Concourt rules new homeowners not liable for debts of previous owners

Municipalities cannot hold a new property owner liable for a previous owner’s historical municipal debt, the Constitutional Court ruled on Tuesday.

The precedent-setting ruling gives relief to home and business owners, who have been saddled with years of historical municipal debt – dating back to 20 years – and have been denied municipal services until the debt had been paid. The outstanding debt includes water, electricity, rates and taxes charges associated with a property.

In a ruling majority written by Justice Edwin Cameron, the court found that upon transfer of a property, a new owner is not liable for old municipal debt. The court upheld a ruling by the high court in Pretoria in November last year – mainly the part stipulating that the liability of the old municipal debt rests with the previous owner.

Metropolitan municipalities of Tshwane and Ekurhuleni brought an application at the Constitutional Court to appeal the Pretoria High Court ruling.

Municipal debt specialist New Ventures Consulting and Services, which has represented several property owners who have carried the liability for the historical debt, was a respondent in the matter. The Banking Association of South Africa, commercial property financier Tuhf and the Ethekwini Metropolitan Municipality joined the matter as friends of the court.

The metropolitan municipalities of Tshwane, Ekurhuleni and Cooperative Governance and Traditional Affairs Minister Des van Rooyen were ordered to pay costs for the appeal application.

Giving municipalities the power to claim historic debt has implications for the banking industry.

In theory, municipalities would be the first to claim the debt from the proceeds of a property sale, which could result in banks not getting their money back. This would happen when the municipal debt and the amount owed to the bank is larger than the value achieved from the property sale.

Historically, a property was not allowed to be transferred to a new buyer until a municipal certificate that cleared debt spanning over two years was issued under section 118 (1) of the Municipal Systems Act.

However, debts that surpassed the two-year cut off became the liability of the new owner. If the owner failed to pay the debt, the municipality was then permitted to attach and sell the property to settle the debt.

At the heart of the appeal is the interpretation of section 118 (1) and (3) of the act. The act includes a security provision for historical debt to be incurred by the new owner, which municipalities used in their refusal to issue a clearance certificate during the sale of a property until all debts had been paid. This section of the act was declared unconstitutional by Judge Dawie Fourie at the High Court as it unjustifiably limited the property rights of new owners under the Constitution.

In its judgement, the court assessed common law factors that could impact on how section 118 (3) of the Municipal Systems Act can be interpreted in line with the Bill of Rights. Cameron said the sections of the Act must be interpreted so that historical debt is not transferred to the new owner.

It is on this basis that the court ruled that the section 118 (3) is “well capable of being interpreted ” so that the historical debt is not transferred to a new owner of the property.  The court did not confirm the ruling by the High Court that sections of the Act were unconstitutional and invalid, as Cameron said the sections can be “properly and reasonably” interpreted without Constitutional objection.

Section 118 doesn’t require a formal registration of the property’s historical municipal debt with the Deeds Registry office when it’s about to be transferred to a new owner.

“What is notable about section 118(3) is that the legislature did not require that the charge [historical debt] be either registered or noted on the register of deeds. Textually, there is no indication that the right given to municipalities has a third-party effect [to a new owner]… It [historical debt] stands alone, isolated and unsupported, without foundation or undergirding and with no express words carrying any suggestion that it [historical debt] is transmissible,” he said in the judgement.

The respondents in the matter argued that making a new owner liable for historical debt could prejudice new homeowners and promote the deprivation of property, in line with the prescripts of the Bill of Rights. Cameron held this view, saying if the debt survives the transfer to the new owner under section 118(3), “there could be a significant deprivation of property”.

Read the full judgment below:

CONSTITUTIONAL COURT OF SOUTH AFRICA

Chantelle Jordaan and Others v City of Tshwane Metropolitan Municipality and Others; City of Tshwane Metropolitan Municipality and Others v Chantelle Jordaan and Others; Billie Ann Livanos v Ekurhuleni Metropolitan Municipality

CCT 283/16
CCT 293/16
CCT 294/16
Date of Judgment: 29 August 2017

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MEDIA SUMMARY
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The following explanatory note is provided to assist the media in reporting this case and is not binding on the Constitutional Court or any member of the Court.

