We are often requested to advise prospective purchasers, as to the risks involved when purchasing a property where the municipal rates and taxes are in arrears for a period of more than two years.
Section 118 of the Municipal Systems Act provides for the issuing of a clearance certificate, without which no property can be transferred from one owner to another. The provisions of Section 118 (1) (b) however provide that the clearance certificate that is required by the deeds office must certify that the Municipal charges are paid which became due within the preceding two years. On the face of it, it looks like the municipality will have to issue a clearance certificate if they receive payment of the outstanding rates for the last two years which will then allow the purchaser to take transfer of the property into his name.
The question now arises, whether the municipality can hold the purchaser liable for any portion of the municipal charges which were in arrears for more than two years and were therefore not paid or contained in the clearance certificate.
To answer this question, various aspects have to be considered:
The purpose of Section 118 (1)(b) was inserted to ensure that a property would never become “sterile” due to the fact that the municipal charges, which are in arrears, are so much that the property becomes worthless.
Section 118 (3) stipulates that Municipal charges “is a charge against the property” and therefore enjoys preference over mortgage bonds registered over the property.
The various municipalities are however reluctant to write-off municipal charges and has this resulted in various court cases regarding the interpretation of Section 118. The municipalities have always relied on the wording of Section 118 (3) and argued that if the arrear Municipal charges are charges against the property and therefore it follows that the owner of the property must be liable for the arrears. This argument has, unfortunately for purchasers, also been the argument that was followed by our courts in the recent judgments regarding the interpretation of Section 118.
For this reason, we believe that purchasers should be cautious, when they purchase a property where the municipal rates and taxes are in arrears for a period in excess of two years. We are of the opinion that purchasers should insist that the full amount of arrear municipal charges be paid by the seller prior to accepting transfer of the property.
It is also often questioned by sellers, if prescription of the debt does not result in the debt being extinguished after three years. This question has also been debated in our law and the specific reason relates to whether the supply of services by a Municipality amounts to a tax, since the prescription period for taxes are 30 years, whereas the payment for services would prescribe after three years. It is therefore not surprising that the municipalities would choose to argue that all municipal charges are taxes and therefore would only prescribe after 30 years.
We are of the opinion that the portion of the outstanding municipal charges which relates to rates and taxes would only prescribe after 30 years but that the remaining charges (which are mostly for the supply of services like water, electricity, sewerage etc.) will prescribe after three years.