New property owners not liable for historical debt

October 1st, 2017
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Mapula Sedutla – Editor

On 29 August the Constitutional Court (CC) handed down a unanimous judgment, which affirms that new property owners are not responsible for settling municipal debt accumulated by previous owners. In Jordaan and Others v City of Tshwane Metropolitan Municipality and Others (CC) (unreported case no CCT283/16, 293/16 and 294/16, 29-8-2017) (Cameron J), the court handed down judgment on an order by the Gauteng Division of the High Court in Pretoria, that declared s 118(3) of the Local Government: Municipal Systems Act 32 of 2000 constitutionally invalid.

Section 118(3) of the Local Government: Municipal Systems Act provides that an amount due for the municipal services rendered on any property is a charge on that property and enjoys preference over any mortgage bond registered against the property.

The matter came before the High Court after the City of Tshwane and Ekurhuleni municipalities suspended, or refused to contract for the supply of municipal services to the applicants’ properties. This was on the basis that the applicants, who are relatively recent transferees of municipal properties, owed the municipalities for municipal services rendered to these properties before transfer. The High Court found s 118(3) constitutionally invalid, to the extent only that it has the effect of transferring to new owners municipal debts incurred before transfer. The High Court found this to be an arbitrary deprivation of property in terms of s 25 of the Constitution. It said that new owners of property are not liable for municipal debts incurred by previous owners. Therefore, municipalities may not sell the property in execution to recover the debt or refuse to supply municipal services on account of outstanding historical debts.

In considering whether to confirm the High Court’s declaration of constitutional invalidity, the CC had to determine whether the provision, when properly interpreted, in fact means that, when a new owner takes transfer of a property, the property remains burdened with the debts a previous owner incurred. If the provision was capable of an interpretation that did not impose constitutionally invalid consequences, the High Court’s declaration of constitutional invalidity would be unnecessary.

The municipalities of Tshwane, Ekurhuleni and eThekwini, which was admitted as amicus curiae, contended that a proper construction of s 118(3) was that the charge survives transfer. They argued that for municipalities to properly fulfil their constitutional duties of service delivery, they needed extra-ordinary debt collecting measures. This meant burdening new owners with the responsibility for historical debts. The municipalities conceded that nothing prevented them from enforcing their claims for historical debts against those who incurred them, namely the previous owners. The municipalities conceded further that their powers included interdicting any impending transfer to a new owner by obtaining an interdict against the old, indebted owner, until the debts were paid.

Also admitted as amici curiae were the social housing organisation, TUHF Ltd (TUHF); The Banking Association of South Africa (BASA), an association with thirty-two member banks and the Johannesburg Attorneys Association (JAA). TUHF and BASA associated themselves with the applicants in challenging the meaning the municipalities ascribed to s 118(3). They advanced further arguments including that s 118(3) permitted arbitrary deprivation of not just the new owner’s property rights, but of real security rights the new owner confers on any mortgagee who extends a fresh loan on the security of the property post-transfer. The JAA focused on a conveyancer’s duties and ethical position should this CC hold that the s 118(3) right survives transfer.

In a unanimous judgment, written by Cameron J, the court weighed the historical, linguistic and common law factors bearing on how the provision should be understood, plus the need to interpret it compatibly with the Bill of Rights. The court held that the provision is well capable of being interpreted so that the charge does not survive transfer. The court held that a mere statutory provision, without more, that a claim for a specified debt is a ‘charge’ on immovable property does not make that charge transmissible to successors in title of the property. Public formalisation of the charge is required (for example, registration in the Deeds Registry) so as to give notice of its creation.

Section 118 does not require this public formalisation process. The Bill of Rights prohibits arbitrary deprivation of property, which would happen if debts without historical limit are imposed on a new owner of municipal property. Therefore, to avoid unjustified arbitrariness in violation of 25(1) of the Bill of Rights, the court held that s 118(3) must be interpreted so that the charge it imposes does not survive transfer to a new owner.

As a result, the court held that, because s 118(3) can properly and reasonably be interpreted without constitutional objection, it is not necessary to confirm the High Court’s declaration of invalidity. The court, however, granted the applicants a declaration that the charge does not survive transfer.

 

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This article was first published in De Rebus in 2017 (Oct) DR 4.

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