By Tshepo Mashile

The Supreme Court of Appeal interprets the provisions of s 118(3) of the Local Government: Municipal Systems Act 32 of 2000 (the Act) in an important judgment in the matter of City of Tshwane Metropolitan Municipality v Mitchell [2016] 2 All SA 1 (SCA), which saw the majority of the coram agreeing and one judge dissenting. The dissenting judge’s reasons are not relevant for purposes of this article.

Background

On 22 February 2013 Mitchell (the respondent) purchased a fixed property known as Erf 296, Wonderboom Township, Gauteng (the property), at a sale in execution. The property is situated within the City of Tshwane Metropolitan Municipality’s (the appellant) municipal boundaries. Clause 6.4 of the ‘Conditions of sale in execution of immovable property’ provided: ‘The purchaser shall be responsible for payment of all costs and charges necessary to effect transfer including conveyancing costs, rates, taxes and other like charges necessary to procure a rate clearance certificate, transfer duty or VAT attracted by the sale and any Deeds registration office levies.’

When the respondent applied for a clearance certificate, the appellant issued a ‘written statement’ reflecting an outstanding amount of R 232 828,25 in respect of municipal service fees, levies and rates. That amount included debts older than two years preceding the date of the application for a clearance certificate, something to be known as a historical debt.

Section 118(1) of the Act provides that:

‘(1) A registrar of deeds may not register the transfer of property except on production to that registrar of deeds of a prescribed certificate –

(a) issued by the municipality or municipalities in which that property is situated; and

(b) which certifies that all amounts that became due in connection with that property for municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties during the two years preceding the date of application for the certificate have been fully paid.

. . .

(3) An amount due for municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties is a charge upon the property in connection with which the amount is owing and enjoys preference over any mortgage bond registered against the property.’

The respondent disputed the correctness of the amount reflected in the ‘written statement’ as being payable for purposes of obtaining a clearance certificate in terms of s 118(1). The dispute was, however, settled and the appellant issued a certificate reflecting the outstanding amount due to it as R 126 608,50, which represented only the debt due for the two years preceding the date of the respondent’s application for issue of the certificate. The respondent paid that amount, leaving the historical debt of R 106 219,75 still outstanding, due and payable if it had not become prescribed.

The respondent subsequently sold the property to Lynette Prinsloo who, before taking transfer, applied to the appellant for the supply of municipal services such as electricity, waste removal and water to the property. A municipal official refused to open an account in her name and informed her that she would be held liable for the historical debt. Ms Prinsloo accordingly gave instructions to the attorney who was to deal with the transfer not to proceed with it until the issue of the historical debt had been resolved (between the appellant and the respondent).

The respondent then approached the Gauteng Division of the High Court, Pretoria, seeking, among others, an order declaring that he, ‘or his assigns and successors in title of the Property’, were not liable for the historical debt owed to the appellant by previous owners. In Mitchell v City of Tshwane Metropolitan Municipal Council 2015 (1) SA 82 (GP) the High Court, per Fourie J, granted the following order in favour of the respondent:

‘1. It is declared that:

1.1 the security provided by s 118(3) of Act 32 of 2000 in favour of the respondent with regard to the property known as erf 296, Wonderboom Township, Registration Division JR, Gauteng, was extinguished by the sale in execution and subsequent transfer of that property into the name of the applicant;

1.2. the applicant (or his successor in title); is not liable for the payment of outstanding municipal debts older than two years which were incurred by his predecessor(s) in title prior to the date of transfer of the said property into his name;

1.3. the respondent has no right to refuse the supply of municipal services (such as electricity, water, sanitation and waste removal) to the applicant (or his successor in title) with regard to the said property only because of outstanding municipal debts older than two years.

2. There shall be no order with regard to costs.’

The statutory position

In BOE Bank Ltd v Tshwane Metropolitan Municipality (SCA) (unreported case no 240/2003, 29-3-2005), Brand JA observed that provisions such as those contained in s 118(1), ‘sometimes referred to as “embargo” or “veto” provisions, can be traced back to provincial ordinances concerning local authorities passed many years ago’.

He said: ‘Whereas s 50(1) of the ordinance contained an embargo or veto provision, similar to s 118(1), s 50(2) provided for a ‘charge’ similar to s 118(3), which has since been described as amounting to a tacit statutory hypothec … .’

The court was referring to s 50(2), which later became s 50(3) of the Transvaal Local Government Ordinance 17 of 1939 which contained wording similar to s 118(36) of the Act.

In City of Johannesburg v Kaplan NO and Another 2006 (5) SA 10 (SCA), the SCA described the principal elements of s 118 as ‘an embargo provision with a time limit (s 118(1)) [and] a security provision without a time limit (s 118(3))’. It held that the effect of s 118(3) is to create a security for payment of outstanding municipal debts in favour of the municipality. As to the extent of the outstanding municipal debts, the following was held in the BOE Bank matter:

‘For purposes of s 118(3) it therefore does not matter when the component parts of the secured debt became due. The amounts of all debts arising from the stipulated causes are added up to become one composite amount secured by a single hypothec which ranks above all mortgage bonds over the property.’

