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ANALYSIS: Municipal debts are not transferred to the new owner

Sep 18 2017 08:21
Chloe Merrington

Johannesburg - Municipalities can claim payment for rates as old as 30 years but it is not often that a property is owned by the same person for this period. No wonder property owners across South Africa breathed a sigh of relief when the Constitutional Court ruled on 29 August 2017 that historical debts for rates and taxes do not survive transfer of ownership of a property to the new owner. 

Section 118(3) of the Local Government: Municipal Systems Act, 2000, which creates a charge against a property for historical municipal debts, only applies to a property while it is owned by the person who incurred those debts. The court held that, “if section 118(3) meant that new owners are liable, post-transfer, for a previous owner’s debts, it would be constitutionally impermissible”.

Financial institutions and lenders will be equally pleased by the ruling - the Banking Association of South Africa was party to the proceedings and argued that if liability for historical debts survived transfer of ownership, the real security rights of bond holders who extend loans to new purchasers to acquire a property, would also be compromised resulting in an arbitrary deprivation of property.

Following the uncertainty created by rulings in recent cases on the same subject in our high courts, prudent purchasers were insisting on sellers providing warranties that there were no historcial debts to municipalities in respect of the property purchased.

This put sellers in a difficult position when the debts could have been accumulated by people who owned the property before them, and up to 30 years previously. Purchasers no longer have to worry about becoming liable for historical debts and new bond holders are secure in their lending. 

A decision any other way would have allowed the arbitrary deprivation of property, something which is guarded against in our Bill of Rights, and would have placed security of ownership in South Africa at risk. The decision gives us further faith in the South African judiciary and enforces the secure system of land ownership in South Africa, hopefully with a positive impact on local and foreign investments into our property sector.

But what now for municipalities? They are not left out in the cold entirely, as the court held that section 118(3) does apply to a property while the person who incurred the debts is still the registered owner. This means that a municipality could interdict the transfer of a property to a purchaser where the seller is overdue on debts older than 2 years; provided that these debts were incurred by the seller.

A municipality cannot withhold a rates clearance certificate for transfer, as section 118(1) relates only to liabilities for a period of 2 years before the date of transfer. Our Deeds Registry only requires a rates clearance certificate to pass transfer.

However, the request by a conveyancer for a rates clearance certificate will notifiy a municipality of the impending transfer and jolt them into action to recover or get security for any histoical debt before the transfer takes place.

Owners should keep track of their rates and taxes accounts to ensure there is no delay to transfer caused by a municipality instituting an application to interdict the transfer of the owner’s property, until unpaid debts are settled. Purchasers should continue to get warranties so that their transactions are not interdicted without recourse.

While section 118(3) is a “charge” on a property, the existence of historical debt is not knowlege within the public domain and therefore the responsibility lies with a municipality to “publicise” the debt and enforce this charge before transfer. The Deeds Registry, the conveyancer, the existing bond holder and /or the purchaser will have no knowlegde of any historical debt of the seller.

This is significant because while the municipality’s charge enjoys preference over any other charge or real right over a property, including the liability secured by any bonds, there is no public knowledge or external mechanism to prevent transfer when there are historical liabilities, other than the muncipality taking action.

The position is different with an existing bond holder, because our Deeds Registries Act does not allow transfer until any bonds registered over a property are cancelled, or the property is released from the bonds. The bond holder consents to the cancellation of, or release of the property from the bond and will only do so when their debts have been paid or secured to their satisfaction.

Despite the fact that a municipalty’s debts are preferent to those of a bond holder, if the municipality does not enforce its charge, the existing bond holder will simply recoup its full debt without any knowledge of debt owed to the municipality.

And once the transfer is registered, the charge for that particular debt of the seller falls away and the municipality will have to institute action against the seller personally, without the benefit of the a charge against the property. The effect of this and the Consitutional Court ruling should see better administration and collection of debts by municipalities in the future.

The court confirmed that “it is imperative that municipalities do everything reasonable to reduce amounts owing” to it. While municipalities have the safety of the section 118(3) charge, the onus lies with the municipality to ensure that debts are paid prior to any transfer.

  • Chloe Merrington is the Senior Associate, Norton Rose Fulbright.

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