Are buyers of property responsible for the payment of outstanding municipal debt run up by the previous owner of the property? The short answer is “Not anymore”. For the long answer please read the rest of this article.
What happened in the past
Municipalities had to issue rates clearance certificates without which a property couldn’t be transferred from a seller to a buyer. The rates clearance certificates certified that all outstanding debts owing to a municipality up to the date of transfer have been settled in full.
Property buyers reasonably relied on these certificates as proof that all previous debt on the property have been fully settled and that transfer of the property to the buyer could proceed.
However, in some cases it happened that rates clearance certificates were issued while all charges for the period before the transfer date of a property to a new owner were not allocated to the municipal accounts of the previous owners yet.
The first court case
In a court case between a municipality and a ratepayer in May 2013, the judgement made by the court was incorrectly interpreted by municipalities. Based on their interpretation, municipalities held new property owners liable for municipal debt incurred by previous owners and refused to issue rates clearance certificates until all such debt were paid.
In addition, municipal services to a property would be cut off and municipalities would refuse to reconnect such services until all debt were fully settled. Buyers who wanted to take transfer of the property had no choice but to settle debt for services not consumed by themselves.
The second court case
A subsequent court case issued judgement on 8 September 2014, stating that the municipalities’ interpretation of the previous judgement was wrong. The following principles were laid down in this court case:
- A municipality’s right to payment, although attached to a specific property, ended when a property was transferred to a new owner. Outstanding municipal debts up to date of transfer had to be recovered from the seller.
- Payment of debt for services consumed by a previous owner remained the responsibility of that owner. The buyer of a property is not liable for debt incurred for services consumed prior to the transfer of the property.
What happened next?
As a result of the judgement in the second court case, property buyers who had to settle a debt in favour of a municipality which was incurred by the seller before transfer of the property, could request a refund from municipalities.
Municipalities could not refuse to issue rates clearance certificates or to connect municipal services on sold properties based on the fact of unsettled debt between the municipality and a previous owner. The issue of unsettled debt incurred before the transfer date was between a municipality and the previous owner, and the buyer did not automatically become a party to this relationship.
The only way that a buyer can become responsible for settling the previous owner’s municipal debt is if it is specified or implied in the sales contract. Buyers are advised to include a clause in sales contracts that explicitly states that municipal debt incurred up to date of transfer will be settled by the seller.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
Accessed on 21 June 2015: