In the ever-busy world of property transfers, the path from seller to buyer is rarely a straight line. Municipalities, hyper vigilant about their coffers, often stand as gatekeepers, demanding payment of rates and service charges before keys may change hands. However, what happens when a municipality tries to collect more than its legal due?
The recent Supreme Court of Appeal ("SCA") decision in KwaDukuza Municipality v Consolidated Aone Trade and Invest 6 (Pty) Ltd (in liquidation) marks a significant line in the sand in the interpretation of section 118(1) of the Local Government: Municipal Systems Act 32 of 2000 ("MSA") and the legal consequences of payments made under protest in the context of property transfers.
Background
At the heart of the case was the sale of the Ballito Bay Mall, a property owned by Consolidated Aone Trade and Invest 6 (Pty) Ltd (in liquidation) ("Aone"). Aone's liquidators, eager to finalise the sale, approached KwaDukuza Municipality ("KDM") for the all-important rates clearance certificate. Under section 118(1) of the MSA, a municipality may only issue such a certificate if all municipal charges incurred in the two years preceding the application have been paid in full.
KDM demanded payment of all outstanding municipal charges, including those outside of the two year period. The liquidators, under protest and to avoid prejudicing the transfer, paid the full amount demanded – over ZAR21 million – reserving their rights to seek recovery of any amounts that were not due and payable to the municipality after transfer.
Who holds the power?
The central legal questions before the SCA were:
- Whether a municipality can lawfully demand payment of debts older than two years as a precondition for issuing a rates clearance certificate, and
- Whether payments made under protest and duress to secure such a certificate are recoverable.
KDM argued that there was no legal impediment from demanding all outstanding debts, and that once paid (even if the debt was prescribed) the money was KDM's to keep. The SCA was not swayed by KDM's arguments.
Section 118(1) of the MSA is clear and unambiguous: only debts incurred in the two years before the application for a rates clearance certificate must be paid to pass transfer. The SCA highlighted that any attempt by a municipality to demand payment of debts outside this period, as a precondition for issuing the certificate, is unlawful and constitutes a "substantive obstacle to alienation" of property.
Payments under protest: The right to reclaim
With regard to the payment made under protest (of the debt that did not apply to the 2 year period), the SCA drew on a long-standing legal principle that payments made under protest, especially when made under duress to avoid an unlawful refusal by a public authority, do not amount to a voluntary settlement of the debt. Instead, the payer, having made payment under protest and expressly reserved their rights, is entitled to seek recovery of any amounts not lawfully due. The SCA enforced the point that a payment under protest is not the end of the story.
Prescription Act: No shield for unlawful demands
KDM tried to find shelter under section 10(3) of the Prescription Act, 1969 by arguing that payment of a prescribed debt is final and cannot be recovered. The SCA, however, was not swayed. Because the payment was made under protest and the right to seek a refund was expressly reserved, the Prescription Act could not be used as a shield to avoid repayment. The fact that the property was in liquidation only strengthened the liquidators' position, as the rights of other creditors are protected by the concursus.
Moral of the SCA's judgment
The SCA's judgment is a clear message to municipalities and property owners alike:
- Municipalities may only demand payment of municipal debts for the two years preceding the application for a rates clearance certificate.
- Payments made under protest, especially when compelled by an unlawful demand, are recoverable if not lawfully due.
- Municipalities cannot hold property owners or liquidators to ransom by using the rates clearance process to recover historic debts. They must pursue older debts through other legal avenues (i.e. section 118(3) of the MSA), and not by blocking property transfers.
In the end, the Ballito Bay Mall saga is a reminder that, in the world of property law, the rules matter and those who pay under protest may yet have the last word.
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