Municipalities cannot hold you liable for old property debt

If you buy a property that has a municipal-related debt to it – incurred by the previous owner – you cannot be held responsible for paying it.

This was the precedent-setting ruling by Judge Dawie Fourie at the North Gauteng High Court in Pretoria on Monday, clarifying a long drawn-out battle between buyers of residential properties and local municipalities.

The court ruled that the practice by the City of Tshwane and Ekurhuleni, in holding new owners liable for the payment of historical debt amassed by a previous owner, is constitutionally invalid.

Read the judgement here.

Industry players said the judgement will have a profound impact on property owners in SA – beyond those owning residential properties.

The matter, which was initially heard in February includes five separate applications, each involving situations in which transfer of properties occurred following receipt of a clearance certificate under section 118 (1) of the Municipal Systems Act.

The respondents in the matters are the City of Tshwane and Ekurhuleni.

The municipalities in question (where the properties purchased are situated) certified that all amounts due (including water, electricity, rates and taxes) two years’ prior to the application for transfer, were paid.

All the properties, in fact, had historical debt to them.

In some cases, the City of Tshwane refused to supply municipal services – such as electricity, water, and waste removal – to properties until the historical debt was settled by the new owner. The same practice by the City of Ekurhuleni has been alleged by one applicant.

The applicants were seeking clarity on the provisions of section 118 (3) of the Municipal Systems Act, which includes a security provision for historical municipal debt to be incurred by the new owner.

They also argued that historical debt may not be transferred to a new owner unless there is a specific agreement between the seller and purchaser and that municipalities have a “legal duty and obligation” to collect municipal debts timeously.

Both municipalities have argued that they can enforce credit control and debt collection by-laws on the basis that the historical debts are claimable from new owners or tenants.

However, Judge Fourie ruled that section 118 (3) is constitutionally invalid regarding the security provision, as the new owner “is not a debtor of the municipality with regard to municipal debts incurred prior to such transfer [of the property].”

The City of Tshwane and Ekurhuleni municipalities were also ordered to render municipal services where no debt exists in respect of municipal services between the municipalities and the new owners.

Background

The debate about the responsibility of historical debt initially came to light in the matter between the City of Tshwane and Peregrine Joseph Mitchell, who purchased a property in 2013. He was told by the municipality that he had to pay R232 828 in outstanding debt on the property, in order to obtain a clearance certificate.

Mitchell disputed the correctness of the outstanding amount, which was subsequently reduced to R126 608. Mitchell paid this amount and received a clearance certificate, leaving a historical debt of R106 219 still outstanding to the property.  

He later resold the property with the debt and the City of Tshwane refused to supply municipal services such as electricity, water, and waste removal to the property until the historical debt was settled by the new owner.

The matter initially went to the high court in Pretoria, which ruled that new owners were not liable for the historic debt owed to the property.

The judgement was appealed at the Supreme Court of Appeal (SCA) which ruled that a transfer of a property to a new owner doesn’t mean that the debt is extinguished and that the new owner may be liable for the debt.

In this appeal, the SCA did not consider the constitutionality of section 118 (3).

Fourie’s judgement, which did consider the constitutionality of section 118(3), will be sent to the Constitutional Court for confirmation.

It’s not clear whether the municipalities will appeal the judgement.