MUNICIPAL SYSTEMS ACT – 118 – MATHABATHE AND MITCHELL

Posted on: February 15th, 2016 by Jenalee Harrison

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.

6 responses to “MUNICIPAL SYSTEMS ACT – 118 – MATHABATHE AND MITCHELL”

  1. I don’t see how a clause excluding liability for historical debt affords much, if any, protection. If the municipality suddenly decided that the previous owner of my property had in fact owed a fortune to them, it would be up to me to track him down and sue him for this debt. A clause of that nature may facilitate the legal process on that front, but the municipality would always be in the position of holding a lien over my property no matter what the selling contract says. Meanwhile I am trying to track down “Mr X” who may have left no forwarding address, may be insolvent or may have left the country.

    Secondly, this SCA ruling is opening up a huge can of worms in another respect. The municipalities are unable to keep track of month-to-month billing as it stands at the moment. They are clueless. What the heck do I do when they claim an owner of my property 25 years ago owed them 100k and now they want this plus interest? How on God’s green earth do I even know what the rates were at that time? How do I prove payment or otherwise by that (possibly deceased) individual? We would be totally reliant on the questionable word of incompetent municipalities that often have incentives to pull facts out of File 13 and present them as truth, because they are facing bankrupcy.

    This SCA ruling is, from this layman’s point of view, absurd.

  2. Dear Bruno, thank you for the comment and you raise a valid point! Hopefully, should the situation arise, the purchaser will not have too much trouble locating the person who sold to him. Further, you mention that the ruling is absurd. Actually, the SCA just interpreted the clear wording of the Municipal Systems Act and it is rather a case of the provisions of the legislation itself that is the concern.
    Interestingly, the SCA noted in its judgment that a constitutional attack on the provisions of sec 118(3) of the Municipal Systems Act was not before it, intimating that should a home owner in the circumstances you sketch raise a constitutional attack on that clause, the legislature may, depending on the outcome, be forced to amend it.

  3. Hi Maryna, I recently sold a property and had to settle the tenants municipal debt before getting a clearance certificate. My payment was credited to the tenants account and when I queried this, I was told this was the normal procedure and that the tenant’s deposit would be allocated against the amount owing and reconciled by both the municipality and the attorneys.
    This did not happen and the tenant walked away with his deposit and his account paid by me.
    He signed three “Acknowledgement of Debt agreements” (AoDa) over a period of 36 month, the last on two months before requesting a clearance certificate. The outstanding amount on his account increased monthly over a period of four years, clearly in contravention with the AoDa. Section 97, Local Government:Municipal Systems Act 32 of 2000, paragraph 20 – 4 (Pg14) states, the owner of the property must consent in writing to an AoDa with the municipality, this did not happen either, I knew nothing about his AoDa. In addition, they closed his account preventing him from honouring the AoDa. This Municipality appears to have no procedure in place and sits back and waits for the owner to rescue them from their Credit Control and Debt Collection departments.
    I am trying to find out if the Acknowledgement of Debt agreements signed between municipally and tenant would be enforced in a small claims court against the municipality or should I claim from the tenant?

  4. Good day Maryna
    We are also in a process of buying a house that we are currently renting from 2013, also the length of the process. The certificate was requested by the lawyers from the municipality, it was then established that there were also rates outstanding from the previous owners. Both deceased. So as we applied for the home loan, we included the outstanding municipality rates and explained it so to the municipal manager and CFO. So that they can issue us with the clearance cirtificate. So that on the day of registration, the outstanding amount will be paid directly from attorney. The municipality says it cannot be done like this.
    Help please

    • Dear Edwill
      Procedures differ from municipality to municipality but generally, a municipality will insist on arrear rates
      (as well as estimated advance rates) being paid up in full before it will issue the clearance certificate. The latter is required before documents can be lodged in the deeds office, so the transaction cannot proceed without the certificate being obtained.
      You could attempt to escalate the matter and speak to a senior person at the municipality to issue the certificate on the undertaking that you will settle the amount on registration of transfer, but there is no obligation on the side of the municipality to come to your assistance unfortunately.

      All the best,

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