Everything that shines isn’t always gold: property owners must be weary in light of new SCA judgment

Article_Property-owners-must-be-weary-wideImagine finding your dream home: a charming townhouse with sufficient space for you and your family in a quiet neighborhood with a resplendent view of the cityscape. It ticks all of the boxes and you cannot wait to move in and begin this new chapter of your life. Now imagine just before you take transfer, being informed that you have to pay debts incurred by the previous owners – suddenly, the home of your dreams becomes a house of nightmares.

In February 2016 the Supreme Court of Appeal (SCA) held that property owners can be held liable by the Municipality for historical debts incurred by previous owners of the property dating back up to 30 years.

The salient question before the court was whether the security provided for in terms of s118 (3) of the Local Government: Municipal Systems Act, 32 of 2000 (‘the Act’) in favor of the municipality for moneys owed to it for services delivered in respect of fixed properties, is extinguished when the property is sold at a sale in execution and subsequently transferred to the purchaser.

The facts of the case

The Respondent, Mr Mitchell, purchased immovable property situated within the jurisdiction of the Tshwane Municipality from a sheriff’s sale in execution. In terms of the sheriff’s conditions of sale, the Purchaser was liable for the payment of transfer costs and all other incidental costs. Included in this amount were various municipal accounts and charges. In order to facilitate the transfer of the property into his name, he applied for, and obtained a ‘clearance certificate’ from the municipality. In terms of s118(1) of the Act,

a registrar of deeds may not register the transfer of property, except on production of a ‘clearance certificate’ which confirms that all amounts due to the municipality in respect of that property for service fees, levies, rates and taxes for the two years preceding the date of the application, have been paid in full.

The clearance certificate indicated that an amount of R 232,828.25 was owed to the Tshwane Municipality for various municipal charges. The  Purchaser paid an amount of R 126,608.50 which represented municipal debts not older than two years preceding the date of application for the clearance certificate. He then took transfer of the property. An amount of R106,219.75 consequently remained outstanding (the historical debt incurred by previous owners.)

After having taken transfer of the property, Mr Mitchell thereafter sold the property to Ms Prinsloo. Upon application to the municipality, Ms Prinsloo was denied a ‘clearance certificate’ by the municipality. She was advised that as the new owner of the property, she was liable for the payment of the historical debt and the municipal services would not be supplied to the property until such time as the historical debt was settled.

Mr Mitchell subsequently approached the High Court for an order declaring that he was not liable for the historical debts of the property.

Section 118(3) of the Act states that

“an amount due for municipal fees, rates, taxes and levies 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”.

The court (in City of Johannesburg v Kaplan NO & Another 2005 (5) SA 10 (SCA)) observed that section 118 (3) is a limited real right in the property of another that secures an obligation in favour of the municipality. The general rule is that the transfer in the normal course of business does not terminate this right while the principal debt is still outstanding. Immovables subject to a special hypothec pass subject to their burden, irrespective of the manner in which they have been transferred.

However the exception to the general rule concerns a scenario where the property is sold at a sale in execution, the real right is extinguished and the new owner obtains a clean title. The basis for this view stems from the decision in City of Tshwane Metropolitan Municipality v Mathabathe & Another 2013 (4) SA 319 (SCA) where a property was sold by public auction on behalf of the mortgagor. The justification for the exception was that a sale in execution does not take place in terms of an agreement, but follows from a court order wherafter the property is publicly converted into cash to satisfy the claims of creditors, as opposed to a private sale where this is not the case.

In terms of the historical debt, the court indicated that where a transfer is acquired pursuant to a sale in execution the new owner acquires a clean title free from burdens arising out of unpaid debts. However, the principal obligation arising out of the unpaid debt continues to exist and remains unaffected by the loss of security. Therefore the person responsible for incurring these debts remains liable for the payment thereof. The rationale being that there is a distinction between a tacit statutory hypothec as a form of security and the principal obligation. The former is a security for the payment of the debt and the latter is a debt. Thus, the loss of the security does not affect the validity or existence of the underlying debt.

The High Court further indicated that neither the Act, nor the by-laws make reference to a provision which provides that the successor in title of the property to which historical debts outstanding, is liable for those debts as co-debtor, jointly and severally with the principal debtor or that the municipality has the right to refuse the supply of municipal services to the owner of the property.

The court ultimately upheld Mr Mitchell’s contention and concluded that he was not liable for the payment of the historical debt and furthermore, that the municipality could not deny him the supply of municipal services simply because of the debts incurred by the previous owners.

In overturning the High Court’s decision, the SCA held that s118 created a statutory hypothec, and not a common law hypothec, which implies that the debt survives the transfer of property from one owner to another irrespective of the manner in which it was transferred as the burden attaches to the property.

Baartman AJA (writing for the majority) held that the High Court erred in its reliance on the common law exception.  The argument follows that the exception (that is, the distinction drawn between sales in execution and sales by agreement) was unjustified as it does not apply to a statutory hypothec that places no limit on its duration. He further states that

there is nothing in the Act that indicates that any exception to the application of the provisions of s118 (3) was contemplated where property is purchased at a sale in execution.

The SCA found 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.

On the issue of whether the third party would be liable for the historical debt, the SCA indicated that the municipality would have to comply with its own by laws before looking to the new owner for payment. In this regard the municipality would have to show that there is no occupier on the property concerned and; the person who entered into the service agreement cannot be traced .

The SCA consequently upheld the appeal, effectively indicating that property owners could be held liable for the historical debts of the property.

In his dissent, Zondi J indicates that on a proper analysis of s118 (3) it is clear that the subsection does not protect the security once the property over which it was created is sold in execution. He indicated that the proceeds of the sale secures the payment of the outstanding municipal debts, and the municipality’s account must be settled first because its debt enjoys preference over any mortgage bond.

The view of the learned judge was thus consistent with the common law approach, as evinced by the High Court. Ultimately, s 118(3) must be interpreted in a manner which is harmonious with the common law as there was no intention to divert from the common law interpretation. He contended that if it was the intention of the legislature to allow security in terms of s118 (3) to exist beyond a sale in execution, this would have been expressly stated.

The practical implications of the judgment for prospective purchasers are significant. As it stands, your best option would be to conduct as thorough investigation as possible into the history of the property prior to purchasing. You could further require that sellers settle any outstanding municipal accounts and that you be provided with an undertaking that there are no further outstanding debts in respect of that property. However these safety features do not guarantee your full protection against outstanding debts incurred by the previous owners.

Therefore, you may possibly, not live happily ever after.

Dean Pinto

Dean Pinto

Dean Pinto, a candidate attorney, joined Ashersons at the start of 2015. Dean has a particular interest in contract law, consumer law, drafting of commercial agreements, and administrative law.

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