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New property owners liable for historical debt

Johannesburg -

Property owners face the grim prospect of owing huge sums of money to municipalities in debt incurred by previous owners dating back up to 30 years.

A Supreme Court of Appeal ruling has given municipalities the right to recover rates and services debts of previous property owners from the current owners. File picture: Matthews Baloyi/The Star. Credit: THE STAR

This emerged following the judgment handed down by the Supreme Court of Appeal (SCA) at the end of last month, which ruled that new property owners can be held liable for historic debts dating back three decades.

Given that about 326 000 properties are purchased and sold each year, this could have a drastic effect on the market.

As the law stood before, a seller was liable only for debts incurred over the past two years for electricity, water and other services, and 30 years for rates in terms of section 118 of the Local Government Municipal Systems Act in order to obtain a clearance certificate.

The SCA case involves a matter between the City of Tshwane and Peregrine Joseph Mitchell, who purchased a property in Tshwane in 2013. He was told he had to pay R232 828 for a clearance certificate, but he claimed that in terms of section 118, he was liable to pay only R126 600 for debt due for the previous two years.

He obtained the certificate and later resold the property.But the council refused to connect services for the new owner, claiming there was historical debt owing of R106 200.

The matter went to the Gauteng Division of the High Court, which found that new owners were not liable for the historic debt.

This then went to the SCA, which held that the hypothec, or lien, that exists in favour of the local municipality to secure amounts owing by the owner of a property to that municipality for rates and services is not extinguished by the transfer of the property from the owner who incurred the debts.

This judgment, according to lawyers specialising in commercial and residential property practice and litigation, could have catastrophic implications for property owners.

One of the attorneys, Chantelle Gladwin, said the judgment was based on the court’s interpretation of section 118 as interpreted against the backdrop of the South African common law relating to hypothecs.

“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. This action can range from suing for the old owner’s debts and attaching and selling the property itself,” Gladwin said.

“This has major implications for banks too, because the municipality would take the proceeds of the sale of the property to settle whatever is owing, and only then, anything remaining would be paid to the bondholder, and thereafter to the owner.”

Gladwin said that given the problems municipalities have with incorrect billing, faulty meters, incorrect meter numbers, illegal electricity and water connections, and meter tampering, it could be a nightmare for new owners as they would be unable to prove anything going back a number of years.

The same problem exists with the property rates.

“If an owner was being charged rates based on an incorrect valuation, and five or six years after selling the property, the result of a review of the property valuation that applied to the prior valuation roll was that it was undervalued by several million rand, this could result in the new owner receiving a rates bill of several hundreds of thousands of rand for rates that should have been billed to the old owner before transfer,” she said.

The unfortunate thing was that there was very little, if anything, that the new owner could do, other than contact the previous owner, who might be dead, have left the country, have ceased to exist as a juristic person, have not kept any records, or destroyed records older than a few years.

“Basically, no property owner is safe, as no matter how much homework they do before purchasing a property, they can never be 100 percent sure that someone else’s debt will not appear out of the woodwork to haunt you,” Gladwin said.

This affects tenants as well because in many municipal jurisdictions, municipalities have by-laws that enable them to hold tenants and other occupiers of properties liable for charges, so this means that even tenants, who have never been the owners of the property, may be held liable for debts incurred.

“Again, there is no way for a tenant to screen a prospective property to ensure this will not happen.”

The only thing people could do was a thorough investigation into the chances of any old debt popping up, and taking out insurance to cover the risk. Purchasers needed to insist that sellers pay all amounts owing to the municipality when passing transfer.

Gladwin said the only option was to take the matter to the Constitutional Court.

Attorney Peter Lavinos agrees. “This has major repercussions for property owners, sellers, attorneys and the entire property industry as a whole.

“We believe that this is fundamentally unfair and have been fighting tooth and nail against this in the courts,” he said.

Lavinos said he had a similar matter before the high court on Monday next week and he would be arguing that the SCA did not address the constitutional issues.

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