Your municipality cannot hold you liable for historic debt
You may not be held liable for the debt of your home’s previous owner – or for three decades of municipal debt linked to your property.
This week, the North Gauteng High Court ruled that January’s Supreme Court of Appeal (SCA) ruling that homeowners could be held liable for historic municipal debt on their properties for up to 30 years in the past, was in fact constitutionally invalid. The piece of legislation concerned is section 118 of the Local Government Municipal Systems Act which deals with sellers’ need to obtain a rates clearance certificate prior to transfer of ownership. Without the clearance certificate, the home and its associated rates account cannot be transferred to a new buyer.
Section 118 of the Municipal Systems Act (MSA) 32 of 2000 states that:
Restraint on transfer of property
- 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.
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.
January’s judgement by the SCA in the case of The City of Tshwane Metropolitan Municipality v PJ Mitchell, reiterated that the tacit statutory hypothec created in section 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 that 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 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),” says Tiaan van der Berg, director at MC van der Berg Incorporated. “Although section 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 for it. 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.”
The consequences of the previous ruling meant municipalities were able to hold property owners and tenants responsible for previous owners’ municipal debts and if not paid by current owners, the council could refuse to connect new homeowners or go as far as to cut off their services.
Monday’s ruling, however, should be welcomed by all homeowners and tenants. The two respondents, cities of Ekurhuleni and Tshwane, have not indicated whether they intend on challenging the ruling and dragging it back into the SCA.
Reasons for creating legislation which provides municipalities with such sweeping powers hints that this will not be the final say.
The South African Local Government Association was quoted as saying that the judgement “could result in ruin for some municipalities, which are already grappling with debts running into more than R100bn”.
Households account for more than 35% (R35,6bn) of this outstanding debt, with Johannesburg owed R16,1bn, Ekurhuleni R11,7bn, Tshwane R7,6bn and Cape Town R7,3bn.
Much of this debt is, in practical terms, unrecoverable if homeowners are forced to pay; but if a municipality has the power to sell your home to recover the debt, then the historical debt owed to metros can be quickly paid back.
Thankfully, sanity has prevailed.
“We expected that this ruling would be challenged as it not only blatantly prohibitive, but also unfair to new buyers,” says Bruce Swain, MD of Leapfrog Property Group. “We’re delighted to see that the ruling has been declared invalid.”
Judge Dawie Fourie, who ruled over the application, asked why a municipality was entitled to “visit the sins of a predecessor in title upon innocent third parties when there is no relationship or connection between that party and the debts in question”.
Judge Fourie ordered the Tshwane and Ekurhuleni metros to render municipal services where no debt exists in respect of municipal services between the municipalities and the new owners.
“The municipalities were also restrained from claiming payment of outstanding amounts from new owners where they have no debt relationship with the municipality concerned in respect of municipal rates, taxes and charges,” says Swain. “Local municipalities do have legal recourse to deal with arrears and expecting new owners to pay a previous owner’s debt is simply ludicrous. Hopefully this judgement will not only offer a lifeline to new homeowners saddled with debt that’s not their own, but will encourage prospective buyers to purchase, safe in the knowledge that they won’t suddenly be hit with massive historic debts.”