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Taming Medusa

8 December 2016

Introduction
This article highlights the most important legal principles to come out of past and present cases dealing with the impact of section 118(3) of the Local Government: Municipal Systems Act 32 of 2000 (“the Act”), with the aim of summarising the important developments in the law for property owners and managers. It concludes with a synopsis of the legal status as it stands today.

The critical legal issue
All of the law on this issue deals with the burning question of whether a purchaser of a property can be held liable by a municipality for debts incurred in respect of that property by prior owners of the property.

The Birth of the Section 118 Monster
The “Monster” reared its ugly head when the Pretoria High Court in the first Mathabathe 1 case stated that the municipality did not lose its rights to claim amounts owed after transfer. This was (unfortunately – and in our view incorrectly) widely interpreted as meaning that the municipality’s hypothec (right of security for payment of amounts owed to it) created by section 118(3) of the Act “survived transfer” and would operate against the purchaser of the property in respect of the seller’s outstanding municipal debt still owing at the date of transfer. This permitted a municipality to attach and sell a property to satisfy debts owed to the municipality in respect of that property that were incurred by prior owners.

This (incorrect) interpretation was accepted by the court in both of the Mitchell 2 cases in the High Court and Supreme Court of Appeal, exacerbating the problem. These cases were all decided based on the common law, and not on the Constitution: it is very important to appreciate this because it meant that a constitutional challenge to the issue could still be mounted at a later date in another court.

The Many “Medusa Heads”
There are different ways in which a property owner can be held to ransom for the debts of another:

  1. A municipality can refuse to supply services (water and electricity) to a property unless the prior owner’s debts are paid.
  2. A municipality can refuse to restore the supply of services to a property (those services having been terminated for non-payment) unless the prior owner’s debts are paid.
  3. A municipality can summons a purchaser for the seller’s debts and take judgment against the purchaser for such debts.
  4. A municipality can apply to court to attach and sell the property owned by the purchaser such that the proceeds can be used to satisfy the seller’s debts.
  5. A municipality can terminate the supply of services to a property based on non-payment of the prior owner’s debts.

These are the “many heads” of the Monster which, like the Medusa of legend, left consumers battling a monster that seemed to be attacking from all sides. It led to a series of court cases dealing with each of these “heads”.

Stand 287 case 3
In this case the Court confirmed that a municipality may not hold the purchaser of a property liable for debts incurred by prior owners in connection with that property in any way, unless a judgment has first been taken against the prior owners. Only then may the municipality apply to court, on the strength of the judgment, to attach and sell the property.

The Court also strongly endorsed the view (but did not decide the point) that a municipality is not entitled to terminate the supply of services to a property for non-payment of a prior owner’s municipal debt.

Gladwin case 4
Here the Court held that it is unlawful for a municipality to refuse to supply services, or refuse to restore such services, to a property based on non-payment of a prior owner’s municipal debt.

Anzotrax case 5
In this case the Court held that a municipality is entitled to consolidate (combine) separate municipal debts of different persons in relation to the same property. In effect, a purchaser cannot be held liable for payment of a seller’s municipal debts by virtue of a municipality consolidating those two debts.

New Ventures case 6
This is the most recent legal pronouncement on the issue, in terms of which the High Court made three very important and distinct legal findings.

Finding #1: Section 118 is unconstitutional
The Court held that it was unconstitutional for a municipality to attach and sell a purchaser’s property to satisfy the debts of a seller. This was a completely different legal attack to those mounted in the Gladwin and Stand 287 cases as it focused not on the common law, but on the manner in which section 118 offends section 25 of the Constitution: which protects property and states in sub-section 1 that no one may be deprived of property except in terms of law of general application, and no law may permit arbitrary deprivation of property. This finding could potentially lead to Section 118 being struck down as unconstitutional.

Finding #2: Policies and/or by-laws cannot circumvent section 118’s unconstitutionality
The court further rejected the municipalities’ arguments that they were entitled, in terms of various by-laws and policies, to collect amounts owed to them by a seller from a purchaser, or to refuse to supply services to a purchaser based on non-payment of the seller’s municipal debts on the basis that none of these by-laws or policies expressly provided for this. In addition, and just as importantly, the Court held that if a municipality were to collect amounts owed by a seller from a purchaser, or refuse to supply services to a purchaser based on non-payment of the seller’s municipal debts, even if by-laws and/or policies provided for this, that this would be unlawful and unconstitutional because the municipality would be shirking its constitutional duty to deliver services to consumers who are entitled thereto, and would further amount to an unlawful exercise of public power.

Finding #3: Contracts of sale cannot circumvent the unconstitutionality of section 118
It was argued that a purchaser who signed a sale agreement agreeing to pay “all” rates and taxes “necessary” to transfer the property, had agreed to pay all amounts outstanding, including those incurred by prior owners, in order to obtain a clearance certificate to transfer the property.

The Court rejected this for two reasons:

  1. It is only strictly necessary to pay amounts incurred in the two year period preceding application for clearance figures in terms of section 118(1) in order to obtain a rates clearance certificate. It is not necessary to pay any other amounts owing.
  2. Even if the Court was wrong in its finding that it was not necessary to pay all amounts owing to obtain a rates clearance certificate, the municipality is not entitled to rely on the contract of sale as it was not a stipulateri alteri (a contract for the benefit of third parties – ie. the municipality) and the municipality had not accepted the benefits in terms of the agreement of sale in any event.

Conclusion: Summary of law at present on section 118
A municipality is not entitled to:

  • Disconnect the supply of services;
  • Refuse to restore the supply of services already disconnected;
  • Refuse to provide new services to a consumer;
  • Succeed in suing an owner in relation to municipal debts incurred by prior owners; and
  • Bring an application to attach and sell the property in relation to municipal debts incurred by prior owners.

 


Notes
1 Tshwane Metropolitan Municipality v Mathabathe 2013 (4) SA 319 (SCA) at 325

2 Perregrine Joseph Mitchell v City of Tshwane Metropolitan Municipal Authority Case No: 50816/14, North Gauteng High Court, Pretoria (8 September 2014), and 

City of Tshwane Metropolitan Municipality v PJ Mitchell (38/2015) [2015] ZASCA 1 (29 January 2016).

3 Stand 287 Strydom Park (Pty) Ltd v Ekurhuleni Metropolitan Municipality (23503/2014) [2015] ZAGPJHC 79 (27 April 2015)

4 Chantelle Louise Gladwin v Ekurhuleni Metropolitan Municipality (unreported case no. 14497/2016 (Weiner J).

5 Anzotrax (Pty) Ltd t/a Topbet Germiston v Ekurhuleni Metropolitan Municipality (unreported as of yet, case number A5059/2015, Gauteng Local Division, 1 June 2016)

6

1.Chantel Jordaan & Others v The City of Tshwane Metropolitan Municipality & Others (74195/2013)

2. New Ventures Consulting Services (Pty) Ltd & Others v City of Tshwane Metropolitan Municipality & Others (13039/2014)

3. Billie Ann Livanos & Others v Ekurhuleni Metropolitan Municipality & Others (13040/2014)

4. Gemma Diamonds (Pty) Ltd & Others v Ekurhuleni Metropolitan Municipality & Others (19552/2015)

5. Oak Plant Rentals (Pty) Ltd & Others v Ekurhuleni Metropolitan Municipality (23826/2014)

Chantelle Gladwin, Partner and Gary Boruchowitz, Candidate Attorney
Schindlers

Reader Comments: 2
M Koumbatis 08/12/2016:

Good job thank you!

P LIVANOS: New Ventures Consulting: The Municipal Debt Specialist 09/12/2016:

Good day Chantelle and Gary. I would like to compliment you on a very well worded article and the way that you have unpacked the Section 118 debacle. It really is such a pity to be honest that, (as the media have phrased it) the “DA and ANC have formed an unlikely alliance” to fight our court case and appeal to the Constitutional Court. I really do believe that it is high time that organisations and professionals such as yourself need to join our case, possibly as an Amicus Curiae.

I have recently read a wonderful article that was published by BUSINESSTECH: CRUCIAL COURT RULING GIVES SA BANKS GREATER FREEDOM ON HOME LOANS, where they clearly understand how our court case will have a dramatic effect on financial institutions. I really appreciated how the Director at Werksmans Attorneys, Aidan Kenny had an understanding of this.

Here is the link to the article: https://businesstech.co.za/news/general/145899/crucial-court-ruling-gives-sa-banks-greater-freedom-on-home-loans/ I think now more than ever the large financial institutions such as the major banks need to understand the impact that this will have on the banks, the property industry and economy of South Africa if we do not win in the CONSTITUTIONAL COURT.

We believe that the banks should also be included as an Amicus Curiae. I really do hope that the financial institutions and property professionals such as yourself can aid our cause as we are fighting this alone.

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