HISTORIC MUNICIPAL DEBTNew home owners can now at sleep in peace every night with the latest victory related to historic Municipal debt.
The recent Jordaan v Tshwane municipality case dealt with the question of whether new owners could be held liable for historic debt on their property.
The applicants (who took the matter on application in the High Court) were individuals and corporations owning, or acting on behalf of owners of, property in Tshwane or Ekurhuleni. Each complained that the municipality in question suspended municipal services or refused to conclude a consumer services agreement for municipal services until the historical debts relating to the property had been cleared.
The issue at hand was the constitutional validity of S118(3) of the Local Government Municipal Systems Act, which provided that “an amount due for municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties is a charge upon the property in connection with which the amount is owing and enjoys preference over any mortgage bond registered against the property”. The Constitutional Court dealt with it by firstly examining whether the provision allows a municipality to reclaim the debts of a former owner from the new owner, and if so, whether this provision was constitutional.
When the matter appeared in the High Court, it was declared invalid to the extent that it survives transfer of ownership.
The context of the provision is that various statutory mechanisms were created to assist and protect municipalities in collecting debts. Firstly, was the embargo that for a transferor to transfer a property, they had to settle their debts to the municipality. The second was that the municipal debts were given preferred status, which put them ahead of the other creditors when an execution was levied on an immovable property. The third mechanism, which is being contested in this case, is that of transmissibility where the claim survives beyond the transfer to the new owner.
When S118(3) took effect on 1 March 2001, it was radical in that it was not directly linked to the embargo and this there is no retrospective limit on the debts it covers. Thus, it covers all debts except those which has prescribed – and the municipalities took the interpretation that it also covers the debts of the previous owners.
The Court, after considering the common law and historical context, which lead to registration of almost all real rights in the Deed’s office, found that “were there no Constitution, one would conclude, on the wording of section 118(3) alone, that the unregistered charge it creates is enforceable against the property only so long as the original owner holds title. The absence of any requirement that the charge be publicly formalised is a strong interpretative indicator that the limited real right section 118(3) creates is defeasible on transfer of ownership.”
The court then started to consider the constitutional issues. While the municipalities have the constitutional obligation to collect revenue and pursue debtors, nothing prevents them from exercising their right to the embargo and claiming the money from the actual debtor and not from the new owner.
The Court then considered that the Bill of Rights prevents the arbitrary deprivation of property. The new property owner as well as the new bondholders could be adversely affected if the charges were transmissible as the property may then be sold in execution to satisfy the municipal debt, with the municipality being the preferred creditor. The court then turned to whether the deprivation of the property was arbitrary, and given that there is no link between the new owner as creditor and how the debt arose, found that by holding the new owners liable for the debt was an arbitrary deprivation of property.
The court thus found that because the provision can be read in such a manner that the charges cannot be transferred to the new owner, the provision isn’t declared unconstitutional, however, it does mean that in practice that the municipality cannot claim the historic debt from the new owners.
Judgement by the Constitutional Court was handed down on 29 August 2017.
Prepared by Kai Howie MDW INC
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