Property owners not off the hook for historical municipal debt
A municipality must obtain a debt judgment against the party that it alleges is responsible for incurring the debt before it can have a property sold in execution to recover outstanding rates and utility charges. This is the implication of a judgment handed down by the South Gauteng High Court recently.
The judgment is also being cited as confirming that the current owner of a property is not liable for any municipal debt incurred by the previous owners. However, Marlon Shevelew, the director of specialist property law fir m Marlon Shevelew & Associates, says the court did not make a decision on whether the current owner of a property may be held liable for previous owners’ municipal debts, nor did it rule on whether a municipality is entitled to terminate services to a property because of a previous owner’s debts.
A property owner’s liability for municipal debts incurred by previous owners has been a contentious issue since a 2013 ruling by the Supreme Court of Appeal that all amounts owed to a municipality that have not prescribed are secured by a lien on the property, and the lien is not lost when ownership of the property is transferred. (A lien is a claim over an asset belonging to another person until he or she discharges a debt.)
The judgment, in the case of City of Tshwane Metropolitan Municipality v Mathabathe & another, corrected the long-held assumption that a rates clearance certificate guaranteed that no municipal debts were owed on a property, or that if municipal debts were outstanding, the municipality could not, after the transfer of the property, enforce a claim for any historical debts against anyone other than the previous owners who had incurred them.
In June 2014, a company, Stand 278 Strydom Park, sought an urgent interdict to prevent the Ekurhuleni Metropolitan Municipality from terminating services to properties it owned. Stand 278 also sought declaratory orders to the effect that:
It was not liable for the municipal debts incurred by previous owners; and
The municipality was not entitled to terminate services to the properties because previous owners are in arrears to it.
The Ekurhuleni municipality conceded the relief sought by Stand 278 without the court having to rule on the matter.
The municipality then brought a counter-application against Stand 278. It wanted the High Court to grant an order to the effect that if, at some stage in the future, it obtained a debt judgment against the party, or parties, responsible for the municipal debt on the properties owned by Stand 278, and if the debt remained unpaid, the court must rule that the properties could be sold in execution if Stand 278 did not pay the debts incurred by the previous owner, or owners.
Judge Rean Strydom said granting such an order would have far-reaching consequences, because the judgment would be used to declare other properties executable if municipalities were owed historical debt.
As with the 2013 Supreme Court judgment, the success of the Ekurhuleni municipality’s counter-application rested on how sub-section 118(3) of the Local Gover nment: Municipal Systems Act was interpreted.
Shevelew says that sub-section 118(3) provides that a municipal debt is a charge on the property in connection with which the debt is owed and enjoys preference over any mortgage bond registered against the property. A “charge” on a property signifies that it is security for the payment of a debt or the performance of an obligation.
“What is not immediately clear from the wording is its application where there are unsettled municipal arrears accrued by a previous owner and where the property has already changed hands,” he says.
Judge Strydom dismissed the Ekurhuleni municipality’s counter-application.
He said he would not make a finding on how to interpret subsection 118(3), because the municipality had conceded the relief sought by Stand 278 and therefore there was no dispute in law between the two parties.
According to notices served on two previous owners of the properties in June 2014, the arrears stood at R1 119 657 and R4 069 251 respectively.
The municipality had conceded that it had not taken any steps to recover the debt from the previous owners, the judge said.
Before a court can declare property executable, the principal debt must be established and a debt judgment must be obtained, Judge Strydom said.
“Once a judgment has been obtained relating to the principal debt, a party can proceed to obtain an order to declare the security in relation to that debt to be executable. Without the debt being determined, there is no dispute between the applicant and the respondent.”
He said the municipality was seeking relief against Stand 278 “in a vacuum”, because a debt judgment against the company’s properties did not exist.
Once such judgment had been obtained, and the extent of the liability had been established, it could approach a court for an order declaring the properties to be executable. “Whether such a court will grant such an order will depend on its interpretation of section 118(3) of the Act,” Judge Strydom said.
Shevelew says the aspect of the High Court’s judgment that is of significance to property owners and purchasers is the finding that a municipality must obtain a debt judgment against the party responsible for the debt before a court will declare a property executable.
On the issue of liability for debt, he said the court declared that it was unconvinced of the correctness of the municipality’s submission that sub-section 118(3) allows execution against properties for historical debt. “However, this was left by and large unsubstantiated and, in this instance at least, the issue remains unsettled.”