A new court ruling has claimed that home owners could be responsible for the historical debt on their property. According to a report, home owners, and tenants, could be liable for up to 30 years’ worth of historical debt on their property.
Nayna Parbhoo, director of real estate at Cliffe Dekker Hofmeyr (CDH), explained that this will have an impact on home owners.
“To the extent that the homes are newly acquired, and there is historical debt, this judgement would allow a municipality to perfect its security, provided that it has complied with its own by-laws and has obtained a court order. Having said that, it is important to bear in mind that the constitutionality of this judgement and its interpretation of [section] 118(3) has not been tested, and this too was alluded to by the courts,” revealed Parbhoo.
The law
Under the law, current home owners have limited rights when it comes to historical debt. “Apart from perhaps ensuring that the municipality has acted in accordance with its own by-laws, there is little that one can do, apart from a constitutional court challenge,” highlighted Parbhoo.
Furthermore, there is no time limit to when a municipality can claim for historical debt. “The majority held that the municipality's right (hypothec) stems from statute (as opposed to contract) and therefore there is no limitation on its duration,” noted Parbhoo.
What if you can’t afford the historical debt?
But what happens when you are presented with a bill for historical debt that you cannot cover? Parbhoo explained: “They [homeowners] would need to either consider drawing down on their access bonds (if this is in place) or enter into a form of payment agreement with the municipality, however, this again is one of the "side-effects" of this judgement that must be constitutionally challenged.”
To find out if your property or the property you are looking to purchase as any historical debt against it, you will need to carry out an investigation at the local municipality. “Assuming that the systems are functional, on-line and accurate, this information can be sourced,” said Parbhoo.
According to Parbhoo, “the purpose of our deeds registration system was to ensure that home owners received a "clean" title, i.e. that there were no unknown surprises in relation to the land and that which was attached to the land. This judgement, however, dilutes this security because it has affirmed that the hypothec does survive transfer.”
In other words, the purpose of a deeds registration system was to ensure that home owners got a property title with no hidden surprises, such as outstanding debt on the property. There would be no past problems that came back to haunt the new owners. However, the new ruling has claimed that the municipality’s rights survive the transfer of the property to another owner. This means that the new owner will responsible for any outstanding funds owed on the property.
How could this change the market?
Due to the far-reaching nature of this ruling, Parbhoo noted that it is unlikely that is will not be challenged constitutionally. However, until this has happened, she advised that purchasers and credit providers “tread carefully and be weary of this ‘hidden’ cost.”
Parbhoo added: “Sale agreements will now have to make provision for an indemnity by the seller to the purchaser for all historical debt that may be due. Similarly, bondholders will need to factor in the possibility of historical debt when reviewing credit applications and their security is called into question, as a municipality could attach and sell a property to settle historical debt.”