Some are interpreting the Supreme Court of Appeal’s decision in the City of Tshwane v Mathabathe case to mean that a purchaser of immovable property can be held liable by a municipality for any unpaid municipal debts of the seller. This article examines the ‘hidden costs’ of the Mathabathe judgment.
Increase in litigation and transfer costs
Presently there is no law that makes it a requirement for a seller to disclose to a purchaser, to an agent, or even to the conveyancing attorney, how much is owed to the municipality in connection with that property. Some estate agents have taken the decision to insert a clause into their offers to purchase, compelling the seller to obtain a full clearance certificate and settle all municipal debt before transfer. Where clauses like this do not exist, and where it is discovered that there is a large municipal debt that will remain after transfer, it is likely that hundreds (even thousands) of purchasers will get a nasty surprise when they discover that they are now being held responsible for the seller’s municipal debts.
This will ultimately cause a proliferation of disputes between purchasers and sellers, which will lead to the expenditure of millions in litigation fees. Purchasers will argue that the municipal debt constitutes a latent defect not disclosed and fraudulently concealed in terms of voetstoets, and sellers will argue that the purchaser should have done a proper due diligence before purchasing – buyer beware!
This will also cause a delay in the transfer process, which brings with it another series of hidden costs, such as (potentially) higher bond cancellation figures, rates clearance figures and/or levy clearance figures, as well as loss of rental income. Ultimately, it is predicted that the number of transfers will drop, because some sales will be cancelled as a result.
Increased inspection costs
When word gets out that buyers need to be aware of this problem, it will cause many more buyers to make use of home inspection services before they purchase. This will probably result in a drop in the number of sales concluded, which will have a negative effect on the value of properties across the board, and the South African economy as a whole.
Reduced proceeds to sellers
Where sellers are forced to make payment of the full debt owing, this will reduce their liquidity and profitability; and ultimately will reduce the number of sales concluded. This will impact the entire property industry.
Reduction in security
Banks lend money to people to purchase property based on their credit worthiness (how likely it is that they will be able to pay back the loan) and how much value there is in the property itself (how much the bank could recover from selling the property to pay off the purchaser’s debts). Banks will probably start making loans on the condition that a full clearance certificate is obtained – this is problematic because if the offer to purchase doesn’t include an obligation on the seller to this effect, the bank will then require the purchaser to make payment or else it won’t loan the purchaser the money. This will increase the costs of financing the deal, and will likely result in many purchasers not being able to take up their finance because they can’t afford to comply with this condition.
Word of the above will get out, and fewer sales will be concluded, ultimately because there are fewer properties on the market that do not have this kind of problem. Ultimately the entire property industry will suffer, and the value of properties across the board may drop. Ironically, this might, however, serve to reduce hijackings (making them less profitable!).
I shudder to think whether anyone has considered the hidden costs and how our property industry is going to react to deal with them. One can only hope that a challenge to this decision will be brought timeously to avoid the above from manifesting, before too much damage is caused to the industry and our investments.
Chantelle Gladwin, Partner and Ramon Pereira, Associate