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Historical municipal debt

23 January 2014

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.

Inadvertent consequences
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.

Correct Interpretation
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.

Looking forward
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.

Chantelle Gladwin
Schindlers

Reader Comments: 5
Daryl Burman 23/01/2014:

I concur entirely; I loved the reference to the age-old adage " Vigilantibus et non dormientibus serviunt leges "

Kingsley Kingon 24/01/2014:

What about Section 87 (3) (a) of the Municipal Ordinance (Cape)? As far as I am aware, this Ordinance has not been repealed. The sub-section reads: "Should the [owner] primarily liable for any rates...fail to pay such rates on or before the expiration of three months from the date on which such rates become due and payable, any person who at any time thereafter - (a) becomes the subsequent owner of the property concerned, shall be liable for such rates."

Section 87 (4) provides that the persons referred to in subsection (3) will be liable jointly and severally with the owner primarily liable. 1. If the quoted subsection is still on the statute books, is it constitutional? (Being a Cape Ordinance, and if it has not been repealed, it applies where I practice, in the Eastern Cape. I don't know what provisions exist in the other provinces.) 2. Secondly, assuming that a subsequent owner can be held liable for a previous owner's debt, this would surely not apply to service charges which are older than three years, as they would be prescribed? (I accept that rates, which are a tax, would not prescribe before 30 years have passed)

Corrie 24/01/2014:

Any advice on the following of how to handle matter will be appreciated. Registered owner selling property to son-in-law for R100000.00. Municipal valuation R60 000.00. Clearance figure R202 925.27 Interest alone R13 370.00. The Seller is the only occupant in the property. There is no indication of electrical use on the clearance figures. How does the City Councils allow water usage or electrical usage to add up to such an enormous amount with no notifications to the user and owner. The Municipality in this matter is Magaung Local Municipality.

John 24/01/2014:

I agree with the contention of the author save that it is necessary to clarify some issues. Law is a form of science and when discussing an issue or giving judgment language should be clear and precise. The right of the municipality under discussion cannot be a lien as the property in question is not in the possession of the exerciser of the right. In the circumstances it can clearly only be a hypothec. It can also be regarded as a general hypothec which has to be enforced by a judgment which is specifically mentioned in the judgment., in this regard the difference between a general and a specific notarial bond must be kept in mind, therein that a general must be perfected while a specific need not be.

Provision is made in section 102 of the Municipal Systems Act (hereinafter MSA) for the consolidation of the separate accounts of a person liable for payment to the municipality. This section cannot be utilised against the purchaser to enforce payment. This strengthens the viewpoint that some form of process will have to be issued to obtain judgment. Any of the defences available to the previous owner can be availed of by the purchaser.  A defence which is only available to the purchaser is that the municipality must apply credit control in terms of section 96 of the MSA and their failure do do so can surely not be visited upon an innocent party. In the constitutional dispensation in which we now find ourselves there is no doubt in my mind that the municipalities failure to apply credit control will trump their right to collect from an innocent party.

Susanne Rall-Willemse 08/09/2014:

Chantelle, please advise what happens in the case of insolvency? The trustee would clearly only pay the 2 year debt and obtain an abridged RCC (in my case, City of Johannesburg). The balance of the claim would be a concurrent claim against the insolvent estate, and should the estate be unable to settle this, in my view the municipality would have to write off this outstanding debt and cannot claim it from the purchaser. Furthermore, upon the concurrent claim being acknowledged against the insolvent estate, can the purchaser now insist upon the water / electricity being connected again? I would appreciate your input, please.

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