In 2017 a great storm came to South Africa in relation to historical debt on properties (“Historical Debt”). The storm came in the form of section 118(1) and (3) of the Municipal Systems Act No. 32 of 2000 (“Act”) and states as follow:
“118 (1) A registrar of deeds may not register the transfer of property except on production to that registrar of deeds of a prescribed certificate-
(a) issued by the municipality or municipalities in which that property is situated;
(b) which certifies that all amounts that became due in connection with that property for municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties during the two years preceding the date of application for the certificate have been fully paid.
(3) 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”. (own emphasis added)
Subsection 118(3) of the Act is a security provision with no time limit. In essence, it is statutory hypothec (a right established by law over a debtor’s property that remains in the debtor’s possession) held by a municipality and ranks above any mortgage bond that may be registered over a property.
Municipalities in South Africa were collectively owed R94 billion (ninety-four billion Rand) for arrear rates and municipal services fees. About 80% of the debt was over 90 days old. Households owed the most at R57 billion (fifty-seven billion Rand). The lack of payment was attributed to “economic slowdown and unemployment”.
The non-payment has dire consequences for South Africa. Deprived of revenue, municipalities find it hard to maintain and supply basic services, which lead to protests, violence and payment boycotts. Many municipalities are in financial trouble; in the North-West Province, all of the municipalities are on the verge of being insolvent. Many cannot pay their debt to national suppliers of electricity and water – Eskom is owed R10 billion (ten billion Rand) and water boards R2 billion (two billion Rand).
The major issue in this regard is the implication the Historical Debt has on a purchaser of immovable property, at a time when there were still outstanding rates and services in respect of the property (i.e. municipal debt), payable by the seller to the municipality.
The matter of Mitchell v City of Tshwane Metropolitan Municipal Council 2015 (1) SA 82 (GP) went on appeal and in the matter of City of Tshwane Metropolitan Municipality v Mitchell (38/2015)  ZASCA 1;  2 All SA 1 (SCA); 2016 (3) SA 231 (SCA) (29 January 2016) (“Mitchell”) the Supreme Court of Appeal (“SCA”) ordered that the application be dismissed, and therefor led to the fact that the municipality can claim Historical Debt. The court held that “section 118(3) must be interpreted in a sensible manner that is harmonious with the common law and does not undermine the purpose for which it was enacted, which is to provide a mechanism for municipalities to collect historical debts, and that there is no indication that the subsection was enacted with the intention to alter the common law”.
In relation to the case of Mitchell, the municipality challenged the ruling handed down by the High Court and, in its majority decision, the SCA held that the hypothec survives the transfer as it is a hypothec created by statute. In relation to the SCA ruling, the municipality’s hypothec survives the transfer and has security over the property. Thus, the municipality uses the security to settle the Historical Debt outstanding on the property.
The ruling of the SCA has the following effect:
- the municipality’s rights in terms of section 118(3) of the Act does survive the transfer, regardless of the reason for the transfer; and
- an owner of property could be responsible for its Historical Debt – therefore there is no ‘clean’ transfer of title, and purchasers will now have to seek insurances from sellers in relation to rates payments.
The issues around Historical Debt went further and in the case of Jordaan and Others v City of Tshwane Metropolitan Municipality and Others 2017 (11) BCLR 1370 (CC) (“Jordaan and Others”) the Constitutional Court declared that, upon transfer of a property, a new owner is not liable for debts arising before transfer from the charge upon the property under section 118(3) of the Act.
The Constitutional Court made it clear in Jordaan and Others that a new owner is not liable for debts arising before transfer from the charge upon the property under section 118(3) of the Act. Thus, South Africa can sleep peacefully knowing that homeowners who purchased a new property are not liable for Historical Debt which was incurred by the previous homeowner and the matter appears to be finally settled.
03 September 2018