Municipal Debt - A Victory for South African Property Owners

Terrific news for the property market. A recent court judgment has indicated that owners will no longer be liable for historical municipal debt on their property. 

The background 

Picture this. You save for a deposit, you raise a bond and buy a home, only you can't move into the property because the municipality refuses to turn on the electricity and/or water because someone who lived on the premises in the past owes the municipality money. 

Unfortunately, this not only happened in South Africa, in many instances the sum owed was exorbitant, making it virtually impossible for the new owner to settle the debt and move into a property that he owned.

From a layman’s perspective it was always going to be hard to swallow. After all how could it be possible for an individual, who had probably never met the person who had wracked up the debt, to be liable for the money owed? And if it was possible for a municipality to claim back money in this manner, could others such as clothing shops adopt the same approach? Can you imagine opening an account with one of the larger clothing stores and then discovering that you owed an additional R10 000 because a person who once had the same account number hadn't settled their debt? Or buying a car and then finding out that the vehicle was going to cost R100 000 more because the previous owner still owned money to the bank? 

Legally speaking these scenarios are poles apart and that's because these examples relate to personal rights as opposed to property rights. Personal rights go to the person, but property rights attach to the property itself. In other words the property owes the debt and not the person who happens to own the property. What this means is that the person, regardless of whether he wracked up debt on the property or not, is ultimately liable for any outstanding amounts of money. Unfortunately, while most debts prescribe after three years, municipal debt carries a 30 year prescription period, and this is where the problem with historical debt comes in to play. 

The negative effect on owners 

Essentially, what has been happening and what, understandably, has caused numerous property owners untold misery is the fact that despite having the reassurance that the rates, taxes, electricity and water payments are up to date in the form of a rates clearance certificate, in many cases this is not the case and it's only after a sale goes through that municipalities claim that the new owner owes them money. Very often these amounts are enormous and there have been instances where owners who can't afford to pay and who therefore are denied basic services have not been able to move in to the property even though they are paying the bond. 

The court judgement that changes everything 

Possibly the best news for South African homeowners and those looking to invest is that this how now been changed in a landmark judgement handed down in the North Gauteng High Court in Pretoria earlier this week by Judge Dawie Fourie. Although the judgement, which has found a section of the Local Government Municipal Systems Act constitutionally invalid, still has to go to the Constitutional Court for confirmation, the judge ruled that section 118 (3) is constitutionally invalid because a new owner is not a debtor of the municipality with regard to municipal debts run up prior to such transfer. In other words, the municipality can no longer simply lump a bad debt on an unwilling, uninvolved party and force him to pay some predecessor’s debt. 

One has to wonder how we ever managed to get ourselves into a situation where this was even possible. On the face of things, the law meant that although municipalities could claim they had gone through the motions of collecting outstanding debt from the actual people who owed the money, there wasn't actually any onus or indeed great need to go after those who had wracked up millions worth of bad debt because the debt could be, and very often was, simply transferred to an unsuspecting new owner.

We’ll probably never know the damage the previous law caused to the property market, however, it's pretty obvious that there would have been buyers who rather than become embroiled in some expensive, complicated legal mess, chose not to buy.

The damage that the old law caused is immeasurable because we’ll probably never know how many buyers decided not to buy because by doing so they might have automatically become liable for someone else's debt. However, it's obvious that this threat has now been taken off the table and historical debt will attach to the person who incurred it, not the property. 

Courtesy: Lea Jacobs - Private Property South Africa