Be careful when purchasing a new home

If you buy a property that has a municipal-related debt to it – incurred by the previous owner dating back to more than two years – you might be responsible for paying it.

Although this may seem draconian, especially to new owners, municipalities are now upping the ante on recovering unpaid rates, taxes, levies and services fees on properties.

However, slapping new owners with the debt to the property would be the absolute last resort municipalities would take after failing to contact the previous owner.

Talks about who is responsible for the debt emerged from a recent Supreme Court of Appeal (SCA) judgement, in which new property owners could be liable for the historical debt that dates back to more than 20 years. Read judgement here.

Under the current law in the Local Government Municipal Systems Act, a seller of a property is responsible for the debt that has been incurred over the last two years in order to get an abridged clearance certificate under section 118 (1) when a property is about to transferred to a new owner.

In a matter between the City of Tshwane and Peregrine Joseph Mitchell who purchased a property in 2013, was told by the municipality that he had to pay R232 828 in outstanding debts to the property in order to obtain a clearance certificate.

But 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 Gauteng Division of the High Court in Pretoria, which ruled that new owners were not liable for the historic debt owed to the property.  In a precedent-setting judgement, the SCA concluded 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. The judgement is vague about whether residential or commercial properties (or both) are impacted.

In terms of its existing by-laws and policy, the process where the municipality regards the historical debt a charge against the property has been implemented for the last two years, says City of Cape Town’s executive deputy mayor Alderman Ian Neilson.

“This SCA judgement has therefore confirmed our existing process, namely that the new property owners are liable for the historical debts on a property,” says Neilson.  The City of Johannesburg, Tshwane and eThekwini did not respond to Moneyweb’s questions at the time of writing.

Constitutionality of SCA judgement

The constitutionality of the SCA judgement has been questioned by attorneys. Partner at Schindlers Attorneys Chantelle Gladwin, says the constitutionality of the interpretation of section 118 by the SCA, was not dealt with by the court. “Holding a purchaser liable for a seller’s debt is potentially unjustifiable in terms of our Constitution because it constitutes arbitrary deprivation,” Gladwin explains.   The SCA judgement can still be dealt with by the Constitutional Court.

Gladwin says the worst case scenario from the SCA ruling is that if the debt of the property is not paid, then a municipality can sell the property to settle the debts. If this happens, then the actions of a municipality might have implications for banks, as municipalities usually claim the proceeds from the sale first.

“This can result in banks not getting all of their money back. This would happen where the debt owed to the municipality is so large that when you add this to the amount owed to the bank, the total exceeds the amount achieved for the sale of the property,” she says.

Not only does the SCA ruling have implications for the property sector but also the practice of litigation. Owner and managing director of New Ventures Consultancy & Services Peter Livanos, says some transfer attorneys – who are mandated with property transfers – are omitting telling property purchasers and sellers that all debts to a property should be settled properly before transfer.

“Some attorneys feel that they don’t want to act as debt collectors. I feel that attorneys and estate agents now have an obligation to inform the purchaser and seller of the implications of the SCA Judgment. When it comes to the transfer of properties, you need to make sure all the debts are paid,” says Livanos.

Livanos, who acts for banks, attorneys and estate agents, says he has a similar matter, which will be before the high court on Monday and says he would argue that the SCA didn’t interpret the constitutionality of its judgement.

Protecting yourself

It seems like there isn’t much property buyers can do to protect themselves from old municipal debts that could surface.

Oosthuizen & Co Meyer de Waal Attorneys director Meyer de Waal, says before the property is transferred, a sales agreement between a seller and buyer should be in place. This agreement must state that the seller will undertake all debts of the property.  “The agreement could be to the extent that the buyer will have a right to claim damages from the seller, should the purchaser at a later stage be faced with such a claim,” De Waal explains.

De Waal says from a seller’s view, they could cover themselves under the Voetstoots clause, which frees a seller from any liability related to a property.

Another option would be for sellers to take up insurance to indemnify themselves from municipal debt claims. “We have actually started the process to investigate with insurance companies if they will provide cover for such potential losses,” he says.

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