Imagine this. You buy your dream house. You take transfer. You book a date for your move with Fred’s Furniture Removals. But when you apply for electricity and water accounts so you can actually move in, your local municipality refuses until you settle an old (and substantial) municipal debt which the original owner still owes. “Pay up” says the municipality, “or we’ll sue. You could lose the house”.
Can that possibly be correct? A recent Supreme Court of Appeal (SCA) judgement says that indeed it can.

The case of the innocent buyer down R100 000.00

  • A property was sold in execution, and the buyer paid all municipal debts for the preceding 2 years (in order to obtain a municipal clearance certificate, which you need to take transfer), thinking that that was the end of the matter.
  • The new owner on-sold the property to another buyer, who was refused municipal services until she paid a “historical debt” (over 2 years old and therefore not part of the clearance certificate) of R106 219.75.
  • The no-doubt horrified new buyer understandably declined to either pay a cent to the municipality or take transfer until court ruled on whether she could really be held liable for someone else’s debts like that.
  • Initially the High Court found in her favour that old municipal debt cannot survive a sale in execution. The SCA disagreed, holding that – per existing legislation and regardless of whether the sale was an execution sale or a normal private sale – the municipality’s claims for rates, taxes and services remained “a charged on the property”. These old debts survived the change in ownership. Provided that it followed its own bye-laws (in this case requiring it to first try recovery from the original debtor, and disallowing action against an occupied property), the municipality could obtain court authority to “perfect its security” and sell the property.

Buyers: Protect yourself!

There is talk of a constitutional challenge to this legislation, but in the meantime take legal advice immediately if you are ever on the receiving end of such a demand. “Prescribed” (expired) debt cannot be claimed from you (prescription is 3 years for service accounts but 30 years for “rates & taxes”, which our courts have held includes sewer and refuse charges), and your lawyer will check whether all local bye-laws have been complied with.

Even more importantly, before signing the sale agreement ask your lawyer to check that it protects you as fully as possible. For example the sellers should prove payment of all municipal debts, old as well as new, and you should be indemnified against any other claims crawling out of the woodwork after transfer.

Sellers: This is for you

Ensure a quick, clean transfer – ask your attorney (remember you choose the transferring attorney) to double-check that the municipality isn’t going to hassle you down the line for some old “forgotten” claim.

A recent High Court judgment reminds us once again of how important it is, when dealing with a company, to check that whichever director/s you are dealing with is/are fully authorised to bind the company.

R3 800 000.00 in claims attacked

  • A liquidation application was launched against a property developing company with 3 directors,
  • The applicant creditor was owed some R3 800 000.00 in loan and suretyship claims,
  • Its problem was that the suretyship and loan agreements had been signed by only one of the directors of the property company, with the knowledge and approval of the second director but not of the third,
  • The third director (acting as trustee of a creditor trust) opposed the liquidation application on the grounds that the first and second directors had acted without authority. He argued that the creditor had no claim against the company, and therefore had no standing to liquidate it,
  • The court found on the facts that the creditor had failed to prove that the first and second directors had acted with authority. Nor had it proved that they were held out as being persons authorised to manage the company’s affairs. Thus it could not enforce any claim, and the liquidation order was refused.

So, how do you prove authority?

You must firstly show that you were dealing with someone who had either actual or apparent (often called “ostensible’) authority to contract with you. You can’t enforce your claim if you can’t prove authority.

Assumptions, assumptions

As a rule you are allowed to assume that the board of directors and any managing director have the necessary authority. The same doesn’t generally apply to any ordinary director or employee, except perhaps to the extent that they hold an executive position (financial director or branch manager perhaps) which suggest that they have authority “usual to that type of position”. Of course you can’t make any assumptions at all if you actually knew, or should have known or suspected, that the director or employee was acting outside his/her powers and authority.

No wriggle room

To complicate matters (sorry, but this is important and to your advantage) what happens if a company tries to wriggle out of its contract with you on the basis that, unknown to you, the director had breached some internal company procedure? Since usually only insiders will know about a company’s internal policies, it would be highly unfair to you if that were allowed.

To protect you, our law says that, once you have proved actual or apparent authority as above, you can then assume that all the company’s internal rules and policies have been complied with. Out of interest, if you ever hear lawyers earnestly and learnedly debating “The Turquand Rule”, this is what they are talking about.

Beware – our law on this both complex and fraught with grey areas, and the notes above are just a summary of some general legal principles. Insist on directors you contract with producing written proof of authority (a formal company resolution to start with) and take legal advice on your particular circumstances.