One would assume that the fact the seller of a home is in possession of a Rates Clearance Certificate would guarantee that all the outstanding rates and taxes on the property had been paid in full. Unfortunately, this doesn't appear to be the case anymore and it has come to light that the new owner could be held responsible for the debt incurred by previous owners in years gone by.
"The whole issue of who is responsible for long-standing municipal debts when properties are transferred has been raised time and again in the South African courts," says Tony Clarke, Managing Director of the Rawson Property Group.
"Traditionally," says Clarke, "the position has been that the seller or buyer has only to pay the last two years’ outstanding debt to be issued with a Rates Certificate, without which transfer cannot legally take place. This means of pressurising sellers into meeting their outstanding debts has proved effective in bringing them at least partially up to date on their payments, but it still leaves the new owner with the problem of who is responsible for longstanding unpaid debts."
"The two-year payment provision," says Clarke, "was upheld in September 2008 when Judge Blieden of the Johannesburg High Court ruled that Counsel had no right to withhold Rates Clearance Certificates on account of debts going back longer than two years. This approach was confirmed by the High Court of Cape Town and later by the Supreme Court of Appeal, which, incidentally, also ruled that all documentation relating to the two-year debt had to be produced.
"Now, however, in a third case (Tshwane Municipality vs Thomas Mathabata) it was ruled that even when the two-year payment is met, debts going back more than two years can be transferred to the new owner. Furthermore, the municipality has the right to attach the property and sell it in execution to achieve payment of those debts."
In other words, the fact that a Rates Clearance Certificate has been issued offers no guarantee that the rates and taxes have been paid in full and that the account is up to date.
It is absolutely vital that buyers contact their local authority in order to ascertain if there are any outstanding amounts due as these will automatically be passed on to the new owner, regardless of who incurred the debt.
It is no secret that a number of municipalities are struggling to recover large sums in outstanding bad debt. In some instances, the amounts owed involve billions of Rands and it is highly likely that local authorities are going to start taking a firm stand and will go all out to ensure that these outstanding debts are recovered. Taking occupation of a new home and then discovering that thousands are owned in back taxes is certainly no joke. The fact that a local authority can attach a property and sell it in execution in order to recover the outstanding money is a terrifying thought, but this nightmare could well become a reality if the new owner is unable to pay what is owed.
Clarke says that the ruling puts new owners in a very difficult position and in light of the recent judgement, it has become essential for sellers to offer a written guarantee that all debts owing on the property have been paid prior to transfer. In his opinion, a clause of this nature should now be included in all sales agreements.