Property debt judgment ends era of confusion and controversy

Cape Town - The Constitutional Court judgment on Tuesday that new home owners are not liable for historical debt taken over from previous owners brings to an end a long period of confusion “and no little controversy” in the property industry since 2013, according to Berry Everitt, CEO of the Chas Everitt International property group.

In 2013 the North Gauteng High Court ruled against the Municipality of Tshwane in a case concerning the process of obtaining and lodging a municipal clearance certificate. It ruled at the time that, if there was historical debt, the property could be transferred to the new owner, but the seller would remain indebted to the municipality for historical debt.

The Municipal Systems Act stipulates only that the municipality must issue the certificate if the outstanding debt for the two years immediately preceding the date of sale has been paid in full.  

"Today’s ruling by the Constitutional Court means that new home owners will no longer have to worry about being held liable for historical debt incurred by previous owners, and having their municipal services cut off as a result, or possibly even having their property attached and sold in execution," said Everitt.

In terms of the act, conveyancers are obliged to obtain such clearance certificates before properties can be transferred to new owners. This is to ensure that any rates and utility charges owed to a local authority by the property seller have been paid and are up to date.

Charge on the property

However, the act also stipulates that all municipal debt - including the historical debt - is actually “a charge upon the property”, rather than on a person. This led the court to also rule that the municipality would, therefore, have a lien (a right to keep possession of property belonging to another person until a debt owed by that person is discharged) over the property for the payment of the historical debt.

This right would not fall away when the property was transferred to a new owner.

Everitt pointed out that a municipality which wanted to use its lien, could therefore attach the property from the new owner and sell it on auction to settle the previous owner’s historical debt. Some municipalities did in fact attempt to use this 2013 judgment to collect historical debt from new owners.

Some even went so far as to refuse to open utility accounts in the name of a new owner until they had settled the previous owner's historical debt.

Worry and frustration

"This has obviously created a major worry and frustration for property buyers, and for the real estate industry as a whole," explained Everitt.

In 2014 the same high court in Gauteng - this time in a case against the City of Tshwane Metropolitan Authority - ruled that a municipality’s lien over a property is cancelled by a sale in execution, and that the new owner should be granted a clean title.

In that particular case, the court also ruled that a municipality cannot refuse to provide services to a new owner on the grounds of unpaid historical debt.

Everitt explained that it however remained to be decided what should happen when a property is not sold in execution but, as is usually the case, in terms of an agreement between buyer and seller.

“And this is exactly what today’s ruling by the Constitutional Court makes clear...the Municipal Systems Act is capable of being interpreted so that the ‘charge upon the property’ does not survive transfer of that property to a new owner,” said Everitt.

Application of the new judgment

Aidan Kenny, director and property specialist at Werksmans Attorneys, said the court in the ConCourt case specifically focused on the words "charged upon property" as contained in Section 118 (3) of the act.

"The court held that when a legislator creates a transmissible charge (a debt) upon property, namely a debt which can be transferred from one person to another, registration in the Deeds Office is required," said Kenny.

"Notably Section 118 (3) does not require the charge to be registered or noted on the register of deeds. The court held that this was a telling indication that the charge (the debt) only takes effect on current owners and not new owners unaware of the new historical debt. The debt effectively does not pass to the new owner, as it does not survive transfer."

Bill of rights

Kenny said the court further held that the bill of rights prohibits arbitrary deprivation of property and Section 118 (3) must be interpreted to the effect that the historical debt of a previous owner does not pass to a new owner.

He pointed out that the ConCourt did not, however, declare Section 118 (3) invalid, due to the fact that it can be interpreted without constitutional objection.

"The ruling of the Constitutional Court to the effect that new owners cannot be held liable for the historical debt of a previous owner is indeed a victory for property owners and financial institutions alike," said Kenny.

"This will certainly provide our financial institutions with peace of mind when lending funds for the purchase of property, knowing that neither the owner nor the financial institutions can be deprived of their security for the sins of the previous owner."

He said municipalities will immediately have to stop the practice of imposing and trying to collect historical debt they failed to collect from a previous owner from the new owner.

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