In Albaraka Bank v New Turn Investments (Pty) Ltd, the Honourable Justice Mossop granted an order and ex tempore judgment in the High Court of South Africa Kwazulu-Natal Local Division, Durban, declaring the partnership agreement in respect of the purchase of immovable property to be terminated.

This case relates to a series of agreements concluded by Albaraka Bank with New Turn Investments (Pty) Ltd in accordance with the principles of Islamic Shariah Law, in order to allow Albaraka to advance a loan to New Turn for the purchase of immovable property at a profit.

Islamic Shariah Law's prohibition on the giving and/or receiving of interest because it promotes inequality is well known. The prohibition is meant to ensure equity in exchange and that people can protect their wealth by making unjust and unequal exchanges illegal. Islamic Shariah law encourages people to act charitably by, for example, loaning money without interest. Islam itself aims to promote charity and helping others through kindness.

Instead of just re-labelling the interest charged on transactions as "financing charges", renowned Islamic scholars with specialised expertise in business transactional law and Islamic finance from across the globe developed a mechanism allowing for a bank to advance a loan to its customers for the purchase of immovable property at a profit through a property partnership agreement.

Three inter-related agreements were accordingly concluded between Albaraka and New Turn on 29 May 2018"

  • An agreement to purchase equity which required Albaraka to purchase 90% of the undivided shares in the immovable property for the sum of ZAR1 485 000 and New Turn would then purchase the other 10% of the undivided shares for the sum of ZAR165 000.00 ("Mushaarakah agreement").
  • A unilateral promise agreement in terms of which New Turn undertook to purchase Albaraka's undivided shares in the immovable property to be acquired.
  • An overriding agreement in terms of which it was agreed that New Turn would purchase Albaraka's undivided shares in the immovable property at a fixed monthly instalment of ZAR14 825.94 over a period of 240 months.

The immovable property to be acquired would be registered in the name of New Turn who would hold it on behalf of the partnership. New Turn would then proceed to repay Albaraka fixed instalments over the duration of the agreements in order to acquire Albaraka's undivided shares in the immovable property. Albaraka would however make a "profit" on the transaction, which amount is incorporated into the value of the property upfront, instead of requiring New Turn to pay interest on the price for the purchase of the property.

Pursuant to these agreements, the immovable property was acquired. During July 2020, New Turn breached the agreements by failing to make payment of arrears in the amount of ZAR23 985.06 and Albaraka consequently elected to terminate the agreements on 18 November 2021, after providing one-month's written notice.

Albaraka launched this application in the High Court seeking, inter alia, the following relief:

  • an order declaring the partnership in respect of the immovable property that is the subject of the three agreements and which has the formal description of Portion 1 of Erf 13, Chiltern Hills to be terminated; and
  • to achieve the winding up of the partnership property, the appointment of a liquidator with certain defined powers including the power of interrogation.

In this case, the common law application for the court to order the dissolution of the joint ownership based on the termination of the partnership (actio communi dividundo) found application as a co-owner, Albaraka, had requested the joint ownership arrangement to be terminated.

New Turn relied on two defences: Firstly, the fact that New Turn has subsequently rectified its default through a payment that was made in the amount of ZAR142 651.19 to Albaraka on 19 July 2022. Secondly, whilst the immovable property is registered in the name of New Turn, the immovable property is a domestic residence and should be afforded the protection of section 26 of the Constitution (the right to adequate housing) and Uniform Rules 46 and 46A.

In respect of the first defence, New Turn admitted its failure to maintain the agreed payments to Albaraka. New Turn however denies that Albaraka sent a breach letter and consequent cancellation letter. Therefore, according to New Turn the agreements had not been cancelled. The High Court disagreed and found that due and proper notice was indeed given and the Mushaarakah agreement was cancelled. Counsel for New Turn attempted to argue that the cancellation of the Mushaarakah agreement did not result in a cancellation of the other agreements, but the High Court found that the three agreements are "inextricably linked" and the cancellation of the Mushaarakah agreement brings the entire scheme to an end.

In respect of the second defence, the High Court indicated that New Turn, as a juristic entity, cannot be equated to a natural human being and afforded the rights of a natural person (ie for example the right to housing). Additionally, Albaraka had not sought an order of executability against the immovable property, only the termination of the partnership agreement. What is more is that New Turn may again acquire the immovable property in the future. Therefore, the High Court found that nothing in the dissolution of the partnership agreement would make it unconstitutional.

In light of the above, there are two important points to note. Once a Mushaarkah agreement has been cancelled due to a breach thereof, it will be terminated like all other similar agreements in South African law, even if payment is made subsequently. Whilst using a company as a vehicle to conclude agreements may have many benefits, it also carries with it certain risks, in that as a juristic person, the company is not afforded the same protection as a natural person.

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