Are purchasers of immovable property now liable for the seller’s historical municipal debt? Introduction Sellers of land are obliged to obtain a rates clearance certificate (“RCC”) from their local municipalities before ownership can be transferred in the deeds office. Legislation has always provided for a seller to either pay all amounts outstanding (called a “section 118(3)” or a “full” clearance), or alternatively to pay only amounts owed arising during the two year period prior to application for a RCC (called a “section 118(1)” or “abridged” clearance). If the seller obtained an abridged, two year clearance, there would still have been monies owing to the municipality after transfer of ownership, and the seller remained liable for such monies, but the debt was no longer secured by the property. For this reason, many municipalities were reluctant to issue abridged RCC’s, and some outright refused to issue abridged RCC’s.
A refusal by the City of Tshwane to issue an abridged RCC has given rise to a recent judgment of the Supreme Court of Appeal (‘SCA’) in City of Tshwane Municipality Metropolitan Municipality v Mathabathe and Another. In this case the SCA confirmed that municipalities must issue abridged RCCs, but has inadvertently created a new and potentially even greater problem for the property industry.
Decision in the Mathabathe case
In the Mathabathe case, SCA held that section 118 of the Local Government: Municipal Systems Act 3 of 2000 does not permit the municipality to refuse to issue a RCC until all amounts owing in connection with the property have been paid or security given for payment of same. It found that a municipality could only refuse to issue a RCC where all amounts incurred in connection with the property for the two year period prior to application had not been paid/secured.
The court remarked in the Mathabathe ruling that the municipality was “plainly wrong in its contention that ‘upon registration…[it] loses its rights under Section 118(3) of the Act”. This obiter remark is now being interpreted by some municipalities to mean that they retain the right, after transfer of the property to a purchaser, to rely on the property as security for the debts of the seller. In other words, the municipality will effectively be able to hold the purchaser liable for the seller’s municipal debts that remain unpaid after transfer (ie. those that date back more than two years and were not paid by date of transfer), and further to attach the property owned by the purchaser and sell it to satisfy the seller’s debts. The Johannesburg, Cape Town, and Ethekwini municipalities have all indicated that they intend to do this.
It is our opinion that this cannot possibly, in logic or in law, be the interpretation that the court intended. If it is, then, with respect, the court is incorrect as this would fly in the face of established common law principles of property law, and violates the purchaser’s constitutional property rights.
We are of the opinion that the court intended to convey that after a two year RCC is issued, but before transfer, the municipality retains its real right of security in the form of its statutory hypothec (its lien) to attach and sell the property to obtain payment of the full debt owed, including all amounts that remain owing after the two year RCC had been issued. After transfer, the municipality’s right of retention falls away, because it cannot operate over the property of an innocent third party (namely the purchaser). So the municipality’s lien does not survive transfer, but it does survive the issue of a two year RCC. In addition, at all times after both the issue of a two year RCC and transfer, the municipality retains its personal rights to sue the seller for any amounts outstanding. But it no longer has any security for the debt in the sense that the property, which before transfer existed as security, is no longer subject to the statutory lien.
Municipality’s failure to collect debt owed to it
The law protects those who are vigilant and not those who sleep. This would apply equally to the municipality in relation to charges owing to it after the issue of a two year RCC. The municipality has an opportunity, at any time up until transfer, to make use of its lien and attach the property, to compel payment (or obtain security) for all amounts outstanding. This can happen regardless of whether or not the seller plans on selling the property, and regardless of whether the seller has asked for (and paid for) a two year clearance or not. The municipality’s rights in this regard remain 100% intact up until transfer. If the municipality is slack and fails to attach the property, especially where it is notified that transfer is pending by the request for the issue of clearance figures, then the municipality is choosing not to avail itself of its legal remedies to recover the amounts owing. After transfer, it cannot visit the consequences of its failure to act in good time on the purchaser, by effectively holding the purchaser liable for the seller’s debts.
If the court had genuinely intended to convey that the municipality retains its rights after transfer to use the property as security for the seller’s debts, even though it is owned by the purchaser, this, with respect, cannot be legally correct as it would fly in the face of a long line of established common law principles that define the nature and extent of liens. It would also violate the purchaser’s constitutional rights to its own property, because that property would then be subject to attachment by the municipality for the seller’s debt, which the purchaser has no liability in respect of.
Talks with COJ’s clearance department
Schindlers engaged with the COJ’s clearance department in relation to its intentions of holding purchasers liable for seller’s debts, but although COJ recognised that this judgment may be taken on appeal, it indicated that it would press on with its stated intention. The consequences of taking transfer of a property where there are large municipal debts outstanding, could be dire. Ethekwini municipality has indicated that it will not even allow a purchaser to open up a new account until all debts of the seller are paid in full. The authors hereof have been mandated to act in several cases where the purchaser of a property refuses to take transfer, until the seller has paid all amounts owing, and not just amounts incurred in the two years prior to transfer.
We believe that no court would order the attachment of a purchaser’s property for a seller’s debt, unless the purchaser had agreed to assume the seller’s liability. None the less, it is our advice to include a clause in all Offer to Purchase/Sale Agreement documents to the effect that the seller undertakes to obtain a full and not an abridged clearance, to avoid this type of dispute from arising.