Are you liable for a previous owner’s unpaid rates and taxes on a property?

article_historical-property-taxes-wideYou might not have initially been aware of this, but it might have arisen during conversation over dinner if somebody you know has recently purchased a house. The crux of the conversation was “beware when buying a new property, because you may become liable for rates going all the way back to the 1980s. This is notwithstanding that you were in a cot at the time.” Surely this could never be the case, especially since it is not your debt – it is the previous owner’s debt?! However, fear not, the Gauteng Division of the High Court has clarified the issue and has, at least for new property owners, saved the day (for now).

The salient facts of Jordaan v City of Tshwane Municipality (74195/2013) [2016] ZAGPPHC are as follows: In the first situation there were three parties who purchased a property at a sale in execution, and in a second situation another party purchased a property from a company in liquidation. In each of the two cases there were historical debts for unpaid rates for the properties and the municipality turned to the new owners for payment thereof.

The Municipality relied on the Municipal Systems Act (“The Act”) to recover the rates.  Section 118 (1) of the the Act records that:

“the municipality must certify that all amounts that became due in connection with that property for municipal service fees as well as property rates and taxes during the two years preceding the date of application for the certificate, have been fully paid.”

This procedure is widely accepted as fair and reasonable among conveyancers however in these two instances there were unpaid rates for a period prior to the two years. The municipality enforced its policy of refusing to render municipal services, or to enter into a service agreement with a new property owner, until such time as all historical debts in respect of the property were paid. The municipality relied on Section 118 (3) of the Act and the Supreme Court of Appeal judgment of City of Tshwane Metropolitan Municipality v Mitchell (38/2015) [2016] ZASCA (“Tshwane v Peregrine”) to guarantee payment.

Section 118 (3) reads as follows:

an amount due for municipal service fees, surcharges on fees, property rates and other municipal taxes, levies, duties is a charge upon the property in connection with which amount is owing and enjoys preference over any mortgage bond registered against the property”

Tshwane v Peregrine held the following:

Furthermore, the SCA held that as a result of the s118 (3) hypothec surviving the transfer of the property, the municipality was accordingly entitled to perfect its security to ensure payment of the historical debt. Security could be perfected provided a court order was obtained and the proceeds of the sale of the property were used to settle the outstanding debt. In this scenario the new owner might be forced to pay the previous owner’s debt in order to avoid losing his property.

See our previous article, Everything that Shines isn’t always gold

It is trite that the collection of historic debts in respect of properties is in the interests of the Municipality and its proper functioning. Ideally then, these benefits would be passed on to residents of the Municipality. However, this was challenged by the Applicants.

D S Fourie, J, the presiding Judge in this instance, revisited Section 118 (3) of the Act and challenged its Constitutionality.

Section 118 (3) concerns in particular, Section 25 of the Constitution, which states inter alia that:

no one may be deprived of property excepts in terms of a law of general application, and no law may permit arbitrary deprivation of property’

In analysing whether Section 118 (3) of the Act was unconstitutional, a three step enquiry was conducted by the court to determine whether one is 1) deprived of their property 2) in terms of a law of general application and if so 3) whether the deprivation is arbitrary.

Deprivation:

The court weighed up the process involved in settling these historic debts, with the definition of deprivation. The process of collecting the monies owing is explained City of City of Johannesburg v Kaplan NO and Another (111/05) [2006] ZASCA 39:

“Any amount due for municipal debts (i.e. not limited by the aforesaid period of two years) that have not prescribed is secured by the property and, if not paid and an appropriate order of Court is obtained, the property may be sold in execution and the proceeds applied in payment of the debts. In such event, the proceeds will be applied to payment of the municipal debts in full. Only after satisfaction of such debts, will the remainder, if any, be available for payment of the debt secured by a mortgage bond over the property.”

The court found that this loss of ownership, and consequently the ability to use, enjoy or exploit the property is such a drastic remedy that constitutes a severe limitation of a new property owners rights. It was therefore held to be a deprivation for the purposes of Section 25 (1) of the Constitution.

