You’ve just taken transfer of your dream home. You’ve moved in and introduced yourself to your new neighbours. You’ve even set a date for your house warming and invited all your friends. Everything is better than you ever imagined. But then, you receive a letter from your municipality demanding back payment of substantial unpaid debts by the previous owner. Can they do this? Can they hold you liable for the previous owner’s debts?
As unfair as it may seem, the simple answer is yes. Recently, the Supreme Court of Appeal (SCA) held in City of Tshwane Metropolitan Municipality v PJ Mitchell (38/2015) ZASCA 1 (29 January 2016), that the current owner of a property could be held responsible for the debts incurred by a previous owner with regard to municipal services supplied prior to transfer.
The municipality therefore has a claim as a creditor against the property which will survive transfer, and can be used to secure its claim over the property in order to settle the debt owing.
The SCA did mention in passing that the constitutionality of section 118(3) was not before the court. This raises the hope that the law may yet be challenged on constitutional grounds.
How would the municipality perfect their security?
Irrespective of with whom the debt originated, the municipality could:
- Obtain a court order allowing it to attach the property;
- Sell the property in execution; and
- Use the proceeds from the sale to settle the debt owing. If there are any proceeds thereafter, they would first be paid back to the bondholder (if there is a mortgage bond registered over the property) and only then would the current owner receive the balance.
However, before the municipality can secure its claim against the current owner, it must first comply with its own by-laws. To do this, they would need to show that the consumer is liable for all services supplied to the premises.
A ‘consumer’ is defined as “the occupier of any premises which the Municipality has agreed to supply or is actually supplying electricity, or if there is no occupier, the person who has entered into a current valid agreement with the Municipality for the supply of electricity to the premises, or, if such a person cannot be traced, or has absconded or for whatever reason is not able to pay, the owner of the premises”.
What are the implications?
- A municipality’s rights in terms of section 118(3) of the Local Government: Municipal Systems Act 32 of 2000, survives transfer, irrespective of the cause of the transfer.
- The current owner of a property could be held responsible for the debts incurred by a previous owner(s). As a consequence, there is no “clean” transfer of title. Purchasers will now have to seek indemnities from the sellers. This could be in the form of a clause within sale agreements.
In addition, if the new owner were to be presented with an invoice incurred by a previous owner, the new owner would be able to raise any defences to that debt that the previous owner would have been able to. However, practically the new owner is unlikely to know what those defences are.
Furthermore, depending on how long ago the debt was incurred, the municipality may have inadequate, incomplete or incorrect records relating to the account, if they have any records at all. It is therefore very difficult for a new owner to be able to disprove the municipality’s claim.