The Effects Of Municipal Debts On The Transfer Of Property

There have been various opinions relating to the judgment in the Perregrine Joseph Mitchell vs City of Tshwane Metropolitan Municipal Authority, North Gauteng High Court, Pretoria (8 September 2014) (“the Mitchell case”) and its effect on the law relating to clearance certificates in terms of section 118 of the Local Government: Municipal Structures Act (“the Act”) as dealt with by the court in the Tshwane Metropolitan Municipality v Mathabathe 2013 (“Mathabathe”).

Essentially section 118(1) of the Act provides that no transfer of property can take place in the deeds office until a clearance certificate is issued by the municipality stating that all debts incurred in the two year period prior to application for the clearance certificate, have been paid. Section 118(3) says that all kinds of municipal charges are “charge[s] upon the property” and they enjoy ‘preference’ over any mortgage bond.

Practically speaking municipalities issue two types of clearance certificates. A 118(1) or “two year” or “abridged” clearance, and a section 118(3) “historical” or “full” clearance. The two year clearance is the minimum required by law to pass transfer, and this kind of certificate certifies that all charges incurred in the two year period prior to application for same, have been paid in full. The historical clearance is a certificate that certifies that all amounts owing, no matter when they were incurred, have been paid in full. There is no requirement in law that a property owner obtain a historical clearance when passing transfer of a property, where logically it is preferable that this be obtained in all cases.

What does section 118(3) and “preference over any mortgage bond mean?

This means that the municipality’s claim for amounts owed to it by the property owner, ranks higher than the claim of a bank (or any other mortgagee) who has lent money to the owner of the property and registered a mortgage bond over the property to secure the repayment of the loan amount. So if the property was being sold in execution (by order of court) because the owner owed creditors large amounts of money, and if the purchaser price was insufficient to cover both the municipal charges owing and the amounts owing to the bondholder, the municipality would be paid in full, and the bondholder would then recover whatever was left in satisfaction of the loan. This was what the court decided in BOE Bank Ltd v City of Tshwane Metropolitan Municipality (240/230) (2005) ZACSA 21 (29 March 2005) (“BOE”).

In BOE, the court also looked at what the legal meaning of the word “charge” in section 118(3) is, and what the consequences of that word, in context, are. The court held that the word “charge” in section 118(3) indicates that the legislature intended to create a statutory hypothec. A ‘hypothec’ refers to any form of hypothecation in our law, where one person acquires rights in and to another’s property, as security for payment of some debt or performance of some obligation.

In this matter the court was called upon to consider how much of the debt owed to the municipality was covered or ‘secured’ by section 118(3). It is clear that section 118(1) has a time limit and that only amounts incurred in the two year period prior to application for clearance are covered by this section, but can the same be said for section 118(3) – is it also limited to amounts incurred in the two years prior to application for clearance or does it cover all historical debt no matter when incurred? The court held that section 118(3) is not limited debt incurred in the two years prior to transfer and that it ‘covers’ all historical debt owed to the municipality that remains unpaid at the date that the municipality enforces its rights in terms of section 118(3). The legal issue that then came to the fore as a result of this judgment, was what exactly a municipality could do, when enforcing its rights in terms of section 118(3). This was dealt with in the Mathabathe case. In this 2013 case the Supreme Court of Appeal was called upon to decide whether the municipality, after being paid for all amounts owing to it and incurred in the two year period prior to transfer, was further entitled to refuse to issue the clearance certificate, until such time as it had been given security (usually from the proceeds of the sale of the property) for the payment of the historical debt that remained owing to the municipality after the two year clearance certificate had been obtained. So essentially what the municipality was trying to do, was to use section 118(3) as escape route to claim payment of all historical debt before transfer, and before a clearance certificate in terms of section 118(1) could be issued.

The court considered the purpose of sections 118(1) and 118(3), and ultimately determined that they are two very different sections with different purposes. It held that section 118(1) gave the municipality a unilateral right to stop transfer until all amounts incurred in the two year period prior to application for the clearance certificate had been paid. Section 118(3) is quite different. It does not give the municipality unilateral right to stop transfer, but rather a right of security (or a hypothec or lien) over the property that is subject to the right. This hypothec or lien has no time limit in the way that section 118(1) does – where it is limited to amounts incurred in the prior two years. The hypothec in section 118(3) is unlimited and thus secures all amounts incurred prior to application for clearance, regardless of how long ago they were incurred prior for application for clearance, regardless of how long ago they were incurred, except if these amounts became prescribed. The ‘right’ that section 118(3) gives a municipality, is the right to sell the property in execution (following a judgment being granted for payment of the debt) to recover all amounts owed to it. The court held that the municipality was not entitled to use section 118(3) to ‘block’ transfer before all historical debt was paid. Once the debt incurred in the two year period prior to transfer had been paid, the municipality was legally obliged to issue a clearance certificate in terms of section 118(1).

