Historic debt on a property who is liable?

A recent Supreme Court of Appeal judgement has got South African homeowners running scared. The ruling found that a current owner can be liable for unpaid rates, taxes and utilities incurred by previous owners, going back 30 years.

Can you imagine buying a home and then finding out that the municipality is refusing to connect the lights and water because an historical debt is outstanding?

This exact scenario occurred in 2013 when a certain Ms Prinsloo bought a home from a Mr Mitchell who had purchased the property on auction. The original buyer (Mitchell) contacted the municipality and was informed that the total of the amount outstanding was R232 828 in respect of municipal service fees, levies, rates and taxes. The amount included debts older than two years, preceding the date of the application for a rates clearance certificate.

However, Mitchell disputed this as being payable for purposes of obtaining a rates clearance certificate, the dispute was settled and the municipality issued the required certificate reflecting the outstanding amount due to it as R126 608.50 which represented the debt due for the last two years preceding the date of Mitchell’s application. Mitchell paid that amount, however, the historical debt balance was still outstanding and was still owed to the municipality.

While the matter may have been resolved in Mitchell’s eyes, it certainly wasn't as far as the municipality was concerned and when he resold the property to Prinsloo the historic debt once again came to the fore. The municipality insisted that Prinsloo, who had applied for municipal services before the transfer had gone through, settle the historic debt of R106 219.75 before they would allow her to open an account. Prinsloo then issued an instruction to her attorney to delay the sale until the historical debt matter had been resolved.

Mitchell then approached the High Court seeking an order declaring that he and any subsequent owners of the property were not liable for the historical debt. The High Court found in his favour noting that neither he or subsequent owners of the property were not responsible for the payment of historical debts older than two years which were incurred by previous owners of the property.

Unimpressed by the ruling, the municipality took the matter on appeal and that's when things started to get interesting. The Supreme Court of Appeal found in favour of the municipality because, in simple terms, the right of a municipality to claim monies owed for a rates and services is not extinguished when the property is transferred from one person to another. This claim is against the property itself (in other words a real right) and not against the owner of a property as an individual.

While this is a terrifying thought - after all why should anyone be responsible for anyone else's debt, this doesn't mean that municipalities can just demand that new owners must simply roll over and pay the debt. The judgement makes this very clear when it notes:

“Before a municipality can look to an owner for payment, it has to comply with its own by-law: it has to show (1) there is no occupier on the property concerned and (2) the person who had entered into the contract to receive the services cannot be traced or has absconded, is unable to pay or does not exist.”

It also pays to remember that each case is different and the courts won't necessarily find in favour of the municipality every time. However, property owners who find themselves in this position do have a legally remedy in the form of a claim against previous owners who incurred the debt.

If anything, the facts of this case clearly indicate that buyers need to do their homework before they buy a property. It is therefore recommended that buyers ask the seller if he is aware of any historical debt on the property. Better still, contact the relevant municipality in order to check if the accounts are up to date. While you would probably be full entitled to sue a seller who knowingly sold you a home with an outstanding amount owing to the local authority, legal fees are expensive and given the backlog of our courts, you could end up waiting for years before the matter is resolved.

Another interesting aspect of this case is that the first buyer (Mitchell, who brought the property on auction) was fully aware of the overall outstanding debt when he applied for a rates certificate. Although the municipality agreed to only charge him for rates and services that had been incurred during the two years before transfer took place before issuing a rates clearance certificate, this didn't mean that the debt disappeared. One of the reasons that the outstanding amount didn’t become due, owing and payable is because unlike Prinsloo, Mitchell never applied to have the lights and water connected.