New Owners Liable For Historic Debts

by Jul 7, 2016Articles, Property and Mining

Article: Thapelo Mbita

(Property and Mining Department)

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Background

In a recent judgment by the Supreme Court of Appeal (“SCA”) in the case of City of Tshwane Metropolitan Municipality v P.J. Mitchell 2016 (1) SA 38 (SCA), the court ruled that municipalities may, in certain limited circumstances, hold new owners liable for payment of debt of the previous owner of the immovable property relating to rates, taxes and services.

The matter before the SCA was whether a municipality can hold a successor-in-title in respect of immovable property, liable for an unpaid debt incurred by a previous owner for municipal services supplied prior to transfer as well as the interpretation of s 118(3) of the Local government: Municipal Systems Act 32 of 2000 (“the Act”).

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The facts of the above case are as follows namely:

Joseph Mitchell purchased immovable property situated within the Municipality boundaries of Tshwane. When the Joseph applied for a clearance certificate, the Municipality issued a ‘written statement’ reflecting a total amount of R232 828.25 as being outstanding in respect of Municipal service fees, levies and rates. That amount included debts older than two years preceding the date of the application for a clearance certificate (historical debt).

He claimed that he was liable to pay only an amount of R126 600.00 for debt due for the previous two years because section 118(1) states that a registrar of deeds may not register the transfer of property, except on production of a clearance certificate confirming that all amounts due to the municipality in respect of that property for service fees, levies, rates and taxes for the two years preceding the date of application for the certificate, have been paid in full

The dispute was, however, settled and the Municipality issued a certificate reflecting the outstanding amount due to it as R126 608.50, which represented only the debt due for the two years preceding the date of the respondent’s application for issue of the certificate.

He obtained the said clearance certificate and later resold the immovable property but the municipality refused to connect services for the new owner, claiming that there was a historical debt in an amount of R106 200.00

The Gauteng Division of the High Court found that the new owner is not liable for the historic debt after which the matter was referred to the SCA.

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Supreme Court of Appeal’s findings:

The SCA held that nothing prevents the municipality from perfecting its security over the immovable property, should it wish to do so, in order to ensure payment of historical debt.  Perfecting its security would involve obtaining a court order, selling the immovable property in execution and applying the proceeds to pay off the outstanding historical debt.

On the question whether the new owner could be held liable for the historical debt, it was decided that the municipality can hold the new owner liable subject to compliance with its own by-laws namely the municipality has to show that (1) there is no occupier on the immovable property concerned and (2) the person who had entered into the contract to receive the services cannot be traced or has absconded, is unable to pay or does not exist.

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Implications of the court’s decision and commentary

The above judgment means that;

  • A municipality can, if it chooses to do so, take legal action against the current owner of an immovable property, not only for any amounts owing by the current owner but also for any other amounts owing by any prior owner(s) of the property.
  • The legal action that can be taken against the current owner can range from suing the current owner for the previous owner’s debts in court and attaching and selling the property.
  • This principle is also applicable to any amounts that the municipality becomes aware of which is owed by the previous owner even if the said amounts were not levied prior to the date of transfer for example if a municipality discovers months or even years after registration of the property that it omitted to levy amounts on the previous owner’s account for electricity, rates, taxes or any other service, the municipality may claim same from the current owner.
  • In the instance where there are numerous prior owners who were in arrears , the municipality can hold the current owner liable for (and attach and sell the property for) all the debts of the previous owner(s) as there is no limit to how many previous owners might not have paid their debts.
  • Furthermore, there is virtually no way whatsoever that any new owner would ever be able to refute the municipality’s claim that amounts were owing by the old owner in these circumstances because the municipality may not have any records relating to the account at all, or its records may be inadequate, or incorrect.
  • The judgment empowers municipalities to have greater security for outstanding debts, which should (in theory) lead to greater collections by these entities, better service delivery, and better performance overall by these municipalities. In the author’s opinion it is doubtful that this will occur.
  • The implications are terrible for all stakeholders – owners, bondholders, tenants, professionals in the property industry, and generally anyone relying on the South African economy to make a living.
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Conclusion

It seems there is a possible risk that property buyers need to be aware of when the municipality issues a rates clearance certificate on the property they are buying.  This risk arises from the issuing of a clearance certificate by the municipality confirming that all rates, service charges and levies due on the property have been paid in full, but it is sometimes omits that this certificate only goes back two years before the application. This means that transfer of the property can take place even if the seller owes the municipality for charges dating before the clearance period.

This should act as a warning to buyers and agents, to thoroughly check what amounts are still owing to the municipality and the seller should be asked for proof before transfer takes place, that all the old debts, as well as any new amounts, have been settled.

Furthermore, it is advisable for buyers to amend the agreement of sale or offer to purchase to indemnify themselves against historical debt.