The applicants in this matter were various consumers of various municipalities. They had been refused the supply of services to their properties, or had had their service supply to such properties terminated, on the basis that they refused to make payment to the municipalities concerned of amounts incurred by prior owners of said properties.
HIGH COURT JUDGMENT
The applicants initially approached the High Court in Pretoria for relief and judgment was handed down in their favour, declaring that section 118(3) of the Local Government: Municipal Systems Act (“section 118(3)”) is unconstitutional. The matter was then referred to the Constitutional Court for confirmation in the ordinary course.
REFERRAL AND APPEAL TO CONSTITUTIONAL COURT
Tshwane and Ekurhuleni Municipalities appealed the finding of the High Court in the Constitutional Court, arguing that it was lawful for them to hold purchasers of properties liable for the municipal debts incurred by the sellers of same on the basis of section 118(3). There were various arguments aimed at justifying the holding of the purchaser liable for the seller’s debt.
The applicants argued (amongst other things) that it was unconstitutional to hold a purchaser (who is innocent, and has no connection to the seller’s municipal debt) liable for same.
Several other parties intervened in the matter in the Constitutional Court.
TUHF Ltd (“TUHF”) was admitted by the Court as the first amicus (friend of the court). TUHF made novel submissions to the Court explaining how (in its view) it was not necessary to deal with the constitutionality of section 118(3) if it was properly understood and interpreted in light of its historical common law treatment.
BASA (the Banking Association of South Africa) was admitted as the second amicus. It argued that it would constitute an unlawful deprivation of the bank’s property if section 118(3) were found by the Court to allow a municipality to hold a purchaser liable for a seller’s municipal debts.
Ethekwini Municipality intervened as the third amicus, to support and supplement the arguments of Ekurhuleni and Tshwane.
The JAA (Johannesburg Attorneys’ Association) was admitted as the fourth amicus. It made submissions to the Court regarding the duty (or lack thereof) of a conveyancer in notifying purchasers of historical municipal debt.
TUHF’S ARGUMENTS IN THE CONSTITUTIONAL COURT
TUHF’s main argument was that the common law requires that a creditor (ie the municipality) can only acquire limited real rights in the property of another (even for security purposes) as envisaged in section 118(3), if some form of publication of those rights occurs, to notify the public at large (and other creditors) of the fact that the property stands as security for someone else’s claim against the owner thereof.
Absent such publicity (which in present circumstances would take the form of the attachment of the property via an interdict registered as the Deeds Office, which would be done after the municipality has taken judgment against the seller in respect of the outstanding municipal debts) the creditor has no right to enforce his/her/its security against the innocent third party purchaser (or any other successor in title to the property owner).
The municipality is entitled to obtain judgment against the seller for the outstanding municipal debt at any point in time, and if it chooses, to enforce its rights in terms of section 118(3) to obtain a court order attaching the property and registering that attachment in the Deeds Office, thereby giving the world at large notice of the municipality’s enforcement of its rights of security. This would then entitle the municipality to refuse to allow transfer to pass until such time as all outstanding municipal debt has been paid to it.
The municipality’s right to enforce its hypothec in terms of section 118(3) must not be confused with its right in terms of section 118(3) to prohibit transfer by not issuing a rates clearance certificate until such time as all municipal debt incurred in relation to the property for the two year period preceding application for clearance figures has been paid. The two mechanisms are separate and distinct. A municipality may issue a clearance certificate in respect of the debt incurred two years prior to application for figures in terms of section 118(1) and then choose either to act urgently to obtain a court judgment and secure its rights in terms of section 118(3) by virtue of registering that interdict at the Deeds Office, or it may choose not to do this and to allow transfer to pass, in which case it can still claim the outstanding debt from the seller (not the purchaser). A municipality may not, however, refuse to issue the clearance certificate in terms of section 118(1) after all amounts required to clear the outstanding municipal debt incurred in the two years prior to application for figures, has been paid.
The municipality has ample opportunity to enforce payment of the seller’s debts in the ordinary course, before and after transfer. When transfer is pending the municipality is advised of same (when the section 118(1) figures are provided) and it then also, at that point, has the opportunity to enforce its hypothec in terms of section 118(3) by obtaining an urgent court order attaching the property. If it fails to do this, the municipality’s failure cannot prejudice an innocent purchaser. The purchaser cannot, after transfer, be held liable by the municipality for the seller’s municipal debt, and the municipality cannot attach and sell the purchaser’s property to satisfy the seller’s unpaid municipal debts.
The Constitutional Court confirmed TUHF’s understanding and interpretation of the relevant law. It held that it was not necessary to deal with the constitutional arguments because section 118(3) was capable of an interpretation which did not offend the Constitution. The interpretation given to section 118(3) by the Constitutional Court was ultimately that the seller’s historical debt does not “travel” with the property into the hands of the purchaser, and accordingly that the purchaser cannot be held liable in any shape or form for such debt.
It held that “public formalization of the charge is required (e.g. registration in the Deeds Registry) so as to give notice of its creation to the world” (page 3 of the Constitutional Court’s media summary). It further held that “registration or its equivalent is, in addition, required” in order to create a “burden running with the land” (paragraphs 41 – 43 read with footnote 83 of the Constitutional Court judgment).
IMPLICATIONS FOR PROPERTY OWNERS, BANKS, CONVEYANCERS, SHERIFFS, AND MUNICIPALITIES
Purchasers cannot be held liable in any way by municipalities for seller’s outstanding municipal debts not paid before transfer.
The municipality must recover amounts not paid before transfer from the seller directly. The municipality is free to take whatever action it deems necessary before transfer of the property to the purchaser in order to secure its right of security in terms of section 118(3) (which actions may include the attachment of the property and prevention transfer until all amounts are paid) at any time before transfer, but it cannot do this after transfer.
Because the purchasers cannot be held liable for the seller’s outstanding municipal debt, there is no prejudice to the purchasers, and there is thus no duty on the conveyancer to disclose the existence of such debt.
Until such time as the municipality has perfected (or exercised) its rights in terms of section 118(3) by attaching the property in the Deeds Office, following a court order permitting same, the municipality is not secured by the property for the seller’s outstanding debt. This means that a bank’s claim to payment (in terms of the bond) will rank superior to the municipality’s claim until the municipality has registered its attachment in the Deeds Office.
This long awaited judgment has “set the record straight” and confirmed the common law position that the municipalities have refused to accept. Hopefully this will settle the innumerable disputes in the industry in relation to the matter, and fortify the industry as a whole.
Any queries herein may be directed to Mr Hamilton Thindisa at email@example.com and any legal queries regarding this case can be directed Chantelle Gladwin-Wood from Schindlers Attorneys at (011) 448 9600 or firstname.lastname@example.org.