Constitutional Court rules municipal debt does not survive property transfer

© Cathy Yeulet – 123RF.com

The case, Jordaan and Others v City of Tshwane Metropolitan Municipality and Others [2017], has not stated that section 118(3) was unconstitutional. The Court held that section 118(3) was perfectly capable of an interpretation that did not offend any rights. The Court proceeded to explain how it needed to be interpreted, against the backdrop of the common law relating to security rights. The Court’s ultimate finding (that historic debt does not ‘survive’ transfer) was based on the Court’s common law interpretation of section 118(3).

The Court noted that if the legislature had intended the debt to ‘travel’ with the property to purchasers, it would have needed to state this expressly in the section (which it had failed to do). The Court also looked at how hypothecs work in our law and found that for debt to be claimable against an innocent purchaser there must be ‘notice’ or ‘publication’ to the world at large of the existence of the debt.

This publication would allow innocent purchasers to check whether any rights of other parties that could rank superior to their rights as the new owner burden the property that they are purchasing. In the absence of this publication, the section could not be interpreted to make new owners liable for the old owner’s debt.

No more holding purchasers liable

The consequence of the ruling that historical debt does not ‘survive’ transfer is that a municipality cannot refuse to supply services to a purchaser’s property or terminate the existing supply of services for non-payment of historical debt incurred by prior owners of the property. Furthermore, a municipality cannot lawfully transfer charges that were previously billed to a prior property owner from that owner’s account onto the account of a purchaser of the same property. Lastly, a municipality cannot attach and sell a purchaser’s property in order to settle the prior owner’s municipal debts.

Rates clearance certificates

It remains lawful for the seller of a property to pass the transfer of the property after paying only the section 118(1) amounts owing to the municipality (which would include only amounts incurred in the two-year period preceding application for rates clearance figures).

If a seller chooses to do this, he will remain liable to the municipality for any amounts that are unpaid at the date of transfer. The municipality is fully entitled to claim any amounts unpaid from the seller after transfer using whatever debt collection mechanisms it chooses.

A municipality also cannot refuse to issue a seller with a rates clearance certificate on the basis that the seller has paid only the section 118(1) amounts and not all historic debt owing (section 118(3) amounts). Once the section 118(1) amounts have been paid, the municipality is obliged to issue the rates clearance certificate regardless of whether or not there are any amounts outstanding in terms of section 118(3).

Judgment against the seller

The municipality is entitled (indeed even obliged) to take judgment against owners who have defaulted in payment of amounts that are legitimately owing to the municipality. A municipality can initiate procedures to do this before transfer or after transfer. This type of credit control action can be done by any municipality at any time in the ordinary course and this has not been affected at all by the Constitutional Court’s ruling last week.

Exercising rights in terms of Section 118(3) Hypothec

In order for a municipality to ‘perfect’ or exercise its special right in terms of section 118(3), a municipality must first take judgment against the seller of the property for whatever amounts are owing and may at the same time as taking judgment apply for an order attaching the property.

The Constitutional Court confirmed last week that the hypothec renders the property immediately and specially executable. In the ordinary course, a judgment creditor would first have to attempt to satisfy any judgment obtained by selling the debtor’s movables and would only then be entitled to apply to court to in order to sell the debtor’s immovable property attached and sold in execution in order to satisfy the judgment. However, in terms of section 118(3), the municipality has the right to apply to court to obtain judgment against the seller and simultaneously request the court’s authorisation to sell the immovable property by auction and take the proceeds. This is very similar to a bank’s rights to execute against immovable property upon mortgage defaults.

However, an order attaching the property is not sufficient to perfect the security right - in addition; the municipality must register the attachment (which is a form of interdict) against the title of the property at the deeds office. Once registered, the municipality has perfected its security rights. Now the municipality is a secured creditor for the amount of the judgment taken against the seller and it will rank above a mortgage bond holder (because this is specifically provided for in section 118(3)). However, until the attachment or interdict has been registered in the deeds office, the bank will rank superior to the municipality in insolvency proceedings or in terms of the rules that set out how a sheriff must distribute the proceeds of a sale in execution.

Once the attachment is registered in the deeds office, the Registrar of Deeds will not allow transfer of the property to pass to the purchaser, until the municipality has given its consent to uplift the interdict. This means that the municipality is entitled to refuse to uplift the interdict stopping any transfer until it has been paid all amounts owing in terms of section 118(3). Until the municipality has been paid in full or arrangements for payment have been made to the municipality’s satisfaction, the seller will not be able to pass the transfer of the property. In this way, the municipality would have utilised its security right and have prevented the transfer from taking place until it has been paid in full.

Interdicting transfer

A municipality is fully entitled to apply to court to interdict transfer of a property passing where the seller has elected to pay only the section 118(1) amounts before transfer.

However, such an application would most likely be brought on the urgent roll at court and it is unclear at this stage whether court would grant such an order for the municipality owing to the fact that the municipalities’ urgency in these kinds of cases would very clearly be self-created. It is important to note that an interdict obtained by a municipality to stop the transfer urgently, is not the same as an attachment order granted by the court in terms of section 118(3). The former does not give the municipality any special rights in terms of section 118(3) at all – it merely delays transfer for a certain time.

If a municipality were granted an order stopping transfer for a period of time, the municipality would then need to take the necessary steps quickly to take judgment against the seller and get a court order attaching the property, and then register the attachment at the deeds office in order to perfect its security rights in terms of section 118(3) before transfer.