THE APPLICATION OF THE DOCTRINE OF THE UNDISCLOSED PRINCIPAL IN SALE OF LAND AGREEMENTS

Sellers and purchasers of immovable property often appoint others to negotiate and/or enter into sale agreements on their behalf or for their benefit. This is not prohibited or restricted in any way by the Alienation of Land Act (“ALA”), save for the provision (s 2(1)) stipulating that an agreement of sale of land is void unless the terms thereof are contained in a written document (“deed of alienation”) “signed by the parties thereto or by their agents acting on their written authority”. The reason underlying such appointments is usually convenience or privacy, for example where a party is unable to negotiate or conclude the transaction personally, or simply wishes to remain anonymous until after the agreement has been finalised. A number of legal mechanisms are available to bring about these outcomes. Commonly used is direct representation, whereby the seller or purchaser empowers an agent to negotiate and/or conclude the transaction on his or her behalf. Another approach, particularly useful from a purchaser’s perspective, is a nominee transaction in terms of which the true purchaser (A) appoints someone (B) to enter into a sale agreement on the basis that the purchaser is to be described as “B or nominee”, the understanding being that B is to nominate A as the purchaser after the sale agreement has been finalised and signed. A third possibility is indirect representation, where the seller or purchaser mandates someone to enter into a sale agreement in the latter’s own name and thereafter to cede to the former the rights arising from the agreement, the seller/purchaser indemnifying the mandatary against any liability arising from the sale. The legal principles governing deeds of alienation concluded by agents (direct representation) and nominee transactions are well established (see Van Rensburg and Treisman The Practitioner’s Guide to the Alienation of Land Act 2ed (1984) 42 and 59; and Aronstam The Alienation of Land Act (1985) 37-8). What is less clear is the application of indirect representation in the context of sale agreements of land, more particularly whether or not in such transactions the operation of the doctrine of the undisclosed principal is precluded by section 2(1) of ALA. This is the focus area of the present note. A number of high courts have held (or at least suggested) that legislation prescribing formalities for contracts of sale of land leave no room for the application of the doctrine in such contracts, but the issue was left undecided by the Supreme Court of Appeal. The key submission made in this note is that section 2(1) of ALA constitutes no barrier obstructing parties from concluding sale of land agreements as representatives of undisclosed principals. Confusion arises, not because of the formalities legislation, but because the relevant principles of agency law are not correctly understood and applied, notably the distinction between direct and indirect representation and the fundamental principles underlying the doctrine of the undisclosed principal. Thus the emphasis is on agency law, not so much the formalities legislation. The discussion commences with an exposition of the distinction between direct and indirect representation and the application of the doctrine of the undisclosed principal. This is followed by a concise explanation of section 2(1) of ALA and a discussion of section 16 of the Transfer Duty Act 40 of 1949. Case law is analysed and discussed against this background.