, with approximately 200 tenants. The loan agreement stipulates, among other things, that the failure to settle municipal charges constitutes an 'event of default'.

Wolmarans had an ongoing disagreement with the city regarding electricity billing from an incorrect meter. Nonetheless, there was no dispute concerning other charges imposed by the city, such as rates, refuse removal, and sanitation. However, Wolmarans had not paid these charges since 2015. The loan agreement mandated the borrower to cover municipal charges, which Wolmarans had neglected for seven years. The SCA rejected Wolmarans’ application for special leave to appeal a High Court judgment enforcing the terms of the loan agreement.

Terms of the Agreement: 

The court scrutinized the essential provisions of the loan agreement, which obligated the borrower (first applicant) to settle municipal charges pertaining to the property. Failure to do so empowered the lender (first respondent) to demand full repayment of the loan.

Breach of the Agreement: 

It was undisputed that the borrower had violated the agreement by failing to pay municipal charges, jeopardizing the lender’s security.

Unconscionability and Public Policy: 

Wolmarans contended that enforcing the acceleration clause was unconscionable and against public policy. However, the court, invoking the principle of pacta sunt servanda, dismissed this argument. The lender had the right to enforce clear and unequivocal terms of the agreement. Mere hardship or financial adversity faced by the borrower was insufficient to deem the enforcement unconscionable, especially when the borrower was in breach. The court found no evidence to suggest that the lender’s conduct was improper or that the agreement violated constitutional principles or public policy.

Conclusion: 

The court ruled that the applicants failed to demonstrate any reasonable chance of success on appeal or special circumstances justifying the granting of special leave to appeal. The application was dismissed, with costs awarded against the applicants.

Written by Msizi Mhlongo, Attorney, SchoemanLaw Inc