Article written by Chantelle Gladwin-Wood, Partner at Schindlers Attorneys and Lauren Squier, Associate at Schindlers Attorneys.
This article takes a critical look at the City of Johannesburg Metropolitan Municipality (“COJ”)’s proposed 2022/2023 rates policy. The COJ is currently in the process of conducting public meetings relating to the proposed changes to the policy, which will take effect on 1 July 2022.
At this point all the City has released are a set of slides setting out, in very broad strokes, what changes are anticipated – no actual draft documents containing the “fine print” that is needed for meaningful comment has been released as of yet. This article is thus based on the information in the public realm at this time but will be updated when the fine print is available.
What is the Rates Policy?
The Local Government: Municipal Rates Act (“the Rates Act”) provides that the municipality must have a Rates Policy, which sets out the categories that properties can be placed into for rates purposes and described the qualifying criteria for those categories. In addition, it will detail any rebates applicable. In essence, it is a rule book written by the City, that helps the municipal valuer determine which properties fall into which rating categories, and when rebates will apply to any particular property.
Conflict between the Rates Policy and Rates Act
Although the municipality has a lot of latitude in creating these rules, they must not conflict with the principles and laws set out in the Rates Act, because the Rates Act will overrule the policy. If any content of the Rates Policy conflicts with the Rates Act, it will not be enforceable because that content will be regarded in law as ultra vires (meaning that the municipality did not have the authority to make a rule that conflicts with the Rates Act).
What are rating categories?
Each category of property is allocated a tariff, which is a rate in the rand charge that is multiplied by the municipal valuation of the property to arrive at the amount of rates due annually for that property. Once divided by twelve, this represents the monthly rate payable by the property owner for that property. Residential properties are typically allocated lower tariffs than commercial properties, as a result of the ratios prescribed by law. This means that generally residential properties cost less from a rating perspective than a commercial property of the same municipal value would. The idea is to charge higher rates to businesses than to residential consumers, on the assumption that businesses are more easily able to afford higher rates. Each year the Rates Policy includes a list of property categories that properties can be placed into. These comprise the rating categories applicable for that particular year. The policy also contains an explanation of the requirements for each category.
Surprizes in Store?
It is very important to understand that by changing the qualifying criteria for the various rating categories, and/or by changing the categories available themselves, the municipality can bring about very drastic changes to the amounts that consumers are charged for rates. For example, if the municipality does away with a category that your property is in, you will have to be put into another category (your property will be recategorized on a supplementary valuation roll) and the effect could be disastrous if you are put into a category that is much more expensive than the one that you were previously in. It is also very important to see whether the rules for the categories have changed, because if a new exclusionary criteria has been added to any particular category and you no longer qualify to be in that category, you will have to be put into another, and this could cause a drastic increase in your rates charges.
BIG CHANGE #1: Splitting the value of properties between leasehold and bare dominium owners
Although it has always been possible and lawful to do so, the COJ has not historically “split out” the value of a property into two parts, and charged the bare dominium value to the property owner and the lease value or other real right value to the leaseholder or other right holder. This can be important for valuation purposes, where the structure of the lease or other rights concerned means that there is a significant value to be attributed to the bare dominium of the land, that would otherwise not be taken into account if the property were valued only in the hands of one consumer. This splitting out is therefore necessary in some limited cases. However, in the case of the “Waterfall leases” at Waterfall City, for example, where there are over 3,000 residential properties subject to a registered 99year leasehold, and where that lease gives pretty much exactly the same rights as ownership, there is no point at all in splitting out the values because the value of the bare dominium will be negligible if not zero in those circumstances. The effect will be to create two accounts for each property, both of which need to be valued each year, where it is only necessary and prudent to have one. Double the admin, double the time, double the cost to have valued and to deal with disputes, for no financial reward whatsoever. We strongly discourage the COJ from splitting out the value of registered 99year leaseholds where it is apparent from a plain reading of the registered lease that the rights are basically equivalent to ownership, as this will only waste the COJ’s resources and not result in any financial benefit to it.
BIG CHANGE #2: Changing Definitions
The COJ has, in the past month, taken the view that it was undercharging certain types of property owners (namely those who have the rights to run a bed and breakfast / Guesthouse or have some other kind of special consent) too little for services, and have backdated accounts for these consumers in which they have changed their tariffs from being residential to business tariffs, for up to 4 years. In some of the cases that we have looked at, the City was not justified in doing this, because its tariffs at the time (namely, over the past few years) did not allow this. The City appears to be attempting to change the definitions of various services in many of its tariffs (not only the rates tariff and policy) to give it more latitude in charging customers business rather than residential rates, particularly in relation to properties with special consent use rights. Consumers ought to be aware of this.
BIG CHANGE #3: PROPOSED ELECTRICITY INCREASE OF 20,5%
We’ll just leave this here and allow it to elicit the comment it deserves.
BIG CHANGE #4: CHANGE OF CATEGORIES
Due to some legislative amendments coming into operation on the 1st of July 2022 the COJ had to introduce new categories (such as industrial).
BIG CHANGE #5: MIXED USE OR MULTIPLE PURPOSE CHARGES ARE BEING SPLIT
In the past the COJ charged owners of mixed use (also called multiple purpose) properties by putting them into either the residential “heavy” or business “heavy” multiple purpose categories (“heavy” meaning that you had more than 50% of the floor area of the property designated for that type of use). The COJ would then charge 100% of the property as if the whole property were “mixed use residential” or “mixed use business”. The tariffs set for these categories were not precisely the same as for residential and business but were not far off. The COJ has now changed the way that it does things – and this is going to drastically impact on every single property owner who was previously in the “multiple purpose residential” category, because now the COJ is going to split the value of the property’s use components and invoice the property owner separately for rates on each component. In brief, if your property is 10% commercial and 90% residential, you will receive a rates bill showing the valuation split 90/10 and you will be invoiced for residential rates based on 90% of the value, and for business rates based on the other 10% of the valuation. This means that persons who were previously ‘scoring’ a cheaper price for rates because some of their property was commercial in nature and who were in the “multiple purpose residential” category, must expect to see increases in their rates charges as they begin to be charged business rates on the business components of their properties.
CRITICISM FROM LAST YEAR – RINSE AND REPEAT
Whilst the COJ is lawfully permitted to create a category for properties that are violating their zoning or the building laws or the advertising laws, the City is not lawfully permitted to start charging the owner of the property those rates until such time as the City has formally placed the property on the roll in the unauthorized use penalty tariff. This happens very commonly in COJ and Schindlers has been fighting this in court for many years. You can read more about this here if you are interested: https://www.schindlers.co.za/municipal-law/the-legalities-around-coj-imposing-the-illegal-use-tariff/
For the most part the City has made strides in making the content of its Policy more accurate. However, as above, the City ought to give additional thought to the discrepancies referred to above, as desperate consumers will battle to pay the increased rates charges all round as a result of the depressed economy and COVID.