Section 92(1) of the Deeds Registries Act No. 4 of 1937 ("Section 92") provides "no transfer of land shall be registered unless accompanied by a receipt or certificate…that taxes, duties, fees and…on the property to be granted or transferred have been paid".  Section 118 (1) of the Municipal Systems Act No. 32 of 2000 ("the Act") gives some meat to Section 92.  Section 118(1) provides that "a Registrar of Deeds may not register the transfer of property except on production to that Registrar of Deeds of a prescribed certificate:

Issued by the Municipality or Municipalities in which that property is situated; and, which certifies that all amounts that became due in connection with that property for municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties during the two years preceding the date of application for the certificate have been fully paid".

The above seems to be pretty simple. In very simple terms and in general, it basically says an immovable property ("property") cannot be registered into the new owner's name without a valid rates clearance certificate issued by a Municipality confirming that a debt owing to that Municipality has been paid and that the property can change hands (please note that there are instances where a property can be registered without a rates clearance certificate e.g. property being transferred to Sanral for road purposes).

On 29 January 2016, the Supreme Court of Appeal (“SCA”) handed down judgment in the case of City of Tshwane Metropolitan Municipality v PJ Mitchell.  This appeal concerned the interpretation of s 118(3) of the Local Government: Municipal Systems Act, 32 of 2000 (“the Act”).  The SCA considered whether the security provided for in s 118(3) of the Act in favour of a municipality, for moneys owed to it for services delivered in respect of fixed property, is extinguished when the property is sold at a sale in execution and subsequently transferred to the purchaser.

Facts of the case

On 22 February 2013, the respondent purchased a fixed property in Wonderboom Township in Gauteng (“the property”), at a sale in execution.  Clause 6.4 of the ‘Conditions of Sale in Execution of Immovable Property’ stated:

‘The purchaser shall be responsible for payment of all costs and charges necessary to effect transfer including conveyancing costs, rates, taxes and other like charges necessary to procure a rate clearance certificate, transfer duty or VAT attracted by the sale and any Deeds registration office levies.’

In terms of s 118(1) of the Act, a registrar of deeds may not register the transfer of property, except on production of a clearance certificate confirming that all amounts due to the municipality in respect of that property for service fees, levies, rates and taxes for the two years preceding the date of application for the certificate, have been paid in full.  When the respondent applied for a clearance certificate, the appellant issued a ‘written statement’ reflecting an outstanding amount of R232 828.25 in respect of municipal service fees, levies and rates, including debts older than two years preceding the date of the application for a clearance certificate i.e.: historical debt.  The respondent disputed the correctness of the amount reflected in the ‘written statement’ as being payable for purposes of obtaining a clearance certificate, but this dispute was settled and the appellant issued a certificate reflecting the outstanding amount due to it as R126 608.50 (only the debt due for the two years preceding the date of the respondent’s application for issue of the certificate).  The respondent paid that amount, leaving the historical debt of R106 219.75 still outstanding.

The respondent subsequently sold the property to Ms Lynette Prinsloo (“Prinsloo”) who, before taking transfer, applied to the appellant for the supply of municipal services including electricity, waste removal and water.  A municipal official refused to open an account in Prinsloo’s name and told her that she would be held liable for the historical debt.  Prinsloo then gave instructions to the attorney who was to deal with the transfer not to proceed with it until the issue of the historical debt had been resolved.  The respondent then approached the Gauteng Division of the High Court, Pretoria, seeking inter alia an order declaring that he, ‘or his assigns and successors in title of the Property’, were not liable for the historical debt owed to the appellant by previous owners.  On 8 September 2014, the High Court granted the following order in favour of the respondent:

• Security provided by section 118(3) in favour of the respondent with regard to the property was extinguished by the sale in execution and subsequent transfer of that property into the name of the applicant;
• The applicant, or his successor in title, is not liable for the payment of outstanding municipal debts older than 2 years which were incurred by his predecessor(s) in title prior to the date of transfer of the said property into his name; and
• The respondent has no right to refuse the supply of municipal services (such as electricity, water, sanitation and waste removal) to the applicant (or his successor in title) with regard to the said property only because of outstanding municipal debts older than 2 years.

With leave of the court a quo, the appellant then appealed against this order to the SCA.

SCA Judgment

The provision of Section 118(3) of the Act serves as a form of security for services rendered by the Municipality.  Under this section the Municipality enjoys the protection of being a preferent creditor over bondholders of the property since a real right is created over the property in favour of the Municipality by this section.

Section 118(3) of the Act states that:

“An amount due for municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties is a charge upon the property in connection with which the amount is owing and enjoys preference over any mortgage bond registered against the property.”

The SCA held that historical debt that remains unpaid after a clearance rate certificate has been obtained is not extinguished by the subsequent transfer of the property, despite the property being sold and purchased through a sale in execution.  The SCA held that it is irrelevant whether the property was purchased through an agreement between the parties or through a sale in execution, meaning that the Municipality can still recover historical debt from the new owner since the section clearly states that the municipal charge created by section 118(3) burdens the property being transferred and not the erstwhile owner of the property.  It is a real right created over the property and not a personal right that can only be enforced on an erstwhile owner.

Section 118(3) is not without limitations, however.  The SCA held that before the Municipality can enforce the provisions of section 118(3), there has to be due compliance with its own by-laws when recovering the historical debt.  This means that the Municipality has to exhaust all remedies afforded to it by its own by-laws in recovering historical debt before implementing the provisions of section 118(3).

What Does This Mean for Property Owners and Banks Who Finance These Purchases?

As a new purchaser about to take transfer, it means that you have an obligation to ascertain and double check with your Municipality that there are no historical debts owing to your Municipality which could come back and be claimed from you once you have taken transfer.  It also means being aware that if there is a historical debt in respect of the property you are purchasing, you will not be able to raise a defence that it is a historical debt which you know nothing about.  Your Municipality can still attach your property for that historical debt.  This means that as a bondholder, your security is not secure if the property bonded to you owes a historical debt. If the property is attached and sold at a sale in execution by the Municipality in order to recover the debt owing, the Sheriff will pay the Municipality first and then you as a bondholder.

Conclusion

The Mitchell's case has caused an outcry and it may well be that we need a Constitutional Court decision to pronounce on whether or not there is a time limit within which the Municipality must act to recover historical debt.  Our view is that it would be unfair to have an open-ended time limit.