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Here’s why 30 years of municipal debt may fall on you

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Property owners and tenants may be liable for historical debt on their homes for up to 30 years in the past, due to a recent Supreme Court of Appeal ruling. The debt concerns rates and taxes, water and electricity, sewage and refuse charges.http://hometimes.co.za/advertise-with-hometimes/

HomeTimes turned to leading property attorney, MC van der Berg, of MC van der Berg Incorporated, for his expert opinion on the background to this legislation and its implications on current homeowners.

Taking a step backhuge archive resize

The crisis pertaining to historical municipal debt has ‘n history itself. To understand the big picture it is necessary to look at section 118 of the Municipal Systems Act (MSA) 32 of 2000 which, inter alia, states that:

Restraint on transfer of property

1. A Registrar of Deeds or other registration officer of immovable property may not register the transfer of property except on production to that registrar of deeds of a prescribed certificate (a Clearance Certificate – own insertion)

(a)  Issued by the Municipality in which that property is situated.

(b)  Which certifies that all amounts due in connection with that property for municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties during the two years preceding the date of application for the certificate have been fully paid.

2. …

3. An amount due for municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties is a charge upon the property in connection with which the amount is against the property.

Section 118 (1) of the MSA endeavours to protect the municipality’s right to claim outstanding debt in two ways: the first is an embargo (in short, no payment and no transfer of the property to a new purchaser) and the second is by giving the municipality a form of security over the property. This, one would imagine, is a clear cut legal matter. But to everyone’s surprise it has become a contentious issue.

In 2005 the Constitutional Court ruled in Mkontwana vs Nelson Mandela Metropolitan Municipality that section 118 (1) must be interpreted to have reference to rates and taxes as well as all electricity, water, sewage and other municipal services. Furthermore, the court ruled, in a watershed decision, that the owner of the property remains liable for the payment for these services even if an occupier/tenant had the benefit thereof and even if the utility account was in fact in the occupier/tenant’s name. The owner still has redress against the tenant, but at the owner’s peril.

In 2013 the Supreme Court of Appeal (SCA) revisited section 118 of the Municipal Systems Act in Tshwane Municipality vs Mathabathe, but this time with reference to the latter part of section 118 (1) (b) which reads as follows: “…during the two years preceding the date of application for the certificate have been fully paid.”

The SCA ruled that section 118(1) (b) of the MSA is an embargo clause that protects the municipality’s claim for rates, taxes and services (which we now know includes the tenant’s utility account in terms of the Mkontwana case). It was, however, held that the municipality’s right to embargo is limited to the two years preceding the application of the clearance certificate. The municipality was thus frustrated in that it couldn’t enforce the embargo for historical debt, i.e. a debt older than two years, regardless the origin thereof. If there was debt older than two years, but the two years immediately prior to the request for the clearance certificate had been paid, the municipality would have to issue the clearance certificate.

The SCA, however, went further to reiterate that the words in section 118(3) which reads: “is a charge upon the property” creates a security in the form of a lien or tacit statutory hypothec (a limited real right established by law over a debtor’s property which gives a creditor a preferential right to have claims paid out of the hypothecated property as last recourse when the debtor is in default) in favour of the municipality. Furthermore, that unlike the embargo clause, the security was not limited to two years. In this specific case the municipality was of the opinion that its security over the property would be extinguished once it is transferred. The SCA ruled that “The municipality was plainly wrong in its contention that upon registration [to the purchasers] it loses its right [Tacit Hypothec] under Section 118(3).” This has the effect that the municipality can hold the new owner liable for the seller’s and all other previous debt after transfer of the property.

Many a legal scholar was of the opinion that this judgement was in law simply incorrect.

Opening Pandora’s Boxpandoras box old chest

Then in January 2016, in the case of The City of Tshwane Metropolitan Municipality v PJ Mitchell, the SCA had the opportunity to revisit this paradox.

The SCA, in a majority ruling, reiterated that the tacit statutory hypothec created in sec 118 (3) created in the MSA is indeed not extinguished on transfer of the property regardless whether it is a sale in execution (as it was in this case) or a normal sale transaction.

The absurd consequence of this is that the municipality can perfect its security, i.e. obtain a court order and sell an owner’s property in execution for debt of the seller, the owner before that and even their occupant’s and tenant’s utility accounts (if one considers Mkontwana) with the understanding that the specific debt hasn’t prescribed yet (30 years in respect of rates, refuse and sewage, and three years in respect of electricity and water).

