INTRODUCTION

The Appeal in City of Tshwane Metropolitan Municipality v Mitchell¹ concerns the interpretation of section 118(3) of the Local Government: Municipal Systems Act 32 of 2000 (“the Act”). The question before the Supreme Court of Appeal was whether the security provided for in section 118(3) of the Act in favour of a municipality, for moneys owed to it for services delivered in respect of fixed property, is extinguished when the property is sold at a sale in execution and subsequently transferred to the purchaser.

Practically speaking, the issue could be understood as being whether this municipal claim, which is attached to the property itself, falls away when the property is sold at a sheriff’s auction (a sale in execution) and then transferred to a new owner. In other words, if someone buys a property that has unpaid municipal charges, does the municipality lose its right to recover those debts once the property changes hands?

This question is important because it affects not only municipalities trying to recover outstanding payments, but also buyers, banks, and property investors who need to know whether a new owner could become responsible for someone else’s old municipal debts.

WHAT DOES SECTION 118(3) OF THE ACT MEAN?

“118 Restraint on transfer of property

(1) A registrar of deeds may not register the transfer of property except on production to that registrar of deeds of a prescribed certificate-

(a) issued by the municipality or municipalities in which that property is situated; and
(b) which certifies that all amounts that became due in connection with that property for municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties during the two years preceding the date of application for the certificate have been fully paid.

(1A) A prescribed certificate issued by a municipality in terms of subsection (1) is valid for a period of 60 days from the date it has been issued.

(2) In the case of the transfer of property by a trustee of an insolvent estate, the provisions of this section are subject to section 89 of the Insolvency Act, 1936 (Act 24 of 1936).

(3) An amount due for municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties is a charge upon the property in connection with which the amount is owing and enjoys preference over any mortgage bond registered against the property.

(4) Subsection (1) does not apply to-

(a) a transfer from the national government, a provincial government or a municipality of a residential property which was financed with funds or loans made available by the national government, a provincial government or a municipality; and
(b) the vesting of ownership as a result of a conversion of land tenure rights into ownership in terms of Chapter 1 of the Upgrading of Land Tenure Rights Act, 1991 (Act 112 of 1991):
Provided that nothing in this subsection precludes the subsequent collection by a municipality of any amounts owed to it in respect of such a property at the time of such transfer or conversion.

(5) Subsection (3) does not apply to any amount referred to in that subsection that became due before a transfer of a residential property or a conversion of land tenure rights into ownership contemplated in subsection (4) took place”.

BACKGROUND TO THE DISPUTE

Mr Peregrine Joseph Mitchell (“the Respondent”). purchased a property, at a sale in execution on 22 February 2013. To register the transfer, the Respondent was required to procure a clearance certificate from the City of Tshwane Metropolitan Municipality (“the Appellant”).

Section 118(1) of the Act is an “embargo” or “veto” provision, prohibiting the Registrar of Deeds from registering a transfer unless a certificate is produced confirming that all amounts due for service fees, rates, and taxes for the two years preceding the date of application for the certificate have been fully paid.

The Respondent’s application revealed an outstanding amount of R232,828.25, including amounts older than two years. After a settlement concerning the immediate clearance certificate requirements, the Respondent paid R126,608.50, representing the debt for the preceding two years, leaving the historical debt of R106,219.75 outstanding.

The Respondent subsequently sold the property to Ms Lynette Prinsloo (“Ms Prinsloo”). Before transfer, Ms Prinsloo applied for municipal services (electricity, waste removal, water). A municipal official refused to open an account for her, informing her that she would be held liable for the historical debt. As a result, the Respondent then approached the Gauteng Division of the High Court, Pretoria, seeking a declaration that he and his successors would not be liable for the historical debt.

HOW THE MUNICIPALITY INTERPRETED THE LEGISLATION

This piece of legislation was interpreted by the municipality to mean that any unpaid municipal charges such as service fees, property rates and other municipal taxes, levies and duties are legally tied to the property itself, not just to the person who owes them. The municipality argued that these old municipal debts become a financial burden on the property, and the municipality has the right to claim payment from the proceeds if the property is sold.

More importantly for the banks, this municipal claim takes priority over any mortgage bond registered against the property. So, if the property is repossessed or sold to recover debts, the municipality (on its understanding) must be paid first before the bank or lender receives anything. It was argued that this ensures that municipalities can recover what they are owed, even if ownership changes or the property is under financial distress.

THE HIGH COURT’S FINDING AND THE STATUTORY HYPOTHEC

Section 118(3) of the Act, in contrast to section 118(1) (the rates clearance provision), is a security provision known as a tacit statutory hypothec. It provides that any amounts owed for municipal services, rates, taxes, and levies constitute a charge on the property, taking priority over any registered mortgage bonds. This hypothec secures all debts, including historical debts, forming “one composite amount secured by a single hypothec.” Unlike section 118(1), section 118(3) is not limited by time and continues to operate as a security right over the property.

The High Court (“court a quo”) held that security in the form of a tacit statutory hypothec is a limited real right. Crucially, the High Court found that the hypothec was extinguished by the sale in execution and subsequent transfer. It relied on an exception contained in Voet 20.1.13 (common law), which suggested that when properties subject to a special hypothec are sold by judicial order (“sale in execution”), the hypothec is extinguished, and the new owner obtains a clean title.

THE SCA MAJORITY RULING

In a majority decision, the Supreme Court of Appeal (SCA) upheld the appeal, dismissing the Respondent’s application. The Court concluded that the High Court had erred: the transfer of property from one owner to another does not extinguish the security created by section 118(3). That security is rendered useless however once the object of the security (the property) is transferred to another.

The majority found the High Court’s reliance on the exception in Voet 20.1.13 to be misplaced. Voet 20.1 dealt with instances where the hypothec was created by agreement (e.g., mortgage bonds). The common law exception does not apply to a hypothec created by a statute that places no limit on its duration.

The court held that there is nothing in the Act indicating that an exception to section 118(3) was contemplated where property is purchased at a sale in execution. If the legislature had intended a limited duration for the hypothec in such circumstances, it would have explicitly provided for it, as it did regarding insolvent estates (section 118(2)) and certain residential transfers (section 118(5)).

SO WHAT ARE THE PRACTICAL EFFECTS OF THE SUPREME COURT OF APPEAL ORDER?

Since the hypothec survives transfer, the Appellant is not prevented from perfecting its security over the property should it wish to ensure payment of the historical debt. Perfecting security would involve obtaining a court order and selling the property in execution, forcing the current owner (the Respondent) to pay the debt to avoid losing the property.

This does not mean, however,

Practically speaking, a municipality should only attempt to perfect its security whilst the person who incurred the debts in connection with the property remains the owner of the property, and not thereafter, because once the property has been sold to another the municipal debt.

CONCLUSION

The tacit statutory hypothec (the charge upon the property) for municipal debts is not extinguished when the property is sold at a sale in execution and subsequently transferred to the purchaser. The court found that the High Court erred in applying a common law exception intended for hypothecs created by agreement (Voet 20.1.13), emphasizing that the statutory security created by section 118(3) operates without a time limit and survives transfer, meaning the municipality is not prevented from perfecting its security over the property to ensure payment of the historical debt.