The big question that remained to be answered by the court at this point, was what the municipality’s rights were in relation to the balance of the historical debt owed at transfer, specifically in terms of section 118(3) but also generally speaking? The court (unfortunately) dealt with its answer to that question only in passing, in only one sentence in paragraph 12 of the judgment. The court said that the municipality “was plainly wrong in its contention that ‘upon registration [of transfer] … [it] loses its rights under Section 118(3) of the Act’”. This has interpreted widely to mean that the municipality does not lose its right of security in terms of section 118(3) on transfer – namely the right to take judgment for amounts owing by the seller for historical debt, attach the property, and sell the property in execution to recover the amounts owed – and that such right continues to be available to the municipality even once the property has transferred to the purchaser.

The authors are of the view that if the court really did intend to convey that the municipality’s right to attach the property even after it has already been transferred to the purchaser, in order that the property could be sold to satisfy the purchaser’s debts, then it was, with respect, plainly wrong. This is because there is clear authority to the effect that a lien (be it a real lien, or a debtor and creditor lien) cannot be enforced against an ‘innocent’ purchaser was not aware of that debt incurred by the seller, where the purchaser who was not aware of the debt and the municipality took no steps to make the purchaser aware of that debt. In these circumstances the municipality ‘loses’ or waives its rights to enforce its lien, and it cannot exercise it against the new owner, who was ‘innocent’ of the debt.

In the Mitchell case the court held that the hypothec created by section 118(3) does not ‘survive transfer’ and thus cannot be enforced by a municipality against the purchaser of a property, but only where the property is being sold in execution.

Mitchell is not authority for the general principle that the hypothec created in section 118(3) does not ‘survive’ transfer in other situations, such as insolvency, or transfers in the ordinary course from willing buyers to willing sellers.

The Mitchell judgment also held that when one understands that section 118(3) does not transfer the debt of the municipality from the seller to the purchaser – it merely creates a right of security in favor of the municipality that can be used (only before transfer, and in sales in execution) to attach the property and sell it to satisfy the seller’s debts to the municipality – it becomes apparent that short of any law making a purchaser liable for a seller’s debt (which section 118(3) does not do, and neither does any other law) and in the absence of agreement by the purchaser that it will be liable for the seller’s municipal debts, there is no justification in law for a municipality recovering amounts owed by sellers from purchasers of properties. This is very important because hypothecs generally do not themselves create a debt that must be paid – they are simply mechanisms that exist and can be used to enforce payment of that debt.

The third very important aspect of the Mitchell judgment was the ruling that a municipality cannot refuse to supply electricity or water, to a purchaser of a property, merely as a result of the seller’s unpaid municipal debts.

In conclusion:

  1. A municipality can refuse to provide a seller with a rates clearance certificate in terms of section 118(1) but only until all amounts incurred in the two year period prior to application for a clearance certificate, have been paid in full or satisfaction for their payment has been given to the municipality.
  1. The section 118(3) lien/hypothec does not survive transfer and cannot be enforced by a municipality against a purchaser, to attach and sell the property concerned (before transfer) to satisfy the seller’s municipal debts to the municipality.
  1. If a municipality choses to enforce its section 118(3) hypothec and attach the property and sell it to satisfy the seller’s debts to the municipality, this must be done before transfer, and in this event the municipality’s claim will rank superior to bondholder’s, so the municipality gets first preference proceeds and the bondholder can take whatever is left over to satisfy its claims against the seller.
  1. Purchasers are not liable for seller’s municipal debts existing at the date of transfer.
  1. Municipalities cannot refuse to supply electricity and/or water and/or refuse to enter into agreements for the supply of these services to purchasers because of the unpaid municipal debts of sellers, unless:
  • The purchaser agrees to this; or
  • The law changes to make purchasers jointly and severally liable with sellers for municipal debt existing at the date of transfer.
  1. After transfer the municipality’s right to claim any amounts still owing by the sellers remain intact, and the municipality is entitled to take any legal action or institute any credit control measures that it is authorized to, in the ordinary course, to recover amounts owing from the seller.

by Francois van Zyl
francois@dyason.co.za