In the recent ruling of the Nelson Mandela Bay Municipality v Amber Mountain Investments, the Supreme Court of Appeal (“SCA”) addressed the question of whether the seller of immovable property could be held liable for the advance payment of the full annual property rate, or only for the payment of municipal rates calculated until transfer takes place. This SCA decision was handed down on 29 March 2017.

In terms of s118 of the Local Government Municipal Systems Act, No 32 of 2000 a seller requires a rates clearance certificate before transfer of the property to the purchaser, which certificate must be lodged in the Deeds Office with the transfer documents.

The Respondent in the Appeal Court, Amber Mountain Investments 3 (Pty) Ltd (hereinafter the “Respondent”), was the seller of the property situated within the Nelson Mandela Bay municipality (the “Municipality”). Before transfer took place, the Respondent applied for a rates clearance certificate, however, the Municipality required that the rates be paid until 30 June 2010, being the financial year end.

At that stage, the rates until the end of the financial year were nearly double the rates payable until date of transfer. The Respondent decided to pay the amount claim by the Municipality, being an amount of R 2 281 014.68, albeit reluctantly, in a dire need to receive a property rates clearance certificate, in order for transfer to take place.

The Respondent then approached the High Court saying that this constituted an overpayment of its obligations to the Municipality, and successfully claimed reimbursement of the amount by which it overpaid. The Municipality then appealed to the SCA.

The Municipality claimed that once its financial year commenced the seller became liable to pay the rates fixed for that financial year and that it was entitled to withhold the rates clearance certificate until it had received payment of the rates for that financial year.

The SCA considered the Municipality’s contention that levying rates is an integral part of the Municipality’s annual budgetary process and that the approval of the Municipality’s annual budget goes hand in hand with the determination of rates, as the revenue from rates is essential to fund the budgeted expenditure such as the rendering of services to their communities.

The SCA paid particular attention to the Local Government: Municipal Property Rates Act, No 32 of 2000 emphasising that in terms of s13(1)(a) a rate becomes payable “as from the start of a financial year” and not on a particular date. The SCA held that having regard to the fact that the Local Government: Municipal Property Rates Act, No 32 of 2000 defines financial year as “the period starting from 1 July in a year to 30 June the next year”, the section could only be interpreted to mean that the rates are payable within the period of the financial year and not on 1 July.

The SCA firmly held that s118 of the Systems Act is clear and unambiguous that a clearance certificate is issued in respect of municipal debts which have become due in the two years preceding the date of application for the clearance certificate and does not apply to future municipal debts when the seller is no longer the owner of the property.

The ruling provides much needed clarity regarding the issuing of clearance certificates and ensures that many sellers will save thousands, if not millions, of rand during the sale of their properties. It also imposes an obligation on municipalities to change their policy to comply with the various Acts applicable, forfeiting their right to collect advance rates and charges due in future prior to issuing a rates clearance certificate.