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Municipal debt

Can the new owner of a property be forced to pay municipal debt incurred by the previous owner ?

As most people intimately involved in the property industry know the Supreme Court of Appeal (SCA) put the cat amongst the pigeons on the topic of unpaid municipality accounts with its judgement in the case of Tshwane Metropolitan Municipality v Mathabathe

That judgement confirmed (as was already clear to all ) that Section 118 (3) of the Municipal Systems Act gives a municipality a lien (a kind of invisible mortgage bond) over a property within its jurisdiction securing payment to that municipality of any money due to it which relates to that property. What was not at all clear to all and what was rather surprisingly ruled by the SCA is that the transfer of ownership of that property does not destroy that lien.

What this means is that if any money which is due and payable to a municipality remains unpaid at time of transfer, the municipality can, after obtaining a judgement against the person liable for the debt, (the person who owned the property at the time the debt was incurred) attach the property and cause it to be sold in execution to recover the money due to it. This it can do even though the property is then owned by someone else and even though that person does not owe the money !

The effect of this is of course, to force the new owner to save his property by paying the debt even though it is not really his debt at all. This judgement compounded the awful risk to purchasers of properties by confirming that a municipality may not refuse to issue a rates clearance, to permit transfer of a property to a purchaser thereof to occur, as long as payment is made to the municipality of the amounts due for the last two years only. Any amounts in addition thereto need not be paid and transfer to the purchaser can therefore proceed. The municipality can then and after transfer has occurred and in its own time (subject to prescription of certain kinds of municipal debt) take legal action against the person who was liable for the debt when it was incurred (including amounts which the municipality might as a result of an error not even have mentioned when issuing the rates clearance) and then launch an attachment attack on the property!

An article which appeared on a prominent property listing website, cited comments made by a partner of a prominent South African law firm and drew the attention of the readers to a recent court judgement of the Gauteng High Court in the case of Perregrine Joseph Mitchell v City of Tshwane Metropolitan Municipality. The article suggested that the SCA judgement had been reinterpreted in the Mitchell judgement so as to mean that after transfer occurs the purchaser and his property can no longer be threatened by municipal debt issues relating to periods prior to transfer.

I really wish that this was true but sadly it is not. The Gauteng case did make a ruling having the effect of freeing the property and the purchaser thereof in that case from any prior municipal debt but only in respect of properties purchased at sales in execution. The court ruled that the Common Law of South Africa (the law brought to us by our forefathers as interpreted along the way by court judgements) stipulates that if property purchased at a sale in execution (in other words by virtue of an order of court) is transferred to the purchaser thereof without objection or action by the holder of a hypothec over the property (which includes municipality liens) the purchaser acquires “a clean title”.

The Gauteng judgement therefore does not bring to purchasers the relief which the website article suggests and the threat to those of us (the overwhelming majority) who buy properties from sellers in terms of ordinarily negotiated agreements (offers to purchase/deeds of sale) remain vulnerable to unpaid municipal debt. As we have said in previous newsflashes dealing with this same subject, purchasers should ensure that any offer made to purchase a property, includes a clause obliging the seller to settle all debts due to the relevant municipal authority and not just the last two years debt before transfer occurs .One will then have to hope and pray that the municipality has not overlooked some debt in the process!

Kind regards,