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Are Homeowners Now Liable for Past Rates and Taxes?

On 29 January 2016, the Supreme Court of Appeal ruled in a matter that has caused significant concern within the property industry when it comes to liability for historical debt incurred by a previous owner of a property in respect of municipal rates.

The recent court ruling may have repercussions for the property industry, but particularly sellers and buyers who are forced to rethink their own potential risk and liability that accompanies owning or buying a property.

While the view of the courts in the past has been that current owners are not liable for historical municipal debt, the recent court case of City of Tshwane Metropolitan Municipality vs PJ Mitchell (38/2015) [2015] ZASCA 1, which was heard on 29 January 2016, reconsidered this. In its judgment, the honourable court held that, in certain limited circumstances, it is possible for municipalities to hold new owners liable for a previous homeowner’s historical municipal debts.

This ruling may have repercussions for the property industry, but particularly sellers and buyers who are forced to rethink their own potential risk and liability that accompanies owning or buying a property.

In addition, attorneys will need to consider the potential risks and consequences when attending to the transfer of a property, and banks may find themselves at additional risk with their security being affected through municipal debt attached to a property constituting a higher ranking priority claim against such bonded property.

Although this news may seem alarming at first, it is important to make sure, by verification of the relevant information provided that all municipal debts have been paid in full before a property is transferred.

“This includes debts relating to obtaining a rates clearance certificate in terms of Section 118(1) of the Municipal Systems Act, 32 of 2000, and all historical debts in terms of Section 118(3) of the same Act. While this requires careful scrutiny of the rates clearance figures provided prior to transfer, it will minimise the risk of being faced with this dilemma.”

It is also worth noting that while judgment was handed down by the Supreme Court of Appeal, the matter and therefore the consequences for the property industry, will be subject to further consideration.

On 22 February 2016, the Constitutional Court was presented with further arguments on the matter, which may result in the judgment of the Supreme Court of Appeal being upheld, or the decision of the court being overturned, thus reinstating previous case law to the effect that a previous owner cannot be held liable for historical municipal debt incurred by a previous owner.

It is advisable for buyers to amend the offer to purchase to indemnify themselves against historical debt, bearing in mind that the current prescription period for arrear water and electricity debt is three years, and that for rates is 30 years. However, it is possible that, pending the outcome later this month, the local authority may still be able to proceed with a claim based on the new Supreme Court of Appeal precedent.

While the judgment, currently in force by the Supreme Court of Appeal, states that liability will only be applicable in certain limited circumstances, there is not yet clarity as to what constitutes an appropriate circumstance for this.

For more information on purchasing, renting or investing in commercial and industrial property in Cape Town, please contact Robert Ryll | Cell Number: 082 374 2662 | Landline: 021 552 4100 or Email: rob@primeindustrial.co.za

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