"An amount due for municipal services 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." 

This was due to the decision of the Supreme Court of Appeal in the case of The City of Tshwane Metropolitan Municipality v Mitchell, which sent shock waves around financial institutions whose core business is the lending of funds with property as security for a loan. 

Said Aidan Kenny, Director at Werksmans Attorneys in Cape Town: “This made financial institutions like banks more cautious  about lending money to property buyers.

“Municipalities had the right to force sell a property to settle historical rates even if they were not incurred by the current owner. Whatever funds were left, could be applied towards the loan of the bank resulting in a potential loss for the bank.” 

In terms of the decision of the court in Mitchell, a new purchaser was liable for the historic debt of a seller, despite the fact that the new purchaser did not incur the debt with the municipality and being provided with a rates clearance certificate from the municipality to the effect no debt is due to the municipality.

“Essentially what this meant was that a new purchaser could be deprived of a property through no fault or wrongdoing on his or her part, but due to the fault of a seller who never paid rates and taxes,” Kenny noted. 

Needless to say this could have had serious economic implications for financial institutions.

“Credit committees of financial institutions, were surely factoring in, through the interest rate of the homeloan, the possibility of losing security in the form of property through no fault of the borrower, “ said Kenny. 

There is however good news for borrowers and lending banks.  

A matter came before the court in the case of Jordaan and others v The City of Tshwane Metropolitan Municipality and others and the constitutionality of the status quo was tested. 

The court held that the right of the municipality to sell the property of a new owner to ensure the payment of historical debt of the previous owner was unconstitutional. 

This was in terms of Section 25 of the Constitution in that Section 118(3) is a law of general application, permits arbitrary deprivation and the limitation of the Constitutional right to property is not reasonable and justifiable in an open and democratic society.

“The decision effectively allows banks and other financial institutions to lend freely within the parameters of affordability and legislation.

“Right now there are no longer concerns about the ‘sins’ of a previous owner for historical debt for rates and taxes being imposed upon a new purchaser which could potentially deprive financial institutions of their security,” Kenny concluded.

It should be noted however that the Tshwane Municipality has appealed the ruling.