Beneficio Developments (PTY) LTD concluded several loan agreements with Tarentaal Centre Investments (PTY) LTD in terms of which it loaned Taarentaal a sum of money at an interest rate of 1% per week, capitalised monthly. The Village Mall Investments (PTY) LTD signed as surety in favour of Beneficio for the loans. Tarentaal and Village Mall also executed mortgages in favour of Beneficio Developments, as security for the loan.

When Tarentaal failed to make full payment on its loan, Beneficio Developments instituted an action at the Pretoria High Court against Tarentaal and the Village Mall, claiming a payment of ZAR16 358 068.25 as well as interest at the rate of 1% per week calculated daily and capitalised monthly from 1 June 2020 to date of payment.

Tarentaal and The Village Mall contended that the interest rate imposed by Beneficio Developments was usurious (unreasonably high than what is legally permissible) and therefore the various clauses in the loan agreements that provide for this interest are void and unenforceable.

What makes a transaction usurious?

Because the contract in question was not subject to the Usury Act, 1968 nor the National Credit Act, 2005, the Pretoria High Court looked to the Supreme Court of Appeal's ("SCA's") judgment in African Dawn Property Finance 2 (Pty) Ltd v Dreams Travel & Tours CC. The SCA clarified that just because the interest charged seemed high is not sufficient to make it transaction usurious. The key principles highlighted by the SCA judgment were:

  1. "Contracts valid in form are prima facie enforceable in South African law and effect will be given to them unless grounds for the avoidance are proved; ...
  2. The SCA confirmed that the common law test as to whether an agreement was usurious or not did not rely simply on the amount of interest charged, but the test was whether there had been extortion, oppression or any actions akin to fraud;
  3. While there was no suggestion in that matter that the common law rule is inconsistent with a specific Constitutional provision, it considered the correctness of the common law principle and found that "weighty considerations of commercial and social certainty render the common law principle as sound today as it was when first articulated over a century ago"; and
  4. The person relying thereon has the onus of showing that the applicable interest rate was usurious in the sense that it amounted to extortion or oppression or something akin to fraud".

The SCA also held that when determining whether the person relying on the defence has discharged the onus of proving that the applicable interest rate was usurious "the Court will examine all the circumstances of the case. It will not only look at the scale at which interest has been stipulated for but will have regard to the ordinary rate prevalent in similar transactions, to the security offered and the risk run, to the length of time for which the loan was given, the amount lent, and the relative positions and circumstances of the parties". Thus, in common law, there is no fixed customary rate that can be described as a standard rate beyond which it can be said that a transaction becomes usurious.

Constitutional challenge

In their counterclaim, Tarentaal and the Village Mall contended that the loan agreements are unconstitutional in so far as they contravene the constitutional rights to property (which is protected by section 25 of the Constitution of the Republic of South Africa, 1996) and freedom of trade (which is protected by section 22 of the Constitution). However, the High Court held that the reliance on these two sections was misplaced and was without merit. They reasoned that there is no correlation between the facts relating to the loan agreements and the infringement of section 22. In relation to section 25, the High Court held that this section does not apply to agreements that were freely entered into between citizens.

The High Court further relied on the judgment of Beadica 231 CC v Trustees for the time being of the Oregan Trust, which confirmed that a court may not refuse to enforce a contract on the grounds that in its subjective view enforcement of such contract would be unfair, unreasonable or unduly harsh.

Evidence

Similar to the African Dawn case, the High Court relied on the following facts to reach the conclusion that Tarentaal and the Village Mall had not discharged the onus resting upon them to prove that the applicable interest was usurious:

  1. The representatives of Tarentaal and the Village Mall voluntarily agreed to the interest rate charged by Beneficio Developments, and they further negotiated a lesser rate of 1% as oppose to the 1.25% that is normally charged by Beneficio Developments;
  2. The representatives were not uninformed and vulnerable borrowers. They were directors of a company which controlled assets of about ZAR2 400 000 000, who acted as the directors of the subsidiaries, Tarentaal and the Village Mall.
  3. Furthermore, one of the directors was an experienced senior commercial attorney;
  4. On a balance of probabilities, it seemed that they were content with the interest rate as they repeatedly applied for further loans (at the same interest rate) and had never at any stage challenged the interest rate charged by Beneficio Developments;
  5. The interest rate charged by Beneficio Developments was market related. Furthermore, bridging finance is a high-risk business;
  6. Beneficio Developments had a risk of not being repaid timeously by Tarentaal and the Village Mall since both were experiencing financial difficulties; and
  7. The evidence suggested that the representatives of Tarentaal and the Village Mall never had the true intentions to pay up the loaned amounts.

The court therefore concluded that the loan agreements were valid and enforceable, and that Beneficio Developments made out a case for its claim. The court ended up ordering Tarentaal and the Village Mall to pay Beneficio Developments an amount of ZAR31 347 144 (being the amount owed to Beneficio Developments at the time of the proceedings) and the interest on that amount at a rate of 1% per week calculated daily and capitalised monthly from date of judgemnt, until date of payment.

Conclusion

Simply because an interest rate charged by a lender may at first blush appear excessive is not sufficient to prove that the interest rate is usurious. There is also no fixed rate that can be used as a standard to measure a usurious interest rate. Rather, the person claiming that the interest rate is usurious bears the onus of proving that there has been extortion, oppression or any actions akin to fraud. This has to be done with reference to the circumstances surrounding the application for and the granting of the loan.

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