In a much-anticipated Constitutional Court Judgment it has been ruled that new property owners are no longer expected to take responsibility for settling municipal debt incurred by previous owners of the acquired property.
The matter stemmed from an on-going disputes battle which challenged the constitutionality of section 118(3) of the Local Government: Municipal Systems Act.
Section 118(3) followed the archaic notion that services rendered by the municipality on any property followed the land and not the individual who incurred the debt. This created a significant stumbling block for new owners of immovable property, particularly first-time home owners.
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Am I responsible for unpaid municipal debt?
In terms of section 118(3), the Municipality is treated as a preferred creditor, thus compelling the new owner to settle the outstanding amount before being entitled to take transfer of the property. Arrear municipal debt is therefore treated as a preferred debt (even over the settlement of a mortgage bond registered against the property) and a rates clearance certificate may not be issued without these debts having been settled in full.
While section 118(3) does not specifically call upon a purchaser to settle arrear municipal debt, the responsibility to deal with the situation usually falls on the party who is in the less favourable bargaining position. More often than not, that party is the purchaser who in all likelihood has already taken occupation of the property and is desperate to have transfer effected.
The High Court found section 118(3) constitutionally invalid, to the extent only that it has the effect of transferring to new or subsequent owner’s municipal debts incurred before transfer. The High Court found this to be an arbitrary deprivation of property in terms of section 25 of the Constitution. It said that new owners of property are not liable for municipal debts incurred by previous owners. Therefore, municipalities may not sell the property in execution to recover the debt or refuse to supply municipal services on account of outstanding historical debts.
Municipal Rates and Property Transfer Costs
Over and above all the other costs associated with purchasing and selling property, a purchaser was also expected to first foot the bill for any outstanding municipal account for that property. This arbitrary and unfair principle acquiring property with existing debt attached to it created a very real injustice.
Having to settle historical debt also presented major delays in the transferring of a property, due to buyers having to source the often-enormous amounts required to extinguish the debt.
Considering the fact that municipal rates are linked to the value of the property and the area in which it is situated, new home owners stand to now save substantially. Furthermore, this drastically reduces the chance of debilitating and unanticipated expenses arising from property transactions.
The Constitutional Court upheld the High Court’s view on the matter. The ruling is certainly welcomed and comes at a time when even the most astute consumers are struggling to make ends meet and are in desperate need of any form of financial relief.
The Constitutional Court’s decision will almost certainly encourage young professionals who are looking to purchase immovable property to reconsider the investment option and may assist in removing the death sentence “debt” stigma which has deterred so many from taking that massive progressive step of purchasing their own property.