Municipal law: What is a penalty rate?

July 1st, 2022

By Neels Engelbrecht

In the recent Supreme Court of Appeal (SCA) judgment of City of Johannesburg Metropolitan Municipality v Zibi and Another (SCA) (unreported case no 234/2020, 9-7-2021) (Saldulker, Mbha, and Schippers JJA and Carelse and Poyo-Dlwati AJJA), the question to be decided was whether a municipality was entitled to levy a so-called penalty rate without formally notifying the owner of a property of the change in the category use of the property, namely, from residential to unauthorised use, and without complying with ss 78 and 79 of the Local Government: Municipal Property Rates Act 6 of 2004 (the Rates Act) that requires publication of the change of category use in the provincial Gazette.

The facts

The simplified facts were the following: The applicants (in the court a quo) acquired their home in Auckland Park, Johannesburg in 2013 and soon thereafter started renting out rooms in the house to students. Sometime in 2014, the respondent realised that the applicants were renting out the rooms in contravention of the zoning of the property (residential) and instructed the applicants to stop the unauthorised use, which the applicants eventually did in 2018.

The judgment of the court a quo:

The applicants approached the Local Division of the High Court in Johannesburg for a declarator to decide the question as set out above and was successful. In short, the court found, per Fourie AJ, that the respondent is bound by the Rates Act and its rates policy and that the so-called penalty rate was unlawfully raised by the respondent. Fourie AJ relied on the case of Smit v City of Johannesburg Metropolitan Municipality (GJ) (unreported case no 02181/2016, 28-11-2017) (De Villiers AJ), where De Villiers AJ, made the same finding on broadly the same facts against the City of Johannesburg. The ratio of both matters were identical, namely the City of Johannesburg is bound to comply with the Rates Act and its rates policy.

The SCA: The majority judgment

On appeal to the SCA, the majority, Mbha JA (Saldulker JA and Poyo-Dlwati AJA concurring) found that effectively the municipality does not have to comply with the Rates Act and the rates policy for the following reasons:

  • The municipality is entitled to rely on s 75A of the Local Government: Municipal Systems Act 32 of 2000 (the Systems Act) to levy the so-called penalty rate and in doing so did not act ultra vires.
  • That the penalty tariff is not applied as a category under the rates policy (although it is clearly identified as such in the rates policy), but that the penalty charges are directed against the landowner’s illegal conduct and not the property (para 26).
  • It would place an unreasonable administrative burden on the municipality if a ‘supplementary valuation roll had to be published in respect of every unlawful use of a property’.

In para 33 of the judgment the judge of appeal assumed that ‘the penalty or higher tariff the municipality validly (sic) imposed in respect of the respondents’ property, only seeks to address the current situation to the extent and for the duration of the illegal land use in operation’. Not only is this assumption incorrect, as the municipality is still levying the penalty more than three years after the owners stopped the so-called illegal use, but the judge also contradicts himself if regard is had to bullet two above, namely that the penalty levy is directed against the conduct of the owner.

The minority judgment

The minority by Schippers JA (Carelse AJA concurring), disagreed for the following reasons. Section 75A of the Systems Act is ‘inapplicable for the simple reason that the municipality did not act under that provision when it determined the illegal use category and imposed the penalty tariff’, but acted in terms of ss 3 and 8 of the Rates Act. ‘A decision deliberately and consciously taken under the wrong statutory provision cannot be validated by the existence of another statutory provision authorising that action’ (para 49 with reference to the Constitutional Court (CC) case of Minister of Education v Harris 2001 (4) SA 1297 (CC) and Howick District Landowners Association v uMngeni Municipality and Others 2007 (1) SA 206 (SCA)).

Schippers JA went further and listed several reasons (see para 52 to 58) why the rates act does not permit illegal use as a category of rateable property –

  • illegal use is not a use as such;
  • the uses of property in s 8(1) of the Rates Act constitutes lawful uses;
  • it is impossible to determine a value for illegal use;
  • the penalty tariff is not a rate; and
  • the illegal use category cannot be applied equitably.

Simply put Schippers AJ found that the so-called penalty rate is not a rate at all.

Lastly, ‘in determining the illegal use category and imposing the penalty tariff, the municipality acted contrary to the prohibition in s 19(1) of the Rates Act, to which s 8(1) is expressly rendered subject’. (para 59).

The principle of legality

The minority also referred to the principle of legality as set out in Fedsure Life Assurance Ltd and Others v Greater Johannesburg Transitional Metropolitan Council and Others 1999 (1) SA 374 (CC) at paras 56 and 58 and the Pharmaceutical Manufacturers Association of SA and Another: In Re Ex Parte President of the Republic of South Africa and Others 2000 (2) SA 674 (CC) at para 85.

The principle of legality is now firmly entrenched in our law being an ‘aspect of the rule of law [that] requires that a body exercising a public power … must act within the powers lawfully conferred on it’. In Fedsure and in Pharmaceutical Manufacturers Association of SA: ‘The principle required that the exercise of public power should not be arbitrary or irrational’.

The minority found that the ‘action by the municipality in determining an illegal use category of rateable property and imposing the penalty tariff, ostensibly in terms of ss 3 and 8 of the Rates Act, violates the principle of legality in both respects. The action is beyond the powers conferred on the municipality. It is also arbitrary because it is not rationally [connected] to the purpose for which the power to levy rates was given’ (para 63). In coming to the conclusion that the majority did, it ignored both the Constitutional Court (CC) cases and SCA case referred to above.

I am of the opinion that the minority judgment is correct in all respects.

The judgment of the majority is simply wrong and glaringly so, although, in my view, the judge is correct in one respect, namely that the penalty tariff is indeed directed against the conduct of the owner. The problem with this is that neither the Rates Act nor the Systems Act makes provision for penalising the conduct of the owner in this way and is, therefore, clearly ultra vires.

The applicants appealed to the CC, which refused to hear the matter without furnishing reasons.

Neels Engelbrecht LLB (UP) is a legal practitioner in Randburg. Mr Engelbrecht is the attorney on record for the applicant.

This article was first published in De Rebus in 2022 (July) DR 40.