Municipal debt: mind the gap

It may seem completely crazy to us folk-in-the-street, but if you’re buying a property, you could be held liable for debts that the seller ran up with the local municipality long before you came up with your offer to purchase.

True story.

Seems there’s been a bit of confusion in the market since May 2013, when the Supreme Court of Appeal handed down a ruling that’s come to be known as the Mathabathe Decision.

Rates clearance certificate

The seller of a property has always been required to obtain a rates clearance certificate from the local municipality before transfer can take place – and until Mathabathe, the manner in which the municipalities interpreted the law on the topic had the practical effect of protecting the buyer, no matter whether or not the seller had settled all debts to the municipality, or only those that had been incurred during the two years running up to the date of application.

If all the debts had been settled, the municipality would issue a full clearance certificate; it the seller settled only those incurred during the last two years, it would issue an abridged certificate.

The seller remained liable for any amounts outstanding – but the buyer started his or her business relationship with the municipality with a clean slate.

The municipalities reacted

Trouble for the municipality, of course, was that, on the interpretation of the law at the time, the seller’s debt was secured by the property only as long as the seller remained the owner of the property: the municipality couldn’t exercise its statutory hypothec (lien) over it – in other words, attach it and sell it off – once it had been transferred to the third party (the buyer).

If a property was transferred under an abridged clearance certificate, the municipality was still entitled to its money – but it had to find other ways of reclaiming it from the seller. And that wasn’t often that easy ...

For this reason, many municipalities became reluctant to issue abridged certificates – and some even refused to issue them altogether. Unless they had their money, they weren’t going to give up their hypothec (which is set out in Section 118(3) of the Local  Government: Municipal Systems Act 32 of 2000).

But the municipality can’t refuse

According to an article by Chantelle Gladwin* (a partner at Schindlers Attorneys), which was published on golegal.co.za (Are Purchasers of Immovable Property Now Liable for the Seller’s Historical Municipal Debt?), the Supreme Court of Appeal confirmed in the Mathabathe case “that municipalities must issue abridged RCCs” (rates clearance certificates) as long as all the debts incurred in the two-year window have been settled. They couldn’t refuse to issue abridged certificates.

But, wrote Chantelle, the decision “has inadvertently created a new and potentially even greater problem for the property industry.”

Legalese leads to problem

The problem comes from the fact that “the court remarked in the Mathabathe ruling that the [City of Tshwane] was plainly wrong in its contention that ‘upon registration... [it] loses its rights under Section 118(3) of the Act’.”

Chantelle makes the point that this remark “is now being interpreted by some municipalities to mean that they retain the right, after transfer of the property to a purchaser, to rely on the property as security for the debts of the seller.”

In short: the municipalities believe they can hold buyers liable for debts incurred by sellers even after transfer because they believe that they’re able to attach and sell those properties – even though they now belong to third parties.

Of course this will have many consequences, as Chantelle and Ramon Pereirra (an associate at Schindlers Attorneys) noted in their February 2014 article, The hidden costs of Mathabathe. These include increases in the costs of purchasing property, reduced security for buyers, even a reduction in the total number of properties sold.

Buyer, beware

Chantelle and Ramon believe that “no court would order the attachment of a purchaser’s property for a seller’s debt, unless the purchaser had agreed to assume the seller’s liability”.

Nevertheless, they point out that a number of municipalities – eThekwini, Cape Town, Johannesburg – have indicated that they will take various steps in line with their interpretation of the Mathabathe Decision.

Although the situation is likely to be tested in court, their advice until then is to avoid the problem altogether by including a clause in any offer to purchase or agreement of sale that makes obtaining a full clearance certificate – rather than an abridged one – a condition of the sale.

And – since there’s no law that forces sellers to disclose any debts that they may have against their properties – that’s sound advice indeed.