Home buyers, banks and tenants all need to take action to protect themselves against the effects of the recent Supreme Court of Appeal (SCA) judgment that property owners can be held liable for historical municipal debts dating back up to 30 years.
This decision overturns an earlier judgment by the Gauteng Division of the High Court, which found that current owners were not liable for any debt incurred by any previous owners of a residential property.
The SCA decision was based on common law as well as Section 118 of the Local Government Municipal Systems Act, which provides for the payment of certain historical debts in order to obtain the clearance certificate necessary to effect transfer of a residential property.
“Specifically, what the judgment says is that debts owed to a local authority by a property owner are not ‘extinguished’ when that property is transferred to another owner”.
“And what it means,” says Bill Rawson, Chairman of the Rawson Property Group, “is that a local authority can now take legal action against the current owner of any property for any municipal debt incurred by any previous owner over the past 30 years with respect to property rates, refuse and sanitation charges, and three years in respect of electricity and water supply charges”.
“This legal action could go so far as attaching the property and selling it to recover the debt that is being claimed, and that is a horrible prospect with the potential to seriously damage the residential property market until the SCA judgment is, hopefully, overturned in the Constitutional Court.”
In the meanwhile, he suggests, homebuyers should do the following:
* Enlist the help of estate agents and their own attorneys, if necessary, to find out whether there are historical municipal debts associated with the property they are considering – before they make an offer;
* Insist that whoever is selling the property pay absolutely everything that is owed to the local authority and indemnify the purchaser against any undisclosed debt before they take transfer.
The last step would be prudent, Rawson believes, because of the administrative, accounting and billing problems in so many local authorities currently, not to mention faulty and missing meters, illegal connections, meter tampering and decaying infrastructure. “Any or all of these could obscure the information that is being sought about historic debt – or worse, result in debts that have been paid showing up later as unpaid.”
He also says the banks should consider joining forces with the real estate industry in trying to get the SCA decision reversed, because it has serious implications for them too. “If a local authority attaches and sells off a property to settle a historical debt claim, the bank will only get what was left over to settle any outstanding home loan, and that could leave them with many properties in default.”
As for tenants, many municipalities have bylaws that enable them to also hold tenants liable for any debts associated with a property, so they could be negatively affected by the SCA decision too.
“Our advice to them would thus be to rent only through a reputable managing agency and sign a lease only on condition that they are indemnified against any claim for historical municipal debt.”