Beware Historical Debt – Owners and Tenants
Liable for Historical Debt
Property owners are now threatened by the devastating prospect of having to repay piles of historical debt to municipalities accrued up to 30 years ago by former owners.
This is due to a judgment handed down by the Supreme Court of Appeal (SCA) at the end of January, ruling that current property owners can now be held liable for historical debt that dates back 30 years.
Considering around 326 000 properties are bought and sold every year, this ruling stands to have a dramatic impact on the property market.
Until now, sellers were liable for debts accumulated during the previous two years for water, electricity etc., and 30 years for rates, according to section 118 of the Local Government Municipal Systems Act.
The Supreme Court Case
The SCA case in question was between the buyer of a property, Peregrine Joseph Mitchell and the City of Tshwane. Mitchell was advised he had to pay R232 828 in order to receive a clearance certificate, upon buying the property in 2013.
However, Mitchell argued that according to section 118 he was only liable for R126 600 – the historical debt incurred during the previous two years. And so he attained the certificate, later reselling the property. Only for the council to refuse to connect the new owner’s services. It claimed historical debt of R106 200 was outstanding.
The matter progressed to the Gauteng Division of the High Court, which declared that new owners are not liable for historical debt.
From there, the matter progressed to the SCA, which conversely found the hypothec (lien) to be in favour of the municipality.
What Does This Mean?
Basically, the municipality is within its rights to collect historical debt from the current owner for services and rates incurred by previous owners, as this debt is not extinguished by a transfer in ownership.
Specialised residential and commercial property lawyers say this judgment could have disastrous ramifications for property owners. As it means municipalities can take legal action against current property owners for historical debts incurred by prior owners.
All That Could Go Wrong
Given such common municipal issues as erroneous billing, defective meters, inaccurate meter numbers, illegal connections and meter tampering; new owners could have a nightmare on their hands when it comes to proving non-liability.
The same goes for property rates. For example, suppose a new owner is charged rates based on an inaccurate property valuation, only for a review years later to reveal the property was undervalued by millions of rands. Thus, the new owner would receive a rates bill for hundreds of thousands of rands, which should have been billed to the previous owner before the transfer.
In such circumstances, there is very little the new owner can do, besides getting in touch with the old owner, who may have died, emigrated, is no longer a juristic person or has no records to speak of.
What this means for property owners overall is that no amount of homework before purchasing a home can guarantee you that historical debt won’t come back to haunt you at some point or another.
Tenants Aren’t Exempt
Tenants aren’t safe from historical debt either. Due to varying by-laws in different municipal jurisdictions, municipalities can hold tenants liable for charges as well. Accordingly, tenants may have to cough up for historical debt too.
Again, tenants will find there is no real way to screen a potential property to prevent historical debt from raising its ugly head at a later date.
You can take out insurance and insist that sellers settle all outstanding amounts owed to municipalities before transferring ownership to you.
Short of that, your only alternative is to take the matter to the Constitutional Court.
This Supreme Court ruling has serious repercussions not only for property owners, but for sellers, lawyers and the entire property industry at large.