This article examines more closely the thorny issue of when engineering contribution figures demanded by the municipality become due and payable.
COMMON MUNICIPAL PRACTICE
In most (but not all) municipalities it is common practice to require payment of any engineering contribution figures levied (but not paid) at the time when rates clearance figures are applied for. The practical effect of this practice is to require the seller to pay not only the rates clearance figures, but also (as part of the rates clearance figures) all engineering contributions not yet paid at the date of transfer.
CONTROVERSY IN THE INDUSTRY
In many instances the sellers (developers) of properties apply for additional rights and are granted them, but sell the property before these additional rights are utilised. These sellers often intentionally “pass on” the costs associated with the engineering contribution figures (which are levied to provide for the development of the infrastructure at and to the property in order to facilitate the use of the additional rights applied for and approved).
When a seller is required to pay all engineering contributions levied (even when the additional rights that they are levied in respect of have not been utilised) this reduces the seller’s profit margin, and essentially forces it to absorb the cost of supplying the property with additional infrastructure that the seller will never use.
Whether municipalities are entitled to demand payment of engineering contributions levied (but not yet paid) at date of application for rates clearance figures, where the rights in respect of which those contributions are levied have not yet been utilized, has thus become a controversial topic in the property industry, because many sellers do not want to pay engineering contribution figures if they have not utilised (or do not plan to utilize) the additional rights in relation to which those figures are demanded at the clearance stage, as they would prefer to pass this cost on to the purchaser.
It must be noted that in most instances the amounts demanded are significant – they range from a few hundred thousand to a few million rands in most developments.
THE ILLOVO PROPERTIES CASE
In the case of Illovo Opportunities Partnership #61 v Illovo Junction Properties (Pty) Ltd and City of Johannesburg (reportable judgment not yet reported, Supreme Court of Appeal, handed down on 19 September 2014)(“the Illovo Judgment”) the Court was called upon to decide on the controversial issue of precisely when engineering contribution figures levied against the owner of a property are payable.
The court examined the factual and legal matrices surrounding the issue, and ultimately concluded that the amounts levied for engineering contribution figures are payable either at transfer or at the time when the additional rights granted in respect of the property (in relation to which the engineering contribution figures were levied) are utilised, whichever is later.
This essentially means that a seller that applies for and is granted additional rights is not obliged to pay the engineering contributions called for in relation to those additional rights at transfer unless it has utilised those rights. If the seller is selling the property after the approval and promulgation of those rights, but before they have been utilised, the seller can pass transfer to the purchaser without having to pay the engineering contributions demanded and the purchaser will then become liable to pay those engineering contributions if the purchaser then decides to utilise those additional rights.
The clarity of the judgment, and the sound legal reasoning employed by the court in reaching its conclusion, are welcomed as a conclusive answer on this thorny legal issue.
IMPLICATIONS FOR SALE AGREEMENTS
Based on the above it is recommended that sellers (and agents and attorneys drafting sale of land agreements) be very clear as to whether engineering contributions have been levied in respect of additional rights granted, and who is liable for payment of same at what time. If the seller intends to pass these costs on to the purchaser, this should be expressly stated.
It should also be made expressly clear to the purchaser that if it elects to exercise these rights at a future date, it will then become liable for the development costs which will include the engineering contribution figures.
POTENTIAL LIABILITY FOR SELLERS WHO DO NOT DISCLOSE
Should a seller sell a property and represent to the purchaser that the property has these additional rights, and not disclose to the purchaser that engineering contributions are payable in respect of the exercise of these additional rights, the seller may face a damages claim from the purchaser.
A purchaser may successfully argue that the engineering contributions constitute a latent defect and that the seller fraudulently misrepresented the situation to the purchaser.
Although a damages claim of this sort will be more difficult to prosecute where there is a “voetstoets” clause and a warranty by the purchaser that it has inspected the property and conducted a due diligence in relation to the property before signing the offer to purchase, these two clauses are not an absolute bar to the successful prosecution of such a claim.
A voetstoets clause can be “defeated” if the purchaser can prove that the seller knew about the existence of a latent defect (namely the existence of the engineering contributions demanded), and fraudulently and intentionally concealed this fact from the purchaser.
The Illovo judgment has gone a long way to putting to bed the age old practice of extorting payment of engineering contributions from sellers who have not exercised the additional rights granted. But whether the industry will adapt its age old practices (and sale agreement precedents) to avoid potential damages claims, remains to be seen.
Written by Chantelle Gladwin-Wood and Maike Gohl