Property buyers: must you pay the previous owner's old debts?

MARCH 1, 2016

Imagine this. You buy your dream house. You take transfer. You book a date for your move with Fred's Furniture Removals. But when you apply for electricity and water accounts so you can actually move in, your local municipality refuses until you settle an old (and substantial) municipal debt which the original owner still owes. "Pay up" says the municipality, "or we'll sue. You could lose the house".

Can that possibly be correct? A recent Supreme Court of Appeal (SCA) judgement says that indeed it can.

The case of the innocent buyer down R100k

  • A property was sold in execution, and the buyer paid all municipal debts for the preceding 2 years (in order to obtain a municipal clearance certificate, which you need to take transfer), thinking that that was the end of the matter.
  • The new owner on-sold the property to another buyer, who was refused municipal services until she paid a "historical debt" (over 2 years old and therefore not part of the clearance certificate) of R106,219-75.
  • The no-doubt horrified new buyer understandably declined to either pay a cent to the municipality or to take transfer until a court ruled on whether she could really be held liable for someone else's old debts like that.
  • Initially the High Court found in her favour that old municipal debt cannot survive a sale in execution. The SCA disagreed, holding that - per existing legislation and regardless of whether the sale was an execution sale or a normal private sale - the municipality's claims for rates, taxes and services remained "a charge on the property". These old debts survived the change in ownership. Provided that it followed its own bye-laws (in this case requiring it to first try recovery from the original debtor, and disallowing action against an occupied property), the municipality could obtain court authority to "perfect its security" and sell the property.

Buyers: Protect yourself!

There is talk of a constitutional challenge to this legislation, but in the meantime take legal advice immediately if you are ever on the receiving end of such a demand. "Prescribed" (expired) debt cannot be claimed from you (prescription is 3 years for service accounts but 30 years for "rates and taxes", which our courts have held includes sewer and refuse charges) and your lawyer will check whether all local bye-laws have been complied with.

Even more importantly, before signing the sale agreement ask your lawyer to check that it protects you as fully as possible. For example the seller should prove payment of all municipal debts, old as well as new, and you should be indemnified against any other hidden claims crawling out of the woodwork after transfer.

Sellers: This is for you

Ensure a quick, clean transfer - ask your attorney (remember you choose the transferring attorney) to double-check that the municipality isn't going to hassle you down the line for some old "forgotten" claim.

“This issue illustrates how important it is for anyone buying or selling property to seek professional advice before signing an offer to purchase or deed of sale. Failure to do so could have dire financial consequences. In the case under discussion, the buyer could easily have protected himself by stipulating in the offer to purchase the seller must settle ALL outstanding municipal charges in respect of the property, including any historical debt” advises Tracey Watson-Gill, Director, Property Law & Conveyancing Department at Goldberg & de Villiers.

For more information contact: Tracey Watson-Gill, Director at Goldberg & de Villiers, situated along Bird Street, Port Elizabeth. Tel. 041 501 9800 or email: [email protected]