Section 118 of the Municipal Systems Act
Subsections 118(1) and (3) of the Local Government Municipal Systems Act share a common purpose; they enable municipalities to fulfil their obligation in the collection of monies that become payable for the provision of municipal services, property rates and taxes. However, they employ different mechanisms to achieve this common purpose.
Section 118(1) is a veto provision with a time limit. It allows a municipality to halt transfer of property until the stipulated debts have been paid, specifically those accumulated in the two years preceding an application for rates clearance. Subsection 118(3) on the other hand is a security provision with no time limit. In essence it is statutory hypothec held by a municipality and ranks above any mortgage bond that may be registered over a property.
Two recent Supreme Court of Appeal judgments have dispelled any presumption that a rates clearance certificate signifies that there is no municipal debt tied to a property. What is more concerning is that if a seller cannot settle their historical debt, irrespective of the nature of the sale, purchasers could be held liable.
City of Tshwane Metropolitan Municipality v Mathabathe & Another
In this matter the municipality wanted to halt the transfer of the property until all historical debt had been paid. The Supreme Court of Appeal reaffirmed the nature of these subsections holding that they are two different remedies. The Court held that the municipality had misconstrued the import of section 118(3) in that they did not lose their rights under this subsection. Municipalities retain the right after transfer to use the property as security for the historical debts of the seller, which in effect means that the purchaser is liable for these debts. This judgment has been the source of much controversy and debate within the legal profession with some arguing that this judgment has been wrongly interpreted. However, to date this has not been argued before a court. This issue was further exacerbated by the majority ruling of the Supreme Court of Appeal in City of Tswane Metropolitan Municipality v Peregrine Joseph Mitchell.9
City of Tswane Metropolitan Municipality v Peregrine Joseph Mitchell
In this matter the property was purchased during a sale in execution and was subsequently sold to a new purchaser. The municipality refused to accept the new purchaser’s application for municipal services due to historical debt that existed prior to the sale in execution. The High Court held that the new purchaser was not liable for the historical debt as the hypothec contemplated in subsection 118(3) is not transferred when property is sold in execution. The Court further reasoned that this matter was distinguishable from that of Mathabathe which dealt with the sale of the property at an auction. Executions are therefore seen as exceptions, the hypothec is extinguished and the new owner obtains a clean title.
The matter went on appeal to the Supreme Court of Appeal which delivered a divided judgment on the interpretation of subsection 118(3). The majority of the Supreme Court of Appeal held that the High Court’s reliance on the difference between this matter and Mathabathe was not justified. Further, that the exception about sales in execution, in that owners obtain a clean title, was misplaced and cannot be read into subsection 118(3). No distinction should be made between a normal sale and a sale in execution when determining whether the hypothec in subsection 118(3) survives transfer. In other words the majority judgment held that the hypothec survives transfer when there is a sale in execution.
The minority held differently, supporting the judgment of the High Court and reasoning that the wording in subsection 118(3) is not broad enough to protect the hypothec if property is sold in execution. One must distinguish between the form of security created by subsection 118(3) and the principal obligation to repay the debt. The principle obligation is not extinguished and the person that incurs the debt is still liable to pay. However, the purchaser will not be held liable in the event that the seller is unable to fulfil their obligation. The minority delved into the purpose of this subsection stating that there is no reason for the survival of the hypothec when there is a sale in execution as municipalities should have exercised their right of preference at the sale and settled outstanding historical debt.
What does this mean for prospective sellers and purchasers?
As to date the judgment of Mathabathe and the majority judgment of Mitchell govern the interpretation and application of subsections 118(1) and 118(3).
Firstly, municipalities are obliged to issue rate clearance certificates and approve transfer if the debt incurred in the two years preceding the date of application for rates clearance is paid. However, the facts of both Mathabathe and Mitchell indicate the tendency of municipalities to demand payment for historical debt at the stage of application for rates clearance. Conveyancers will need to act as watchdogs and ensure that sellers are only paying for debts that fall within the time limit stipulated in subsection 118(1).
Secondly, purchasers now stand a real possibility of being held liable for historical debt of the seller as the statutory hypothec contemplated in subsection 118(3) is not extinguished upon a normal transfer or a sale in execution. This is highly prejudicial to purchasers, especially in the context of sales in execution.
Further, none of these judgments discussed herein deal with the amendment to the Municipal Systems Act published on 5 December 2002.10 The inserted subsection 118(5) states that 118(3) “does not apply to any amount referred to in that subsection that became due before a transfer of a residential property”. How this is to be interpreted in light of Mathabathe and Mitchell is uncertain.
Although the constitutional validity of subsection 118(3) was not challenged in Mitchell, there exists a real possibility of an infringement on property rights. Further, the differing views of Supreme Court of Appeal in Mitchell illustrates that this is an arguable point of law of general public importance and therefore falls within the ambit of the Constitutional Court’s jurisdiction. If the Supreme Court of Appeal judgment in Mitchell is not appealed to the Constitutional Court, it is only a matter of time before our courts are faced with this issue again.
Until clarity is provided on whether subsection 118(3) and the interpretation adopted by the Supreme Court Appeal in Mitchell is constitutionally permissible, purchasers are advised to enquire whether there is any outstanding historical debt on the property they wish to purchase. Further, purchasers can protect themselves by inserting a clause in the sale agreement that excludes liability for the seller’s historical debt.