Municipal debt: Close the gap

Private Property South Africa
Martin Hatchuel

Could you be held liable for debts that the seller runs up on a property you’re about to buy?

In terms of section 118 of the Local Government: Municipal Systems Act 32 of 2000, the transfer of a property can only take place once the registrar has received either an abridged clearance certificate from the municipality (which states that all debts incurred by the seller in the two years running up to the application for the certificate, have been paid) or a full clearance certificate that states that all historical debts have been paid. It also gives preference to any amount due – service fees, rates and taxes, etc – “over any mortgage bond registered against the property”.

Serious implications

In Municipal debt: Mind the gap (which we published last week) we saw that, as a result of a single sentence in the Supreme Court of Appeal’s Mathabathe Decision, the municipalities believe that they’re now in a position to hold buyers liable for debts incurred by sellers – and that they have the right to attach and sell the properties concerned, even after transfer, even after ownership has passed to third parties.

This puts a very different light on property transactions, and has serious implications for the market as a whole – as Chantelle Gladwin (a partner at Schindlers Attorneys) and Ramon Pereirra (an associate) noted in their February 2014 article, The hidden costs of Mathabathe.

In reference to our article, Municipal debt: Mind the gap, Chantelle pointed out, though, that it isn’t the law that’s changed: it’s the interpretation of it; She also made the point that another ruling – known as the Mitchell Decision – “held that purchasers aren’t liable for seller’s historical debts if they bought the property at a sale in execution.”

She said that this is important for the property industry, “because at least purchasers in this category of property sales are now off the hook.

“But the judgment gave the impression that purchasers of sales in the ordinary course can still be held liable for the seller’s historical debts – which further entrenched the incorrect interpretation of section 118(3) by the municipalities. It strengthened their argument and fueled the fire – so they are not going to stop interpreting section 118(3) incorrectly unless someone takes the matter to court again to clear this mess up.”

Chantelle and another partner at Schindlers, David Hepburn, published a new article – The Impact of Mitchell and Mathabathe on S 118 – by e-mail, last week.

In it, they wrote that “It is the manner in which section 118(3) operates, that has caused a lot of controversy in property circles in recent times.”

Three good points

In Chantelle and David’s view, the Mitchell Decision is important for three major reasons:

  • It means that “section 118(3) does not survive transfer in sales in execution”. In other words, the hypothec created by this section – which allows municipalities to attach and sell properties against which monies are owed – falls away “but only where the property is being sold in execution”. According to Chantelle and David, “A precedent has been set to dispel some of the prejudice suffered by purchasers (if only in relation to a certain class of property transfers – namely those sold in execution pursuant to a judgment – as opposed to all properties transferred generally).”

  • +

It found that “purchasers cannot be held liable for seller’s municipal debts”. Section 118(3) “does not transfer the debt owed by the municipality from the seller to the purchaser – it merely creates a right of security in favour of the municipality that can be used (only before transfer, in sales in execution) to attach the property and sell it to satisfy the seller’s debts to the municipality ... short of any law making a purchaser liable for a seller’s debts (which section 118(3) does not do, and neither does any other law) and in the absence of agreement by the purchaser that it will be liable for the seller’s municipal debts, there is no justification in law for a municipality recovering amounts owed by sellers from purchasers of properties.”

  • It made it clear that “municipalities must supply services to purchasers if they apply”.

Cover yourself!

You will recall from Municipal debt: Mind the gap that some municipalities are refusing to issue abridged clearance certificates – those that certify that all debts occurred in the two years running up to the application, had been paid – preferring instead to issue only full certificates once all historical debts had been paid. According to Chantelle and David, the ruling found “that a municipality cannot refuse to supply electricity or water, or enter into an agreement for the supply of electricity or water, to a purchaser of a property, merely as a result of the seller’s unpaid municipal debts”.

Since both the Mathabathe and Mitchell Decisions could impact on you as a buyer, it seems the only fail-safe position is to include a clause in your offer to purchase that requires the seller to obtain a full clearance certificate from the municipality.

* Write to Gladwin@schindlers.co.za* to receive Chantelle Gladwin’s articles on interesting and developing areas of the law relating to municipal services, as well as to rates in particular, and property law in general. “I write about cases that I deal with in every day life, and I publish about twice a week, so I aim to make my articles useful to the property owner, manager, investor, and even to municipalities.”*

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