Recently the possibility that a property purchaser can become liable for historic debts on a property (ie debts older than two years), was highlighted in the news. This followed on the Supreme Court of Appeal (SCA) judgment in City of Tshwane v Mitchell in January this year in which the court clarified the wording of section 118(3) of the Municipal Systems Act.
1. Rates clearance for a property transfer v historic debts
Before the judgment is explained, it is necessary to distinguish section118(3) from the more commonly known section 118(1) of the Act. The latter provides that a property transfer may not be registered without a municipal Rates Clearance Certificate indicating that payment has been made in respect of service fees, levies, rates and taxes for the property for the preceding two years. A property purchaser therefore knows, once transfer is passed, that the preceding two years' rates have been paid.
Section 118(3), on the other hand, holds that an amount due for "municipal service fees, surcharges on fees, property rates and other municipal taxes ... is a charge upon the property." This meant, so the SCA confirmed, that section 118(3) creates a hypothec, or lien, which operates in favour of a local municipality to secure amounts owing for rates, services and "other municipal taxes, levies and duties", and that this hypothec is not extinguished by the transfer of property to a new owner.
Therefore the debt is tied to the property, not the individual, and new owners can justifiably be held liable for these debts. A municipality may take legal action against a new owner of a property for all historic debts relating to the property older than 2 years (but not older than 30 years as prescription would then be a factor). The Court noted that this was the position regardless of whether the property was purchased by means of an agreement between parties, or through a sale in execution.
2. But …
(i) The SCA qualified the municipality's rights to act in terms of section 118(3) by holding that, in order to enforce the provisions of section 118(3) in the recovery of historic debt, the municipality must first comply with its own by-laws. In most instances this requires the exhausting of all other remedies before proceeding in terms of section 118(3) against an 'innocent' purchaser/new owner of land.
Most municipalities have credit control and debt collection policies which lay down, amongst other things, how the municipality will deal with defaulters. A municipality cannot therefore act against the 'innocent' owner/purchaser in terms of section 118(3) if it had not implemented its own steps with regard to collecting the outstanding debt from the previous owner(s) who incurred the debt.
(ii) The SCA also specifically mentioned that it had to be "remembered, at this point, that the constitutionality of s 118(3) of the Act is not in issue in this matter". It is an indication that the SCA probably considers that the section can be attacked on constitutional grounds, something likely to happen in future.
3. Going forward
The implications for property owners are huge. This means that a municipality can take legal action against the present owner of a property for any other amounts owing by any prior owner of that property up to 30 years ago, provided the municipality exhausted internal remedies and complied with its own policies and by-laws. This action can range from suing for the old owner's debts and attaching and selling the property itself.
What a purchaser can do, is to do a thorough investigation into the chances of any old debt popping up, and deal with it in the sale agreement. Purchasers need to insist that sellers pay all amounts owing to the municipality when passing transfer.
This can be done by way of warranties from the seller that there is no outstanding municipal debt in respect of the property, and an indemnification in favour of the purchaser that should any future claim relating to outstanding municipal debt arise against the purchaser (or any of its successors or assigns), as the new owner of the property, the seller shall indemnify the new owner for such claims. (Unfortunately these contractual protections will not be obtainable in sales of execution where the property is disposed of by the Sheriff.)
Speak to a specialist property practitioner before you sign an agreement to sell or purchase a home, to ensure that all your interests are addressed.
Contact Martin Sheard of our Claremont office on email@example.com.