Your debts – not mine! Victory for new property owners

Jordaan and Others v City of Tshwane Metropolitan Municipality and Others [2017] ZACC 31

This article highlights important points taken from the above mentioned case.

The Constitutional court decision laid to rest the question as to whether historical municipal debt is permitted to be extended and transferred to a new owner who purchases the property.

Held that upon transfer of a property, a new owner is not liable for debts arising before transfer from the charge upon the property under section 118(3) of the Local Government: Municipal Systems Act 32 of 2000, (“the Act”).

What this means is that even thought there might be a historical municipal debt attaching to the property which the previous owner did not pay for, the municipality cannot refuse to supply services , terminate the existing supply of services nor can it transfer the existing debt to the new owners account/property.

Municipalities cannot attach and sell the property of a new owner to settle historical debt whereas previously, a municipality’s claim for municipal debt owing was preferent to any mortgage bond passed over such property.

Real security in property is a limited real right with the purpose of ensuring satisfaction of a debt or obligation to another, usually ahead of other, unsecured creditors. Against this background, what is notable about Section 118(3) is that the legislature did not require that the charge be either registered or noted on the register of deeds. Therefore, there is no indication that the right given to municipalities has third-party effect: no provision is made to fulfil the publicity requirement central to the functioning of limited real rights.

It is respectfully submitted that this oversight feeds the lack of transparency resulting in the unregistered charge being enforceable against the property in as far as the original owner holds the title.

Notwithstanding the above, a municipality is empowered to invoke its debt collection powers to recover any historical debt from the seller both before and after transfer.

Section 118 (1) of the Act prohibits transfer of property without a certificate issued by the municipality certifying that all municipal debts due in connection with that property during preceding two years of application for the certificate have been fully paid.

What this means is that municipal debt must be paid, for the two years before which you intend to apply for the clearance certificate which will then allow you to proceed with the transfer. Notably, this section makes no mention of payment of historical debt owed to the municipality.

In light of the wording and time period stipulated in the above section, it would be unconscionable and unlawful for a municipality to refuse to issue a clearance certificate where there is compliance with this section. Hence, a municipality cannot rely on the argument that historical debt must be paid before the clearance certificate can be issued.

By the same token, Section 118(1) places municipalities on notice that a transfer within their jurisdiction is pending.  This gives the municipality full power, and full opportunity, to enforce the charge against the existing owner for all recoverable debt, even beyond the last two years. In this way, all outstanding debt can be recovered, as a charge against the property, before transfer.

Given these points, the court held that the effect of allowing the historical municipal debt to take effect post-transfer is thus to substantially interfere with or limit the purchasers ownership as well as the mortgagee’s real right of security.

The judgment therefore provides legal certainty on the interpretation of Section 118 (3).