When municipal debt lurks in the shadows

When municipal debt lurks in the shadows
11 Jan 2017

Buying and selling immovable property is usually a fair exchange, with the purchaser paying an agreed price to the seller in exchange for the property.

However, the South Gauteng High Court case of Stand 278 Strydom Park Pty Ltd v Ekurhuleni Metropolitan Municipality (unreported case no. 23503/2014, 27 April 2015) illustrates that parties may not, in fact, be entering into a fair exchange due to outstanding debt accumulated by the property’s previous owner(s).

In this case, the Ekurhuleni Metropolitan Municipality threatened to disconnect the electricity supply to a Germiston property because of unpaid debt for property rates, taxes and municipal services, which was incurred by its prior owners.

One of the central questions in the case was: at what stage can a municipality attach an owner’s property as a result of previous owners’ unpaid municipal debt?

The court held that a municipality can approach a court for an order to attach the property and sell it in execution to offset such debts only after obtaining judgment against the relevant prior owners. This first judgment needs to confirm the legitimacy of the debt claimed by the municipality before it can apply to court for the execution of the property.

In this case, the municipality had not obtained judgment against the previous owners who had incurred the historical debt. As a result, the municipality could not attach the property to satisfy the historical municipal debt.

This case confirms that outstanding charges for municipal services, in relation to property that is the subject of a transfer, are charges against the property and enjoy preference over any mortgage bond registered against the property.

It is important to note that while the court found that a property can be attached and sold in execution to offset historical municipal debt incurred by owners other than the current owner, it did not pronounce on whether or not a municipality can hold a current property owner strictly liable for the municipal debts of previous owners. The court also did not make a finding on whether the municipality could cut off services to the property because of such historical debt.

Clearance Certificates – False Security?

To ensure that the property they are purchasing is unencumbered, property buyers may believe that possessing a clearance certificate that reflects that payment for municipal charges is up to date means they are not at risk of being held liable for any historical municipal debt. However, this is not necessarily the case.

In terms of section 118(1)(b) of the Municipal Systems Act, 2000, a municipality must issue a clearance certificate to confirm payment of all amounts due, in connection with particular property, for municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties. However, to obtain the clearance certificate, one only needs to make payment of an amount that accrued during the two years preceding the application for the certificate. The risk remains that debt could have accrued to the property before this two-year period.

In the recent Supreme Court of Appeal case of City of Tshwane Metropolitan Municipality v Mitchell 2016 (3) SA 231 (SCA), the court held that historical municipal debt provided the municipality in question with a hypothec that survives the transfer of the property. This meant that the property could be sold in execution to settle the municipal debt of previous property owners. However, as held in the Stand 278 Strydom Park case, the municipality first needed to secure a judgment against the former owners who had incurred the debt. The court also confirmed that the municipality could refuse to open a new account for the current property owner until the historical debt was paid.

Safeguards For Property Buyers

Conveyancers often receive clearance figures that cite only charges levied by the municipality over the property and do not cite other charges for services, such as electricity, refuse removal and water. In these instances, conveyancers should request the seller and the municipality to clarify these charges. Where these charges are not levied by the municipality, the conveyancer should request the seller to provide up-to-date accounts and proof of payment for such charges.

As a further safeguard, a condition must be included in the sale agreement that provides that any historical debt associated with the property in question that precedes the two-year period before the application for the clearance figures must be paid by the seller.

Any prospective immovable property purchaser must ensure that appropriate clauses are inserted in the sale agreement to protect the purchaser against outstanding historical municipal debt in respect of the property.

See also: New home owners are not liable for municipal debt of the previous owners

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
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