Is buyer liable for seller’s debts ? – Denoon Sampson Oct 2014

Apart from a recent television expose, there has been very little publicity about a very concerning turn of events in the residential property industry.

New property owners are wrongfully being sued by municipalities for the arrear rates and taxes of the seller.

In fact, it has resulted in a furore of epic proportions amongst many purchasers, new owners of property, property lawyers, auctioneers, banks and bondholders who have registered their bonds over property. Further, those who purchase residential property at auction sales are particularly at risk.

So what is the big fuss and outcry all about? Municipalities have decided, as a matter of policy, to hold purchasers and new property owners liable for the previous seller’s arrear rates and taxes and other municipal service fees.

What is so galling and upsetting to the community at large, is that councils are cutting off electricity on recently transferred houses where the new owner knows nothing about his previous seller being in arrears as well as a new policy that the council is now holding him, as the innocent purchaser, responsible for another person’s debts.

This is despite the fact that a Municipal Clearance Certificate was paid for and lodged in the Deeds Office; despite the fact that there is no lawful basis to hold a stranger liable and responsible to pay off someone else’s debts; despite the fact that this policy is at odds with our common law; and despite the fact that our property registration system has for hundreds of years ensured that immovable property is transferred free of debt. To illustrate the point; the Deeds Registries Act does not permit a new owner to become responsible for, nor even inherit, the previous seller’s mortgage loan indebtedness.

Up until now, the transfer process was that every single arrear of seller, had to be first repaid and/or secured by an arrangement, with the express purpose of ensuring that the purchaser receives transfer of ownership completely free of debt.

In line with this principle, our entire legal framework has become the focal point of all sorts of certificates that make the transfer date, the cut-off date for certifying that any problems and/or liabilities have been resolved for the benefit of the new owner. This includes Electrical Certificates of Compliance, Electric Fence Systems of Compliance, Gas certificates, Water, Plumbing certificates and so forth.

So therefore to suddenly adopt a policy, which at best, is founded on uncertain and contradictory interpretations of one or two court judgments is to disrespect and dismiss our constitution and our internationally respected property registration heritage and legal precedent.

Because our transfer process is so reliable and highly regarded, up until now there has been no need to take out insurance to protect purchasers against unforeseen debts and problems arising after transfer.

This shocking state of affairs has come about, mainly due to an Appeal Court decision in the case of The City of Tshwane vs Thomas Mathabathe and its failure to take into account all of the sub-sections under section 118 of the Local Government: Municipal Systems Act, which was passed in the year 2000.

Amazingly, the Tshwane Appeal Court decision makes no reference to the key subsections (S 118(5)) and (S 118(4)) under section 118 of The Municipal Systems Act. If the appeal court decision as well as the other court decisions upon which it relied on, had examined the meaning of S 118(5), this whole rumpus, inconvenience, anxiety and financial loss would have been avoided. 

In fact S 118(5) read together with S 118(4) does everything we want and expect. It protects the residential purchaser from being held liable to pay the seller’s arrear rates and taxes. Astonishingly these protections have been glossed over and remain unnoticed by many litigators, conveyancers, advocates and judges, who have been grappling with the municipalities, aggressively trying to recover the arrears from whoever they choose.

To explain in more detail how this unwarranted and unnecessary state affairs came about, we briefly discuss the meaning of the sub-sections under paragraph 118 of The Municipal Systems Act. S 118(1) says a local authority must issue a rates and taxes clearance certificate if debts incurred during the two-year period preceding the issue of the rates assessment, are paid. This subsection says nothing about any historical arrears which may be older than 2 years. It just provides that if debts for the preceding 2 years are paid, then the council must issue a clearance certificate. S 118(3) says any amount (in municipal law this can be debts of 30 years old) is a charge upon the property and enjoys preference over any existing mortgage bond.

This means that the council is entitled to tie the debt to the property and to use it as a basis to recover the debt, regardless of who the owner of that property is. Let’s call this the open ended problem clause. This is why councils believe they are free to use a lien over the property to sue, not necessarily the person who failed to pay his bills. They believe, accordingly, that they are fully entitled to sue the current owner of the property, because the debt is now tied to the property. In addition, because of S 118(3), councils believe that despite having issued a clearance certificate for only a two-year period, they are also fully entitled to recover any other debts that might extend back into history for the preceding 28 years, from new owners.

