Municipal debt: will the lights stay on?

Private Property South Africa
Cathy Nolan

Writing in the latest edition of the RealNews newsletter that goes to all RealNet agents and their clients, top property attorney Tiaan van der Merwe notes that the issue of “old municipal debt” has actually not been completely resolved yet, and is probably headed for the Constitutional Court.

Municipal clearance certificate

Before a property can be transferred, conveyancers are obliged in terms of Section 118(1) of the Municipal Systems Act to lodge documentary proof – in the form of a clearance certificate issued by the local municipality – that outstanding rates and taxes as well as utilities have been paid.

However, as explained during a recent episode of Carte Blanche, there has been confusion and controversy surrounding the process of obtaining and lodging a clearance certificate following judgment by the Gauteng High Court in the matter of Mathabathe vs Municipality of Tshwane.

Section 118(1) stipulates that the local municipality must certify that the outstanding debt for the two years immediately preceding the date of application of the clearance certificate is paid in full, and in the above case the court’s interpretation of this section was that if the total debt includes a debt older than two years (historical debt), but the debt for the two years immediately preceding the application for the clearance certificate has been paid, the municipality must issue the clearance certificate. The property can then be transferred to the purchaser although the seller is still indebted to the municipality for historical debt older than two years.

Historical debt

So far so good, but Section 118(3) of the Act stipulates that the debt (including the historical debt) is “a charge upon the property” and the court also ruled that the municipality therefore has a lien (statutory tacit hypothec) over the property – and implied that this lien is not extinguished when the property is transferred to a new owner.

The effect of this is seemingly that a municipality can subsequently perfect its lien, attach the new owner’s property and sell it on auction to settle the previous owner’s historical debt – and some municipalities have already been making use of this back door to try to collect historical debt from new owners. Some have even gone so far as to refuse to open utility accounts in the name of new owners until the historical debt has been settled.

Frustration

This has obviously created a major worry and frustration for property buyers, and it is absurd, to say the least, that the municipalities should be given a proverbial “second bite of the cherry” when the historical debt actually only exists because of their own incompetence.

Fortunately, though, it seems as though sanity will prevail. On 8 September, in the case of PJ Mitchell v City of Tshwane Metropolitan Authority, the same court ruled that a municipality’s lien over a property had been extinguished by a sale in execution and the new owner should be granted a clean title.

This does not completely resolve the issue of the municipality’s right to perfect it’s lien against a new owner because the property in question was sold in terms of a court order and not, as is usually the case, in terms of an agreement between buyer and seller.

Step in the right direction

What is however a major step in the right direction is that the court also ruled that a municipality cannot refuse to provide services to a new owner on the grounds that there is a historical debt that has not been paid.

We’re certain that this matter will soon be taken to the Constitutional Court to be tested against Section 25 of the Constitution, which protects private property rights, but in the interim we suggest that pro forma sale agreements be amended to protect property buyers as follows: “The transfer attorney must obtain a clearance certificate for the full outstanding debt (including the historical debt) and not only an abridged certificate for two years. The seller indemnifies the purchaser against any outstanding municipal debt.”

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