The Supreme Court of Appeal has confirmed that a municipality’s right to secure amounts owing on a property is not extinguished when the property is transferred. This is the second time in two years that the Supreme Court has ruled that a municipality’s claim for historical debt does not expire when a property is sold.

(Go to the link at the end of this article for more about the first Supreme Court ruling and the High Court judgment that resulted in the latest appeal.)

In the most recent case that came before the court, the question that had to be decided was whether the right – in legal terminology, a hypothec (or lien) – survived when the transfer resulted from a sale in execution.

The implication of this and the first Supreme Court ruling is that, if any money owed to the municipality remains unpaid at the time of transfer, the municipality can, after obtaining a judgment against the person who is liable for the debt (the owner of the property when the debt was incurred), attach the property and cause it to be sold in execution to recover the money due to it.

Any remaining proceeds from the sale would be paid to the bond-holder and thereafter to the present owner of the property. Alternatively, if the present owner wanted to prevent the property from being sold in execution, he or she would have to settle the debt even though he or she did not incur it.

Clearance certificate

A property cannot be transferred from one owner to another unless the local authority has issued a clearance certificate to the effect that the rates and other charges due to the municipality in respect of the property have been paid.

However, the certificate covers amounts owed over the preceding two years until the date on which the conveyancer applies for the certificate – these amounts are known as the normal rates debt. Outstanding amounts that predate the period covered by clearance certificate – in other words, that are more than two years old – are known as the historical debt.

A municipality is obliged to issue a clearance certificate if any amounts due on the property during the preceding two years have been settled. But the issuing of a certificate does not necessarily mean that older debts are not due on the property; nor does it mean that the municipality has forfeited its right to claim any money owed to it.

The Prescription Act determines the years after which types of debt not claimed by the institution of legal action (serving a summons on the debtor) will lapse. Municipalities can claim debts in respect of rates, refuse and sewerage for up to 30 years and in respect of water and electricity for up to three years. Thus, a clearance certificate could possibly be issued for a property that has unpaid rates for up to 28 years and unpaid service accounts for a year.

First judgment in 2013

The Supreme Court judgment, which was handed down at the end of January 2015, is the latest matter to come before the courts where the outcome turned on the interpretation of section 118(3) of the Local Government: Municipal Systems Act, which states: “An amount due for municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties is a charge upon the property in connection with which the amount is owing and enjoys preference over any mortgage bond registered over the property.” The key words are “a charge upon the property”.

In 2013, the Supreme Court handed down a judgment (in City of Tshwane Metropolitan Municipality v Mathabathe & Another) that overturned – or, perhaps more accurately, corrected – the long-held assumption that a rates clearance certificate guaranteed that no municipal debts were owed on a property, or that if municipal debts were outstanding, the municipality could not, after the transfer of the property, enforce a claim for any old debts other than against the previous owners who had incurred them.

The implication of the Mathabathe judgment is that property buyers should not assume that a clearance certificate necessarily means they have acquired a “clean title” (a property unburdened with municipal debt). In fact, a municipality can, after issuing a clearance certificate and after the property has been transferred to the buyer, enforce its right against the property, obtain a court order for it to be sold and use the proceeds of the sale in execution to settle municipal debts incurred by a previous owner.

Exemption for sales in execution?

Subsequently, what has been in dispute is whether the hypothec applies to properties sold in execution.

In 2014, the North Gauteng High Court ruled (in Perregrine Joseph Mitchell v City of Tshwane Metropolitan Municipality) that the hypothec created by section 118(3) was extinguished if the property was sold in execution.

At the time, some law firms issued statements saying that the ruling had modified or even reversed the implications of the Mathabathe judgment. However, other attorneys pointed out that the judgment drew attention to the fact that the property had been sold in execution.

The City of Tshwane appealed against the judgment in the Supreme Court.

In her ruling, Judge Elizabeth Baartman said the High Court had erred when it concluded that a sale in execution is an exception to a hypothec created by a law that places no limit on its duration.

Judge Baartman said that if a limited duration of the hypothec created by section 118(3) was contemplated in respect of property purchased at a sale in execution, the legislature would have made provision for it. She said the exception on which the High Court relied – contained in a commentary by the 17th-century Dutch jurist Johannes Voet – could not be read into section 118(3).

Judges Lex Mpati, Lebotsang Bosielo and Halima Saldulker concurred, but Judge Dumisani Zondi dissented, stating he did not believe the legislature intended the hypothec in respect of historical debt to extend beyond a transfer that resulted from a sale in execution.

What can you do?

Chantelle Gladwin, a partner at Schindlers Attorneys, says property buyers should do as thorough an investigation as they can into the chances of any old debt popping up.

Sellers should investigate the possibility of taking out insurance to indemnify themselves against the risk of municipal claims. Purchasers need to insist that sellers agree, in writing, to pay all amounts owing to the municipality when passing transfer (most purchasers do this already).

However, Gladwin says that none of these actions is guaranteed to protect a person from being held liable for another person’s municipal debt, and even losing their property to satisfy that debt.