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Mathabathe hidden costs

13 February 2014

Introduction
Some are interpreting the Supreme Court of Appeal’s decision in the City of Tshwane v Mathabathe case to mean that a purchaser of immovable property can be held liable by a municipality for any unpaid municipal debts of the seller. This article examines the ‘hidden costs’ of the Mathabathe judgment.

Increase in litigation and transfer costs
Presently there is no law that makes it a requirement for a seller to disclose to a purchaser, to an agent, or even to the conveyancing attorney, how much is owed to the municipality in connection with that property. Some estate agents have taken the decision to insert a clause into their offers to purchase, compelling the seller to obtain a full clearance certificate and settle all municipal debt before transfer. Where clauses like this do not exist, and where it is discovered that there is a large municipal debt that will remain after transfer, it is likely that hundreds (even thousands) of purchasers will get a nasty surprise when they discover that they are now being held responsible for the seller’s municipal debts.

This will ultimately cause a proliferation of disputes between purchasers and sellers, which will lead to the expenditure of millions in litigation fees. Purchasers will argue that the municipal debt constitutes a latent defect not disclosed and fraudulently concealed in terms of voetstoets, and sellers will argue that the purchaser should have done a proper due diligence before purchasing – buyer beware!

This will also cause a delay in the transfer process, which brings with it another series of hidden costs, such as (potentially) higher bond cancellation figures, rates clearance figures and/or levy clearance figures, as well as loss of rental income. Ultimately, it is predicted that the number of transfers will drop, because some sales will be cancelled as a result.

Increased inspection costs
When word gets out that buyers need to be aware of this problem, it will cause many more buyers to make use of home inspection services before they purchase. This will probably result in a drop in the number of sales concluded, which will have a negative effect on the value of properties across the board, and the South African economy as a whole.

Reduced proceeds to sellers
Where sellers are forced to make payment of the full debt owing, this will reduce their liquidity and profitability; and ultimately will reduce the number of sales concluded. This will impact the entire property industry.

Reduction in security
Banks lend money to people to purchase property based on their credit worthiness (how likely it is that they will be able to pay back the loan) and how much value there is in the property itself (how much the bank could recover from selling the property to pay off the purchaser’s debts). Banks will probably start making loans on the condition that a full clearance certificate is obtained – this is problematic because if the offer to purchase doesn’t include an obligation on the seller to this effect, the bank will then require the purchaser to make payment or else it won’t loan the purchaser the money. This will increase the costs of financing the deal, and will likely result in many purchasers not being able to take up their finance because they can’t afford to comply with this condition.

Reduced sales
Word of the above will get out, and fewer sales will be concluded, ultimately because there are fewer properties on the market that do not have this kind of problem. Ultimately the entire property industry will suffer, and the value of properties across the board may drop. Ironically, this might, however, serve to reduce hijackings (making them less profitable!).

Conclusion
I shudder to think whether anyone has considered the hidden costs and how our property industry is going to react to deal with them. One can only hope that a challenge to this decision will be brought timeously to avoid the above from manifesting, before too much damage is caused to the industry and our investments.

Chantelle Gladwin, Partner and Ramon Pereira, Associate
Schindlers

Reader Comments: 3
Martin Potgieter 16/02/2014:

One of the fundamental principles of our legal system is Certainty in Law. The judgement in the Mathabathe-case is clearly misinterpreted or if correctly interpreted, the judgement is blatantly incorrect. Surely our legislature would never have intended uncertainty to prevail. An interesting article titled “Change v certainty: precedent under the Constitution” by former Constitutional Judge Kate O 'Regan was published in Advocate Magazine (April 2001) (http://www.sabar.co.za/law-journals/2001/april/2001-april-vol014-no1-pp31-33.pdf). Although it mainly deals with the Doctrine of Precedent in a changing South Africa, the conclusion is worth noting: “Legal systems must continue to develop as societies change and develop. The tension therefore between the need to develop on the one hand and the need for certainty on the other exists everywhere. As Lord Reid remarked: "People want two inconsistent things; that the law shall be certain, and that it shall be just and shall move with the times. It is our business to keep both objectives in view.

Rigid adherence to precedent will not do. And paying lip service to precedent while admitting fine distinctions gives us the worse of both worlds. On the other hand too much flexibility leads to intolerable uncertainty." It is true that the transition in our system is particularly profound, but Lord Reid's observation serves as a timely reminder that we are not embarking on a journey that is completely uncharted. In moving forward, in our legal system, as in others, we need to accept both the need for legal change and the need for legal certainty. We cannot ignore either.” In my humble opinion, based on the above (and many other issues such as prescription of claims by local authorities, applicability of the National Credit Act to services rendered and credit granted by local authorities to consumers, etc) the Mathabathe case or a similar case could and should soon be overturned by the Constitutional Court.

John Christie 20/02/2014:

I have no doubt at all that Martin Potgieter will be proved to be right in time.

Eurydice Stanton 22/02/2014:

I have read the judgment of Ponnan JA in the Mathabathe decision. I can find nothing in it that puts the purchaser of the property at risk of having to cover arrear debt of the seller to the local authority. Chantelle Gladwin does not mention who has interpreted the Mathabathe judgment to mean that a purchaser of property can be held liable for debts due to the Municipality by the seller. I submit that her article is unnecessarily alarmist, and that it is based on a false premise. The judgment is about S118(3) of the Local Government : Municipal Systems Act 32 of 2000, which deals with the lien of a Municipality over property which has been sold, which gives the Municipality a prior right to the proceeds of the sale, ranking above the right of a mortgagee. I agree that this judgment was ultimately wrong, and that the appeal should not have been dismissed.

This is puzzling, because the reasoning of the judge was (with respect) sound right up until the end when, surprisingly, the appeal was dismissed. I submit that the Municipality should have succeeded in its claim for an undertaking to be provided to it by the conveyancer for settlement of the amount due to it over and above the amount that was paid in terms of Section 118(1) for the clearance certificate. That undertaking should have been given, and the Municipality should have had first claim to payment of that amount out of the proceeds of the transfer (i.e. after registration had taken place) ahead of the claim of the mortgagee bank. If anyone is at risk as a result of Section 118(3) it is the conveyancer tasked with the transfer, not the purchaser of the property. For this reason, conveyancers in general should take note of the Mathabathe case. It is unfortunate that the Mathabathe decision was ultimately incorrect, but I submit that it is going much too far to say that it has introduced uncertainty into our law. The conveyancer of the property in the Mathabathe case was just lucky that she or her firm was not held responsible to the Municipality after (presumably) the bank had been paid the full proceeds of the sale.

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