How the “Historical Rates” Judgment Affects You

How the “Historical Rates” Judgment Affects You

“It is declared that, upon transfer of a property, a new owner is not liable for debts arising before transfer from the charge upon the property …” (Constitutional Court Order)

How does the recent Constitutional Court decision [Jordaan and Others v City of Tshwane Metropolitan Municipality and Others; City of Tshwane Metropolitan Municipality v New Ventures Consulting and Services (Pty) Limited and Others; Ekurhuleni Metropolitan Municipality v Livanos and Others (CCT283/16, CCT293/16, CCT294/16, CCT283/16) [2017] ZACC 31] on “historical rates” affect you in practice?

Understanding the issue

When attending to the transfer of immovable property the conveyancing attorneys require the municipality to issue a “rates clearance certificate” certifying that payment of municipal debts (rates, municipal services etc) due for the past 2 years have been settled.

Transfer of the property then takes place into the name of the purchaser.  The purchaser would be forgiven in assuming that there is no historical debt over the property because of the rates clearance certificate.

However, if the municipality subsequently finds out that there is a historical debt owing in respect of municipal debts over the property, it is a common practice of some municipalities to force new owner to settle the old owner’s historical municipal debts instead of proceeding against the old owner directly.

One could therefore purchase a house thinking that all you had to pay was the purchase price and transfer costs, but end up having to pay these old municipal debts run up by previous owners – sometimes a year or more after acquiring the property!

While the old municipal debts might not be large if the municipality does a good job at timeously collecting these old debts, there is a risk that the old debts could be substantial – R6.5m in one of the cases in question.  There was accordingly the risk that you either had to cough up or face losing your home to a sale in execution, as well as threats to disconnect electricity and other services.

Property owners 1, Municipalities 0

In a major victory for property owners, a 2016 High Court decision held that procedure to be unconstitutional.  Whilst the Constitutional Court on appeal said there was actually nothing unconstitutional about the legislation in question, it confirmed that municipalities cannot use it to collect pre-transfer municipal debts from the new owner.

So how does that decision from our highest court affect you?

Buyers

You are no longer the “soft target” for municipalities and you no longer risk having to pay the seller’s historical debts; you are only liable for rates etc after you take transfer.  The other side of the coin is that municipal debt write-offs generally are bound to increase, and those losses will be passed on to us all as consumers.

Sellers

To avoid delays in transfer, keep all municipal accounts up to date. Remember you cannot pass transfer without a “rates clearance certificate” certifying payment of rates etc due for the past 2 years. Debt older than 2 years cannot now be claimed from the buyer so expect municipalities to be extra vigilant from now on in collecting arrear rates and service accounts as they arise.  Get legal help immediately if your municipality demands payment of debts older than 3 years – rates prescribe after 30 years, but other debts survive only 3 years.

Agents

This decision has been touted as positive for the property market generally and it certainly will reassure any potential buyers holding back from making offers for fear of having to pay huge hidden municipal debts.

Municipalities

“Historical debts”, said the Court, “exist only because municipalities have not recovered them”.  Every municipality is obliged to –

  • “Collect all money that is due and payable to it”,
  • “Implement a credit control and debt collection policy”,
  • “Send out regular accounts, develop a culture of payment, disconnect the supply of electricity and water in appropriate circumstances, and take appropriate steps to collect amounts due”, and
  • “For the sake of service delivery … do everything reasonable to reduce amounts owing”.

You have, in the Court’s words “a full-plated panoply of mechanisms enabling efficient debt recovery” – use them to stop arrears building up in the first place.

Andrew Goldschmidt

Andrew Goldschmidt

A Partner at Ashersons, Andrew has been with the firm since 2007. He has experience in contentious as well as non-contentious corporate and commercial matters ranging from the drafting of commercial contracts to commercial litigation, with particular regard to corporate and contractual disputes.

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