Landmark Ruling Historical debt no more

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landmark-ruling

The Constitutional Court’s August 29th ruling regarding historical municipal debt has been widely celebrated as a victory for property owners.

In effect, the ruling meant that “a municipality could not claim its old debts relating to a property from those who became owners of the property after the debt was incurred”, explains Maryna Botha from STBB.

Bruno Simão, from Bruno Simão Attorneys, agrees: “The implications of the ruling are vast for all market participants but, needless to say, it brings with it much-awaited order.”

The wild west

Prior to the ruling, “issues had arisen whereby municipalities had adopted policies which not only prejudice individual purchasers or sellers, but also gave municipalities an easy way out of implementing effective debt collection measures, by holding someone else accountable for their failures”

explains Kai Howie from MDW Attorneys.

The court case, Jordaan and others v City of Tshwane Metropolitan Municipality and Others, brought to light the ways in which municipalities went about the “discontinuation of services to certain properties consequent to the refusal of those respective owners to pay historical debts incurred by the previous owners,” says Simão. As Botha rightfully points out, how did we get to this point?

Prior to selling a property, the seller must be in possession of a clearance certificate, “in order for transfer of ownership to be formally registered. No transfer may take place without this certificate,” explains Botha.

This clearance certificate is obtained once the owner of the property has settled any and all outstanding municipal rates for the two years preceding the date of transfer. The recent ConCourt case, then, involves historical debt, i.e. debt that falls outside of this two year window.

As can be expected, the municipal defence was that it was necessary to hold property owners accountable to debt (even if said debt was incurred by previous owners) in order to raise the necessary revenue to provide services. In response to this, explains Botha, the court was clear: “while a municpality has the constitutional obligation to collect revenue and pursue debtors, it can only claim the money from the actual debtor, rather than claim the historical debt from the new owners.”

Howie expands on this, explaining that the ruling found municipal methods “superfluous, because municipalities have sufficient mechanisms with which to enforce the payment of outstanding debt.” The first, and most obvious, being the refusal to issue the abovementioned clearance certificate.

The issue arose in the interpretation of section 118(3) of the Systems Act.

Interpreting the act

This section discusses the issue of historic debts (thus, older than 24 months) and was used by municipalities to collect debt from new owners. The court ruled in favour of home owners, stating that it is unconstitutional to do so, especially since municipalities have set policies in place to collect unpaid debt from those responsible for paying it.

Furthermore, it was found that it is possible to interpret the act in such a way that historical debt is not transferred to the new owner of the property.

Kokkie Herman, the Director of Rates Watch, summarises the steps taken by the City of Tshwane in the case of outstanding debt on a property:

“The City of Tshwane, in their Collection Policy, summarises their debt collection actions as the disconnection of services at various staegs without legal action to follow where:

  1. Actions to disconnect services at various stages were unsuccessful;
  2. Disconnection is not possible due to the nature of the services;
  3. Debt is older than 90 days.

Legal action is then summarised, as follows:

  1. A telephone call, followed by the collection of data from the credit bureau – the cost of which is debited to the account;
  2. An account smaller than R100 000 is taken to the Magistrates court for a summons. Accounts larger than R100 000 is referred to the High Court.
  3. If no response is received within 10 days after the issuing of summons, an order of execution is applied. This might lead to the property being sold at auction.”

 

He, too, highlights the fact that municipalities clearly had several tools at their disposal with which to collect arrears accounts, and questions why these weren’t utilised.

The road ahead

Botha explains that the court’s ruling opens the door for “many owners instituting action against municipalities that recovered historic debt from them.” Howie agrees, emphasising that “it would be prudent to consult an attorney before making such a decision.”

Sources: STBB, Rates Watch, MDW Attorneys, Bruno Simão Attorneys

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