By Chantelle Gladwin-Wood, Partner, and Maike Gohl, Partner
Schindlers has received numerous enquiries recently as to the legality of the City of Johannesburg (“the CoJ”) firstly demanding deposits (or dramatically increased deposits) from consumers, and secondly, debiting these deposits to the consumers’ monthly municipal accounts. This appears to be taking place where the consumer’s charges for its average consumption of electricity and water over a two month period exceeds the amount of the deposit already held by the CoJ, alternatively where no deposit is held at all. Many consumers are unable to pay what can be very significant deposit amounts, debited to their municipal accounts and failure to pay can lead to interest charges, and to termination of services.
Purpose of a deposit
In the same way that a landlord would call for a deposit in respect of a lease for damages that a tenant might cause to the property, municipalities, as service providers, are entitled to call for deposits in order to secure payment in the event of default by the consumer. On default, the deposit will be applied to any amounts owing to the municipality in reduction of the debtor’s liability to the municipality.
Deposits held ‘in ring fenced account’
These deposits are usually indicated on the invoice as having been separated from the rest of the bill and they are (at least theoretically – what in fact is done with deposit funds is unknown at this stage -watch this space) allocated to a separate ring-fenced account. This means that (ordinarily speaking) amounts that are debited or charged to the account will not be taken from the deposit and payments made into the account will not increase the deposit. The amount of the deposit will thus remain the same (note that no interest is earned on the deposit) while the outstanding balance on the account will change from month to month depending on charges and payments debited and credited in the ordinary course.
Interest on deposits
Many consumers assume that interest will be earned on these deposits held by the CoJ. However, this is not the case. Many consumers feel that this is grossly unfair because they are not getting the benefit of interest on these amounts, which in effect are held by the CoJ in perpetuity (as long as the property is owned by the consumer concerned). The question is, what is the CoJ doing with this money – is it using it to fund its operations, is it investing it and earning interest on it to its own benefit, or is it using it to reduce its own debt? All the while the consumer is losing out on interest that it could have been earning on that amount. However, no challenge has been brought to this as of yet and so the position in our law today remains that no interest is payable by CoJ on utility deposits held.
Right to demand deposits
In terms of CoJ’s Credit Control and Debt Collection Policy, it is entitled to demand a deposit when a new account is opened, up to the maximum of two months’ ‘deemed consumption’. The reason the words ‘deemed’ are used, is because the CoJ will have to base its estimate of what amounts the new consumer might use in the future, based on the old owner’s consumption. However, in CoJ’s case the billing system is required to review this deposit amount after 6 months based on the new consumer’s actual consumption, and adjust it upwards or downwards if necessary (although to our knowledge this is seldom, if ever done). CoJ’s by-laws and policies also provide that the CoJ has an additional right to request a top up or further deposit, at any time. The law does not expressly limit the extent of this right, but it must be understood in conjunction with the right to request a deposit when an account is opened anew, and thus should be understood as being limited to a maximum of two months’ consumption.
When payment of deposit is due
In the case of the CoJ a deposit request is made in one of two ways. Either the CoJ will quote the figure to you when you apply to open an account and, in that instance, the CoJ will not open the account before your deposit is paid. This is in accordance with its by-laws. This means that this kind of deposit must be paid before the account can be opened. The second instance in which a deposit payment may be requested is where the CoJ requests a further or a top up deposit. In this instance the CoJ usually does this by indicating that a further amount is required by showing this as a debit line item on the front page of a consumer’s municipal statement. This amount then is included as part of the current charges for the month concerned. The law provides that these charges are payable on the due date of the invoice. This means that this kind of top up deposit is due by the due date of the invoice in the same way that the other current charges debited in that invoice are.
Difficulty in paying increased deposit request
Deposits payable by ordinary residential consumers may pose short term cash flow constraints and frustration, but the amounts of these deposits ought to not be very large. On the other hand, commercial consumers, sectional title schemes, and multi-unit dwelling owners are facing massive deposit demands, in many cases in the many hundreds of thousands of Rands. In these cases, it may be very difficult for these consumers to be able to make payment of these amounts on the due date of the invoice, especially where they have been given little or no notice.
Sectional Title schemes may need to raise a special levy and to collect the special levy from its owners over several months in order to be able to make payment of a large top up deposit. In situations like this Schindlers would recommend that the consumer concerned approach the CoJ and request that the CoJ allow the consumer to enter into an acknowledgement of debt for payment of the additional deposit requested. In terms of the acknowledgement of debt the consumer and the CoJ can agree as to how this amount can be paid in instalments over an appropriate period of time. The larger the amount, logic dictates, the longer the period that the CoJ should be happy to give the consumer to pay that amount.
Giving of a Guarantee
We have considered the giving of guarantees to the CoJ, in place of the payment of cash deposits. The CoJ’s Credit Control and Debt Collection Policy of 2015 (“the Policy”) and Credit Control and Debt Collection By-laws in 2006 (“the By-laws”) provide that a deposit equal to the average of 2 months deemed charges must be paid. Section 3 of the By- laws expressly states that a deposit must be paid in cash or by cheque, or that “other acceptable security, as prescribed” may be furnished in its place.
Security “as prescribed”?
We are not aware that the CoJ has prescribed any form of “acceptable security”. In the absence of anything to guide us, the legal position is that the nature of such security should be the same or similar to that required in similar commercial transactions, i.e. an attorney’s Irrevocable Letter of Undertaking, or a Bank Guarantee. Schindlers is investigating these avenues at present.
Acknowledgements of Debt
Where consumers wish to pay the deposit demanded, but are unable to do so in a single lump sum on short notice, the CoJ ought to accommodate its consumers in this respect. Firstly, because it is legally obliged to collect debt and in allowing payment in instalments where the consumer simply cannot afford to make payment of the whole amount upfront, it would be fulfilling this function, in the most cost effective and efficient manner possible. Secondly because it would be unreasonable (in the authors’ opinion) for the CoJ to act in any other fashion. Where the CoJ does allow a consumer to pay arrears in instalments, the CoJ is limited to giving the consumer a maximum of 60 months (5 years) to pay everything owing.