Today the Constitutional Court handed down judgment in an application for confirmation of an order by the High Court of South Africa, Gauteng Division: Pretoria (High Court) that declared section 118(3) of the Local Government: Municipal Systems Act, 2000 constitutionally invalid. This section provides that an amount due for municipal services rendered on any property is a charge upon that property and enjoys preference over any mortgage bond registered against the property.

The matter came before the High Court after the City of Tshwane and Ekurhuleni municipalities suspended, or refused to contract for the supply of, municipal services to the applicants’ properties. This was on the basis that the applicants, who are relatively recent transferees of municipal properties, owe the municipalities for municipal services rendered to these properties before transfer. In other words, the municipalities required these new owners to pay historical municipal debts. The applicants complained that they faced darkness, having no electricity, and many other inhumane conditions because they bought property whose previous owners failed to meet their obligations to the municipality – and against whom the municipality failed to enforce its rights in fulfilment of its constitutional obligations.

The High Court found section 118(3) constitutionally invalid, to the extent only that it has the effect of transferring to new or subsequent owners municipal debts incurred before transfer. The High Court found this to be an arbitrary deprivation of property in terms of section 25 of the Constitution. It said that new owners of property are not liable for municipal debts incurred by previous owners. Therefore municipalities may not sell the property in execution to recover the debt or refuse to supply municipal services on account of outstanding historical debts.

In considering whether to confirm the High Court’s declaration of constitutional invalidity, this Court had to determine whether the provision, properly interpreted, in fact means that, when a new owner takes transfer of a property, the property remains burdened with the debts a previous owner incurred. If the provision was capable of an interpretation that did not impose constitutionally invalid consequences, the High Court’s declaration of constitutional invalidity would be unnecessary.

Before this Court, Tshwane, Ekurhuleni and now eThekwini municipality, which was admitted as amicus curiae (a friend of the Court), contended that a proper construction of section 118(3) was that the charge survives transfer. They argued that for municipalities to properly fulfil their constitutional duties of service delivery, in the greater good, they needed extra-ordinary debt collecting measures. This meant burdening new owners with the responsibility for historical debts. Both in the High Court and in this Court, the Minister of Cooperative Governance and Traditional Affairs also presented argument in support of the municipalities’ stand.

The municipalities however conceded that nothing prevented them from enforcing their claims for historical debts against those who incurred them, namely the previous owners. The municipalities conceded further that their powers included interdicting any impending transfer to a new owner by obtaining an interdict against the old, indebted owner, until the debts were paid.

Also admitted as amici curiae were the social housing organisation, TUHF Ltd (TUHF); The Banking Association of South Africa (BASA), an association with thirty-two member banks and the Johannesburg Attorneys Association (JAA). TUHF and BASA associated themselves with the applicants in challenging the meaning the municipalities ascribed to section 118(3). They advanced further arguments including that section 118(3) permitted arbitrary deprivation of not just the new owner’s property rights, but of real security rights the new owner confers on any mortgagee who extends a fresh loan on the security of the property post-transfer. The JAA focused on a conveyancer’s duties and ethical position should this Court hold that the section 118(3) right survives transfer.

In a unanimous judgment, penned by Cameron J, this Court weighed the historical, linguistic and common law factors bearing on how the provision should be understood, plus the need to interpret it compatibly with the Bill of Rights.

The Court held that the provision is well capable of being interpreted so that the charge does not survive transfer. Indeed, it must be so interpreted. The Court held that a mere statutory provision, without more, that a claim for a specified debt is a “charge” upon immovable property does not make that charge transmissible to successors in title of the property. Public formalisation of the charge is required (e.g. registration in the Deeds Registry) so as to give notice of its creation to the world.

Section 118 does not require this public formalisation process. In any event, the Bill of Rights prohibits arbitrary deprivation of property, which would happen if debts without historical limit are imposed on a new owner of municipal property.

Therefore, to avoid unjustified arbitrariness in violation of 25(1) of the Bill of Rights, the Court held that section 118(3) must be interpreted so that the charge it imposes does not survive transfer to a new owner.

In the result, the Court held that, because section 118(3) can properly and reasonably be interpreted without constitutional objection, it is not necessary to confirm the High Court’s declaration of invalidity. For clarity, the Court, however, granted the applicants a declaration that the charge does not survive transfer.

As this represents a victory in substance for the applicants, the Court held that the municipalities and the Minister should pay the applicants’ costs, including the costs of two counsel.

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