Historical municipal debt

Prior to the landmark decision in Jordaan and Others v City of Tshwane Metropolitan Municipality and Others [2017] there was some uncertainty around debts incurred by previous owners of a property.

Verbal vs. written contracts for conveyancing

Previously, municipalities were of the opinion that Section 118(3) of the Municipal Systems Act, 32 of 2000 created a ‘charge’ to the benefit of the municipality. This charge was seen to rank higher than the rights of the bondholder and to last beyond transfer. The consequence of this interpretation by the Municipalities was that in some instances, municipalities refused to supply services to the new owner until the historical debt was settled. Further, it was stated that the property could then be attached and sold to cover the historical amount.

The rather strict view has since been reinterpreted by the courts through a number of high profile cases such as Jordaan and Others v City of Tshwane Metropolitan Municipality and Others.

How the court’s decision impacts purchasers

In accordance with the court’s decision in the Jordaan case, municipalities cannot hold new owners liable for previously incurred debts. The court held that the municipalities are responsible for the collection of the outstanding amounts and such amounts cannot be transferred to the new owner.

In addition, the municipality cannot withhold any services to the new owner and would have to exhaust all remedies at their disposal to collect the outstanding amount due from the previous owner.

It should be noted, however, that although this finding makes a significant step to protect purchasers, a prospective buyer should still be wary and perform due diligence before any transaction is entered.

Obligations placed upon the seller

Section 118(1) of the Act provides that a Registrar of Deeds may not register a property transfer without a rates clearance certificate which acts as proof that all amounts due in connection with the property have been paid for the preceding two years.

Due to the implications of the judgement, municipalities have been more vigilant in their collection of unpaid accounts. For the certificate to be issued, the municipality will issue a clearance figure which is then to be paid by the seller. While it is possible for the seller to pay only the amount due for the preceding 2 years in order to obtain the necessary rates clearance certificate, he or she will remain liable for any additional amounts not covered by this payment. As such, the municipality may claim any unpaid fees from the seller after transfer has taken place using normal debt collecting measures.

Action by the municipality

The municipality where the property is situated will be within their rights to apply for a court interdict to stop the transfer of the property if the seller chooses to pay only the Section 118(1) amount. If such an order is granted, the municipality would then have to act with urgency to take the necessary steps to obtain an order attaching the property. Once the attachment is registered in the Deeds Office, the Registrar of Deeds will not allow transfer until the interdict is uplifted, thus forcing the seller to pay the full amount.

Sellers should be advised to pay the full amount owing in terms of the clearance figures to ensure that no delays are experienced and that no action is instituted against them after transfer.

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Historical municipal debt

Prior to the landmark decision in Jordaan and Others v City of Tshwane Metropolitan Municipality and Others [2017] there was some uncertainty around debts incurred by previous owners of a property.

Verbal vs. written contracts for conveyancing

Previously, municipalities were of the opinion that Section 118(3) of the Municipal Systems Act, 32 of 2000 created a ‘charge’ to the benefit of the municipality. This charge was seen to rank higher than the rights of the bondholder and to last beyond transfer. The consequence of this interpretation by the Municipalities was that in some instances, municipalities refused to supply services to the new owner until the historical debt was settled. Further, it was stated that the property could then be attached and sold to cover the historical amount.

The rather strict view has since been reinterpreted by the courts through a number of high profile cases such as Jordaan and Others v City of Tshwane Metropolitan Municipality and Others.

How the court’s decision impacts purchasers

In accordance with the court’s decision in the Jordaan case, municipalities cannot hold new owners liable for previously incurred debts. The court held that the municipalities are responsible for the collection of the outstanding amounts and such amounts cannot be transferred to the new owner.

In addition, the municipality cannot withhold any services to the new owner and would have to exhaust all remedies at their disposal to collect the outstanding amount due from the previous owner.

It should be noted, however, that although this finding makes a significant step to protect purchasers, a prospective buyer should still be wary and perform due diligence before any transaction is entered.

Obligations placed upon the seller

Section 118(1) of the Act provides that a Registrar of Deeds may not register a property transfer without a rates clearance certificate which acts as proof that all amounts due in connection with the property have been paid for the preceding two years.

Due to the implications of the judgement, municipalities have been more vigilant in their collection of unpaid accounts. For the certificate to be issued, the municipality will issue a clearance figure which is then to be paid by the seller. While it is possible for the seller to pay only the amount due for the preceding 2 years in order to obtain the necessary rates clearance certificate, he or she will remain liable for any additional amounts not covered by this payment. As such, the municipality may claim any unpaid fees from the seller after transfer has taken place using normal debt collecting measures.

Action by the municipality

The municipality where the property is situated will be within their rights to apply for a court interdict to stop the transfer of the property if the seller chooses to pay only the Section 118(1) amount. If such an order is granted, the municipality would then have to act with urgency to take the necessary steps to obtain an order attaching the property. Once the attachment is registered in the Deeds Office, the Registrar of Deeds will not allow transfer until the interdict is uplifted, thus forcing the seller to pay the full amount.

Sellers should be advised to pay the full amount owing in terms of the clearance figures to ensure that no delays are experienced and that no action is instituted against them after transfer.

Follow Snymans on Facebook for more legal information, tips and news about property.