Also there is a false belief amongst many that the issue of a clearance certificate is confirmation that all debts on the property have been fully repaid by the seller. This is not the case. Only the debts for the preceding two years are certified as having been paid, leaving the remaining 28 years still a target for debt recovery; and not necessarily from all the previous owners of the property.

Then came a backtrack or afterthought by the government, when it amended the legislation, two years after the initial Municipal Systems Act was passed. Government Gazette No. 24149 dated 5 December 2002 introduced amendments which changed the whole picture. It introduced new law in the form of subsections B S 118(4) and S 118(5).

Eleven years later, this all came to a head when the Appeal Court ruled on the dispute between the Tshwane Municipality and Thomas Mathabathe. Because the owner was in debt; his property was sold at an auction. The conveyancer applied for a clearance certificate but the council wanted more than just a two-year debt to be repaid on transfer. The conveyancer applied for a court order that the council should limit its claim to the two-year period. Then the municipality made a counter application, saying that it required a conveyancer’s undertaking to secure repayment of the full historical debt, in excess of the two-year period, being paid on registration of transfer.

The municipality lost its claim for the whole historical debt to be paid on transfer; but the judge also made a side comment which upset many household apple carts around the country. Despite ordering that the council could not claim any historical debts on transfer by means of an undertaking, the judge contradicted his own ruling by saying: but that did not mean, that upon transfer, the council lost its right to recover any larger historical debts in terms of S 118(3).

The result is that the municipalities latched onto this observation that after transfer, they can recover historical debts from not the original debtor, but from whomever currently owns the property; in terms of S 118(3).

Lungi Dlulisa, representing the South African Local Government Association is on record as saying: our interpretation is that the debt remains a charge on the property. We are not in the business of being fair. Councils need to collect the debts. Municipalities need to be creative in collecting arrears.

The result is much condemnation of this current status quo and many attorneys have expressed their shock and disagreement with the principle that municipalities now believe they are entitled to sue new owners and purchasers for the debts of the sellers.

As the law is an evolving process we are all waiting for subsequent cases to come before the courts and/or the constitutional court to reconsider this current unacceptable state of affairs.

In the meantime, if we look more closely at the subsequent amendments, we see that new law was introduced in the form of additional subsections; namely S 118(5) and S 118(4). S 118(5) simply says that: S 118(3) [which is the open ended problem clause referred to above] B does not apply to amounts that became due before a transfer of residential property. Therefore any debts incurred before transfer, cannot be a charge on the property and therefore cannot be pinned on the new purchaser or owner. Also, the rights of existing bondholders remain intact. Further, S 118(4), which was also introduced with the subsequent amendment, supports and works hand in glove with S 118(5).

With subsection 3 knocked out of the equation, it confirms that the legislators intended that the arrears of the seller (which cannot be anybody else’s) may be paid on transfer, in tandem with S 118(1) B the two year clearance certificate rule. Practically speaking, the subsequent amendments in the form of S 118(5) and S 118(4) were clearly intended to prevent new owners from being held responsible for their seller’s debts and also to prevent municipalities from claiming the seller’s debts from the new purchaser.

The result is we have a stalemate: because if one reads the amended Municipal Systems Act, one will find subsections S 118(5) and S 118(4) plainly visible in the legislation; recorded as acts of Parliament. What is so surprising is that these sections have not been mentioned nor even considered in any of the judgements or numerous commentaries on the topic.

If the Appeal Court in the Tshwane matter had considered subsections S 118(5) and S 118(4), the unwarranted and mistaken belief, that municipalities are entitled to tie unlimited debts to the property after transfer, regardless of who is the owner, would never have come about.

Should anybody face legal action pertaining to or disconnections of municipal services, they should bring subsections S 118(5) and S 118(4) to the attention of their legal advisers, to use as part of their defence to resist an unfair and unlawful attack on their rights. – Denoon Sampson

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