Law of general application:

In relation to the above, the court deemed it unnecessary to decide whether this was a Law of General Application for the reasons set out below.

Arbitrariness

The question of arbitrariness involves providing the affected individual with sufficient reason and that said conduct is procedurally fair. Firstly, the court assumes that as a result of the municipalities conduct arising out of legislation, it is procedurally fair.

The next enquiry is whether there is sufficient reason. In this regard, there are already prevailing standards which must be applied when determining whether sufficient reason has been given. This was laid down in the case of First National Bank of SA t/a Wesbank v Commissioner, South African Revenue Services. It was held that the court must look to inter alia, the extent of deprivation, the nature of the property concerned, the relationship between the purpose of the deprivation and the person whose property is affected as well as the relevant facts of each case.

Extent of the deprivation

The court found that the extent of the deprivation in this case may result in a complete and permanent removal of ownership – a principle that is sacrosanct in South African law. Digressing somewhat in this enquiry, the court also turned to the connection between the historical debt of the property and the current owner. The court held that the deprivation is therefore, substantial.

Purpose of deprivation

The court found that the transfer of a property into the name of a new owner does not cause the new owner to become a co-principal debtor. The right of a municipality to perfect their hypothec over the property for the payment of historical debt, does not in law, make that new owner a debtor of the municipality. Importantly, the court then raises the following question

“why should a municipality be entitled to visit the sins of a predecessor in title upon innocent third parties when there is no relationship between that party and the debts in question?”

The court then held that there is a sufficient mechanism, as contained in Section 118 (1) and 118 (3), to recover outstanding municipal debts against the current owner who does have a connection with the debt in question. It was held then that when a municipality looks to a new owner in title for payment of historical debt, the purpose of the deprivation is extended far beyond what is tenable and necessary.

Reason for the deprivation

Herein, the court contemplates the importance of sustainable municipalities. However, insofar as that may be the case, the court also notes that no matter how important the objective is – the deprivation is indiscriminately extended far beyond what is necessary. Put differently, the subsequent owner in title has no connection whatsoever to the historical debts in question, and could not have guarded against their accumulation. For this reason alone, the deprivation has no connection to the underlying transaction which gave rise to the debt. In the absence of the relevant relationship, the enquiry as to whether there is a sufficient reason for the deprivation fails at the outset.

Is the deprivation justifiable in terms of section 36 of the Constitution?

This is an enquiry undertaken by the courts once it is established that a law infringes upon a constitutional right. As discussed above, Section 25 (1) of the Constitution is infringed upon. In essence, and in terms of Section 36 of the Constitution, the court must find as follows:

“the rights in the Bill of Rights may be limited in terms of a law of general application to the extent that the limitation is reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom, taking into account all relevant factors…”

The court held that this infringement could not be considered legitimate by reasonable citizens in a constitutional democracy which values human dignity, equality and freedom above all others.

Can a municipality withhold services notwithstanding historical debts?

After settling the enquiry with regard to Section 118 (3), the court turned to the question of 1) whether a municipality has the right to refuse municipal services to a new or subsequent owner who has no connection with any of the outstanding municipal debts (historical debts) in respect of the property concerned and, 2) whether the municipality has the right to demand that all historical debts in respect of a property be paid before entering into a service agreement with a new or subsequent owner.

The court held in this regard that a new or subsequent owner, who is not a debtor, cannot be held liable for the payment of these debts and consequently that the municipality is not entitled to refuse the rendering of services to such a person.

It is unclear what the effect of this judgment will be, as it may still be tested by a higher court. For the time being however, it appears that property owners will avoid the clutches of Municipalities whom have failed to collect the rates and taxes.

We may now all breathe a collective sigh of relief.

Jaryd Kay

Jaryd Kay

Jaryd Kay, a candidate attorney, joined Ashersons in January 2016. Jaryd has experience in labour law, consumer protection and also has experience in drafting commercial and non-commercial contracts.

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