The practice of holding new property owners liable for municipal debt incurred by previous owners came to a head at the Constitutional Court (ConCourt) on Tuesday, with a full bench of judges hearing that it could prejudice new homeowners and promote the deprivation of property.
The court heard an application by metropolitan municipalities of Tshwane and Ekurhuleni to appeal last year’s landmark judgement by the Pretoria High Court, which held that municipalities cannot hold new property owners liable for historical debt.
Municipal debt specialist New Ventures Consulting and Services, which has represented several property owners who have carried the liability for historical debt, was a respondent in the matter. The Banking Association of South Africa (Basa), commercial property financier Tuhf and the Ethekwini Metropolitan Municipality joined the matter as friends of the court.
Historically, a property was not allowed to be transferred to a new buyer until a municipal certificate that cleared debt spanning over two years was issued under section 118 (1) of the Municipal Systems Act.
However, debts that surpassed the two-year cut off became the liability of the new owner. If the owner failed to pay the debt, the municipality was then permitted to attach and sell the property to settle the debt.
At the heart of the appeal is the interpretation of section 118 (1) and (3) of the Act. The act includes a security provision for historical debt to be incurred by the new owner, which municipalities used in their refusal to issue a clearance certificate during the sale of a property until all debts had been paid.
However Judge Dawie Fourie, at the Pretoria High Court in November, declared this section of the act to be unconstitutional on the basis that it limited the property rights of new owners.
David Unterhalter SC, who represents New Ventures Consulting & Services, argued that sections of the act don’t explain the type of liability that can be charged to a new owner and the duration of the security enjoyed by municipalities to claim old debt.
“How can a new owner be burdened with a debt that he has absolutely no connection to? It means that people who acquire properties can lose their homes because of the charge while the municipality chooses its preferential rights [to claim old debt],” Unterhalter told the court.
He added that it’s the obligation of municipalities to collect the debt while the potential seller occupies the property. In court papers, Tshwane has argued that it doesn’t have personnel or resources to monitor and collect old debt from existing owners. Unterhalter added that new owners cannot ascertain the debt owed to a property as the municipalities’ records are “imperfect”.
Giving municipalities the power to claim historic debt has implications for the banking industry. In theory, municipalities would be the first to claim the debt from the proceeds of a property sale, which could result in banks not getting their money back. This would happen when the municipal debt and the amount owed to the bank is larger than the value achieved from the property sale.
It’s on this basis that Basa’s counsel, led by Alfred Cockrell SC, argued that section 3 of the act favours municipalities over bondholders and banks. “It ultimately leaves the bondholder with nothing. Bondholders have no measure to protect themselves,” he said. Cockrell added that buyers wouldn’t be awarded home loans as “banks don’t know if a municipality would take the first bite from proceeds of a property sale”.
Municipalities have argued that once a buyer of a property is aware of historical debt, he/she has several options. “They may choose not to enter into the transaction [to purchase a property] or negotiate for the reduction of the debt. It’s not true that new owners have no remedy,” said Terry Motau SC, who represents the Tshwane municipality.
Motau said bylaws and municipality policies on sale agreements would need to be amended if the ConCourt upheld the High Court’s judgement.
This argument was also supported by the Minister of Cooperative Governance and Traditional Affairs Des van Rooyen.
Judgement was reserved.