New property owners not liable for old debt, court rules

The precedent-setting ruling gives relief to home and business owners, who have been saddled with years of historical municipal debt – as long as 20 years – and have been denied municipal services until the debt had been paid. The outstanding debt relates to water, electricity, rates and taxes associated to a property. 

In a ruling majority written by Justice Edwin Cameron, the court found that upon transfer of a property, a new owner is not liable for old municipal debt. The court upheld a ruling by the high court in Pretoria in November last year – mainly that the liability of the old municipal debt rests with the previous owner.

Metropolitan municipalities of Tshwane and Ekurhuleni brought an application at the Constitutional Court to appeal the Pretoria High Court ruling.

Municipal debt specialist New Ventures Consulting and Services, which has represented several property owners who have carried the liability for historical debt, was a respondent in the matter. The Banking Association of South Africa, commercial property financier Tuhf and the Ethekwini Metropolitan Municipality joined the matter as friends of the court.

The metropolitan municipalities of Tshwane, Ekurhuleni and Cooperative Governance Minister Des van Rooyen were ordered to pay costs for the appeal application.

Giving municipalities the power to claim historic debt has implications for the banking industry.

In theory, municipalities would be the first to claim the debt from the proceeds of a property sale, which could result in banks not getting their money back. This would happen when the municipal debt and the amount owed to the bank is larger than the value achieved from the property sale.

Historically, a property was not allowed to be transferred to a new buyer until a municipal certificate that cleared debt spanning over two years was issued under section 118 (1) of the Municipal Systems Act.

However, debts that surpassed the two-year cut off became the liability of the new owner. If the owner failed to pay the debt, the municipality was then permitted to attach and sell the property to settle the debt.

At the heart of the appeal is the interpretation of section 118 (1) and (3) of the act. The act includes a security provision for historical debt to be incurred by the new owner, which municipalities used in their refusal to issue a clearance certificate during the sale of a property until all debts had been paid.

This section of the act was declared unconstitutional by Judge Dawie Fourie at the High Court as it unjustifiably limited the property rights of new owners under the Constitution. The Constitutional Court did not confirm this section of the High Court ruling.

The respondents in the matter argued that making a new owner liable for historical debt could prejudice new homeowners and promote the deprivation of property.