It follows that in the present matter the historical debt was a charge on the property, as was the amount paid for purposes of obtaining the clearance certificate.

The position under common law

The court a quo observed that security in the form of a tacit statutory hypothec is a limited real right (as opposed to a personal right) in the property of another that secures an obligation. ‘Generally speaking’, it said, ‘there is no reason, whilst the principal debt is still outstanding, why transfer in the normal course of business should terminate this right.’ And, quoting Voet 20.1.13 (Percival Gane The selective Voet being the Commentary on the Pandects Paris edition of 1829, vol 4 (Durban: Butterworths & Co 1956)), the court held that ‘immovables subject to a special hypothec pass subject to their burden – whether they have been transferred by onerous or lucrative title to another and whether that other is aware or unaware of the mortgage bond’. However, after referring to an exception to this ‘rule’ contained in Voet 20.1.1311 (op cit), it concluded thus: ‘It therefore appears that in terms of the common law, when mortgaged properties have been sold and delivered “on the petition of creditors by order of a Judge” – which is another way of referring to a sale in execution – the hypothec was extinguished and the new owner would be granted a clean title. This is, in my view, still the law today ’ (my italics).

With regard to the application of the exception to the present matter the court a quo reasoned that it must be accepted that the appellant was aware of the sale in execution prior to transfer, as it had been requested to issue a certificate in terms of s 118(1) of the Act and that, while holding a statutory hypothec, it kept silent by not exercising its right of preference over the proceeds of the sale of the property. In those circumstances, it should follow, so the court held, that the appellant’s statutory hypothec ‘was extinguished by the sale in execution and subsequent transfer of the property into the name of the [respondent]’.

Sale in execution vis-à-vis sale by public auction

In holding that the appellant’s security over the property (hypothec) had been extinguished by the sale in the execution and subsequent transfer of the property, the court a quo distinguished the present matter from SCA’s decision in City of Tshwane Metropolitan Municipality v Mathabathe and Another 2013 (4) SA 319 (SCA), on the basis that in that case the property was sold, ‘not at a sale in execution, but by public auction on behalf of the mortgagor’. In Mathabathe, the property was sold by public auction at the request of the owner and by agreement between him, as mortgagor, and the mortgagee. The municipality sought an undertaking from the owner, or transferring attorney, that the historical debt would be paid on the date of transfer or soon thereafter. The municipality alleged that it needed the undertaking because its security over the land would be lost once transfer took place. The court held that: ‘Unlike ss (1), ss (3) is not an embargo provision – it self-evidently is a security provision.’ There was therefore no need for the municipality to seek any undertaking.

This court has therefore clearly held that a transfer of property from one owner to another does not extinguish the security created by s 118(3). Counsel for the respondent did not argue that Mathabathe was wrongly decided, but submitted that at least in respect of sales in execution, the statutory hypothec created in terms of s 118(3) ‘is to be enforced against the proceeds of the sale of the property at a sale in execution’.

Judgment implications

Section 118(3) creates a hypothec (in favour of a municipality), which in essence is the same hypothec that a landlord in an agreement of lease enjoys. In a lease agreement a hypothec is a special security assisting in the collection of arrear rental from tenants, which is called the ‘landlord’s hypothec’. Any action taken in the collection of arrear rental is based on this security. The hypothec allows the landlord to sell the movable goods of the tenant (and in certain instances movables of a third party), which are on the leased premises, if the tenant fails to pay the rent. The hypothec created under s 118(3) allows a municipality to recover any debts owing, for municipal service fees, levies, rates and taxes, on a property within the particular municipality’s authority. This security is not extinguish by a sale of the property, in execution, in public auction or in the normal course of business, or subsequent transfer of the property from one owner to another.

The municipality may, at any time perfect its statutory hypothec under s 118(3) to the value of outstanding municipal debts, provided that such debts have not become prescribed, by obtaining an appropriate court order; selling the property in execution and applying the proceeds to settle the outstanding municipal debts notwithstanding the fact that those debts were incurred by an erstwhile owner/occupier prior to registration of transfer of the property into the name of the current owner. As long as the debt is less than three years old, the current owner is liable for all debts, incurred by previous owners, for municipal service fees, levies, rates and taxes.

Conclusion

In the court’s view, the distinction drawn by the court a quo between the present matter and Mathabathe, and relied on by counsel for the respondent in this court, is not justified. In the court’s view, the exception in Voet 20.1.13 (op cit), on which the court a quo relied, does not apply to a hypothec created by a statute that places no limit to its duration.

Tshepo Mashile LLB (UL) is an attorney at Mkhonto & Ngwenya Inc in Pretoria.

This article was first published in De Rebus in 2016 (June) DR 30.