Where does it leave the public?

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This four-bedroom house in Bryanston is on sale for R5,3m. The main en-suite features walk-in cupboards, three spacious bathrooms and a guest cloak room. It comprises a family lounge, large study, small pub and a separate dining room off the kitchen. The outside enclosed patio area is an entertainer’s dream, while a two-bedroom, two bathroom cottage is on the property. http://bit.ly/1RN10nR

This situation obviously scares the wits out of most prospective purchasers. Although sec 118 (1) limits the embargo of the municipality, nothing hinders the purchaser to make it a contractual condition that the transferring attorney must request a full clearance certificate (including historical debt) and not an abridged certificate (for only two years prior to request). The problem, however, remains that the municipality can still in good faith issue an erroneous clearance certificate omitting certain outstanding debt.

The purchaser can also seek a contractual guarantee from the seller that there is no outstanding debt apart from that covered by the clearance certificate. Keep in mind that the seller might be innocent and unaware of any outstanding debt as the municipality might have made a calculation error or under billed for services. It might even be that the municipality retrospectively reviews the property evaluation or realises that it has all along been using the wrong valuation schedules in the two-year period covered by sec 118 (1) or even before that.

The purchaser can even insist on a contractual indemnity from the seller regarding any claims from the municipality. The seller might refuse because he/she him/herself might be unaware of any historical debt and wishes not take any responsibility therefor. On the other hand, such an indemnity might be worthless as the seller may die, become insolvent, be a pauper or emigrate. It is questionable how far this will take the purchaser.

It is a pity that the law is currently interpreted in a manner that gives municipalities vast rights to infringe on innocent people’s property rights whilst the very crisis is the result of their own ineffectiveness, incompetence or negligence.

Sweeping powers for municipalities?muncipal building Port Elizabeth

Whilst the intention of this legislation is to give the municipalities the tools to collect outstanding debt, it remains to be seen if they will make full use of this interpretation as they are still legally obliged to collect the outstanding debt firstly from the person who incurred it.

It needs to be added that although the debt on a property only prescribes after 30 years, it is doubtful if municipalities still have the records or even have the resources to engage in an exercise of this magnitude to extinguish possible historical debt.

It needs to be noted that in neither the Mathabathe nor the Mitchell case did the judgement revolve around the question of whether the municipality can in fact perfect their tacit statutory hypothec and sell the property in execution for outstanding debt. Both of these cases revolved around different issues although the need arose to make a ruling about the interpretation of the aberrant hypothec.

The only solution to this problem is that the legislature must change the relevant section to read that the tacit statutory hypothec is cancelled on transfer. Any other construction will be unfair and will push the already wavering property market into the abyss. It remains to be seen if the legislature is willing to change the relevant legislation.

Lastly it has to be noted that it wasn’t the Mitchell case in early 2016 that introduced the tacit statutory hypothec topic set out sec 118 (3) of the MSA to the industry. It wasn’t even the MSA that introduced it in 2000 as the idea of the tacit statutory hypothec has its origins in section 50(1) the old Transvaal Local Government Ordinance 17 of 1939. It has been there all along and was maybe given publicity for the first time via the Mathabathe case and the subsequent Carte Blanche coverage. Despite predictions after the Mathabathe case that the courts will be inundated with civil cases against owners by municipalities perfecting their security for historical debt, this did not transpire. I am not aware of any such cases. Maybe, just maybe, the municipalities are more up to scratch with debt collecting than what we like to believe.

My personal take on this is that sec 118 (3) of the Municipal Systems Act will not withstand the scrutiny of the Constitutional Court in reference to the property rights contained in Section 25 of the Constitution.

I believe that in the end sanity will prevail.


MC van den Berg, of MC van den Berg Incorporated.

MC van der Berg, director of MC van der Berg Incorporated.

M.C. (Tiaan) van der Berg, BLC LLB LLM (UP) H. Dip Labour (UJ) Dip ADR (AFSA/UP), is an admitted attorney, conveyancer and notary, and the founding director of M.C. van der Berg Incorporated, a legal practice specialising in property law. He is also the co-director of Mcademy Training Institute.

 

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