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MUNICIPAL DEBTS OF PREVIOUS OWNERS –
PROPERTY LAW UPDATE

Section 118 of the Municipal Systems Act (“MSA”) has been the cause of a lot of concern for home owners as this section is interpreted to enable a municipality to hold a new home owner responsible for the arrear municipal debts of a previous owner.

According to Section 118(1) of the MSA, a property may not be transferred unless a rates clearance certificate has been issued by the municipality where the property is situated. The certificate must certify that all amounts due to the municipality 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.

According to Section 118(3) an amount due for municipal fees is a charge upon the property and enjoys preference over any mortgage bond registered against the property, thereby creating a security provision in favour of the municipality for the payment of the outstanding debts. This means that municipalities would be the first to claim the debt from the proceeds of a property sale, which could result in banks not getting their money back. This would happen when the municipal debt and the amount owed to the bank is larger than the value achieved from the property sale.

No time limit is attached to this provision and it does not matter when the secured debt became due. It can include debts up to 30 years old (for rates, refuse and sewerage charges), including debts of more than one previous owner, all of which are secured through Section 118(3) in favour of the municipality.

This section has caused a controversy in so far as a new (innocent) owner is now held liable for municipal debts older than two years incurred by previous owners, without any prior knowledge that there is arrear debt and that municipalities may hold the new owner responsible for the arrear debt of someone else.

Conversely, a recent Constitutional Court ruling, Jordaan and Others v City of Tshwane Metropolitan Municipality and Others [2017] ZACC 31,  upheld the High Court order that municipal debt charges against a property do not survive transfer of the property and that new home owners will not be penalised for historical municipal debt which has been accumulated by previous owners.

The Constitutional Court in considering whether to confirm the High Court’s declaration of constitutional invalidity, had to determine whether section 118(3), properly interpreted, in fact meant that a new owner takes transfer of a property which remains burdened with the debts a previous owner incurred. The Constitutional Court further had to have due consideration against historical, linguistic and common law factors as well as establishing  what the legislature’s intention with the provision was, plus the need to interpret the section’s compatibly with the Bill of Rights.

Therefore, to avoid unjustified arbitrariness in violation of section 25(1) of the Bill of Rights, the Court held that section 118(3) must be interpreted so that the charge it imposes does not survive transfer to a new owner.

New owners ‘were in no position whatsoever’ to control the indebtedness of their predecessors in title – but municipalities were.

Accordingly, municipalities may no longer hold a property owner liable for a previous owner’s historical municipal debts.

Prepared by:

Ashley Adriaans | Director | Dispute Resolution: Litigation & Arbitration

Dominique Dirks | Candidate Attorney

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)