Buyers and Sellers Protect Yourselves from Historic Debt

The recent ruling by the Supreme Court which states that the current owner can be held liable for any arrears in taxes, rates and other utilities incurred by past owners – going back up to 30 years – comes as a blow to the property market.

At the moment the Local Government Municipal Systems Act states that a seller of a property is responsible for all debt incurred over the previous two years, which much be settled in order to obtain a rates clearance certificate under section 118(1), before the property can be transferred to a new owner. The latest judgement by the SCA would seem to uphold this stipulation, but extends the period for which an owner / seller can be held liable for historic debt.

While this judgement will almost certainly be challenged in the Constitutional Court it has certain far reaching and immediate ramifications for buyers, sellers and lenders; if our municipalities were all known for their efficiency and accurate accounting this ruling wouldn’t present much of a problem, unfortunately there are numerous stories indicating that local municipalities often make accounting mistakes and have questionable record keeping. This means that sellers could believe themselves to be in the clear but suddenly get saddled with unexpected debts when trying to sell. On the other hand buyers could take ownership of their new home only to be told that they’re liable for the previous owner’s unsettled debt.

What is certain to make banks weary to lend is that the ruling allows municipalities to sell the property in question if the debt isn’t paid. The municipality is then allowed to claim from the proceeds of the sale first. Depending on the outstanding amount this could mean that the lending bank doesn’t recoup all of its money.

Ways of protecting buyers and sellers

There is no question that buyers, sellers and lenders will have to do their research very carefully before engaging in a property transaction as a rates clearance certificate isn’t necessarily a guarantee that all debts are settled, according to the municipality. While the judgement will hopefully make its way to the Constitutional Court Oosthuizen & Co Meyer de Waal Attorneys has advice on how both buyers and sellers could try to protect themselves:

Buyers can ask for a clause to be included in the sales agreement in which the seller agrees to undertake all debts on the property. The agreement could also include the proviso that the buyer has the right to claim damages from the seller, should the buyer be faced with a claim at a later stage.

Sellers on the other hand could protect themselves under the Voetstoots clause which frees them from any liability related to the property. According to the law firm another option would also be for sellers to take out insurance in order to indemnify themselves from municipal debt claims.

The long and the short of the current situation is that all parties involved in a property transaction will need to do their due diligence – in as much as this is possible – to ensure that there is no outstanding municipal debt on the property. While clauses can be included in the sales agreement I believe that this judgement essentially makes no sense and will hopefully be overturned before it causes further chaos in an already delicate market.

If you have any questions regarding this ruling, or on how to protect yourself from historical municipal debt contact your nearest Leapfrog Property Group agent.

Bruce