Should you pay historical debt on your property?

A ruling by the Pretoria High Court stated that property owners and tenants should not be burdened with historical municipal debt from old owners or tenants. Several property owners went to court after their properties experienced electricity and water cuts by the Tshwane and Ekurhuleni metros due to outstanding bills from previous owners. The court ruled that the section of the Local Government Municipal Systems Act which permitted for this was constitutionally invalid.

Justmoney looks at what you should be told and what you are responsible for historically when purchasing a property.

So what does the High Court ruling mean for you?

Lew Geffen, Chairman of Lew Geffen Sotheby’s International Realty, said this week’s decision by the Pretoria High Court that effectively declared a section of the Local Government Municipal Systems Act constitutionally invalid is a victory for South African consumers.

“If you consider that last year substantially more than 300 000 residential property transactions alone were concluded in this country, then the judgment that relieves current owners of historically-incurred municipal debt affects a relatively small percentage of people. That said, many unfortunate souls caught in this debt trap not of their making were financially ruined trying to escape it, losing their families’ entire savings or in cases affecting commercial property, leading to who knows how many retrenchments and businesses going under.

“The fact that the law attached a service debt to a fixed asset rather than the person or entity that incurred the liability could potentially have affected hundreds of thousands of other property owners down the line, though, and was simply bad law, especially since the seller only has to produce a 24-month rates clearance certificate in terms of current legislation in order to proceed with a sale,” noted Geffen.

However, Michelle Dickens, MD of TPN noted: “The High Court ruling is certainly a step in the right direction, but it is important to remember that when it comes to the constitutional validity of any Act or a portion of an Act, the correct forum to turn to is the Constitutional Court. TPN is eagerly awaiting the Constitutional Court Judgment which will cement the position on historical municipal debt once and for al.”

Geffen cautioned: “This was a judgment passed by the High Court, which means there are two higher courts in which it can still be tested if the Tshwane and Ekurhuleni metros choose to take the case further. One would sincerely hope sanity prevails, though, and this matter has now been put to rest.”

Should you be informed about historical debt?

Experts are divided on this matter. Dickens, noted: “Legally the seller of the property is obliged to disclose any defects or encumbrances that the seller is aware of to a potential buyer. Such disclosure would include any historical debt that the seller is aware of at the time of the sale.”

Gary Ross, from Ross Law and RE/MAX One, disagreed with Dickens about access to information regarding historical debt, as this is a matter of privacy and confidentiality. “Due to privacy and confidentiality issues no-one will be able to gain access to someone’s municipal records to check whether there is historical [debt]. However, with the new ruling there is no need for the new owner to know whether there is historical debt because they cannot be held responsible for it. The point of the new ruling was to protect the new owner from having to pay debt that they did not incur. Why should one person have to pay the debts of another?”

Ross added: “The transferring attorney will have access to the records, but often they won’t inform the buyer of any outstanding historical debt until transfer has taken place. This is again due to the fact that the records are private and confidential.”

If, following the purchase and transfer of the property to you, you are confronted by a bill from the municipality for historical debt, you may have grounds to take the previous owner to court to recoup the funds. Dickens revealed that this is particularly true “if the seller was aware of the debt at the time of the sale and intentionally did not disclose the existence of the debt to the buyer. However, litigation is a costly and a protracted exercise with legal fees sometimes even exceeding the amount that is claimed by an aggrieved party.”

According to Ross, with the new ruling, it will hopefully no longer be necessary new owner having to take the previous owner to court for historical debt on the property.

For more information on historical debt click here.

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