Given the language of Sections 116(7)(a) and 116(8) of the Companies Act any registered mortgage bond in favour of a third-party lender (such as a Bank) and in existence prior to the amalgamation date cannot be transferred by endorsement in terms of Section 3(1)(v) of the Deeds Registries Act as that mortgage bond is not the “property” of the amalgamating company and instead is the “property” of the third-party lender. A mortgage bond can only afford real security to the third-party lender if prior to the amalgamation date a substitution of debtor or a new mortgage bond is registered in favour of the third-party lender.

Section 116 of the Companies Act 71 of 2008 (“the Companies Act”) regulates the merger and amalgamation of companies and the consequences thereof.

More particularly –

•      Section 116(7)(a) of the Companies Act states that –

……….

“(7) When an amalgamation or merger agreement has been implemented ‑

(a) the property of each amalgamating or merging company becomes the property of the newly amalgamated, or surviving merged, company or companies; 

…….

in accordance with the provisions of the amalgamation or merger agreement, or any other relevant agreement, but in any case subject to the requirement that each amalgamated or merged company must satisfy the solvency and liquidity test, and subject to subsection (8), if it is applicable.“

and

  ……….

“(8) If, as a consequence of an amalgamation or merger, any property that is registered in terms of any public regulation is to be transferred from an amalgamating or merging company to an amalgamated or merged company, a copy of the amalgamation or merger agreement, together with a copy of the filed notice of amalgamation or merger, constitutes sufficient evidence for the keeper of the relevant property registry to effect a transfer of the registration of that property.”

In turn, Section 3(1)(v) of the Deeds Registries Act 47 of 1937 (“Deeds Registries Act”)  provides that “[t]he registrar shall, subject to the provisions of this Act make, in connection with the registration of any deed or other document, or in compliance with the requirements of any law, such endorsements on any registered deed or other document as may be necessary to give effect to such registration or to the objects of such law”.

In the writer’s opinion –

• Section 116(7) (a) of the Companies Act has the effect of creating the amalgamation notice filed with the Companies and Intellectual Property Commission (CIPC) as the causa for the registration of transfer of immovable property, which when read with Section 116(8) of the Companies Act and   Section 3(1)(v) of the Deeds Registries Act means that the Registrar of Deeds is permitted by virtue of a simple application filed with the Registrar of Deeds to endorse such transfer of immovable property (“endorse” or “endorsement”) in terms of Section 3(1)(v) of the Deeds Registries Act instead of requiring a full transfer by way of the usual power of attorney and deed of transfer. However, the endorsement process does not exclude the requirement for a transfer duty receipt or exemption certificate in terms of the Transfer Duty Act 40 of 1949 (“Transfer Duty Act”). Nor does the endorsement exclude the requirement for a clearance certificate in terms of Section 118 of the Local Government: Municipal Systems Act 32 of 2000 (“Municipal Systems Act”);

• Section 116(7)(b) of the Companies Act has the effect that the amalgamated company becomes liable for the “obligations” of the amalgamating company. The “obligations” referred to therein are nothing other than the personal obligations under the contract (for example, a loan agreement or guarantee) which is the causa for the security (ie. the mortgage bond);

• The word “property” as referred to in Section 116(8) of the Companies Act can only be interpreted to mean immovable property owned by the amalgamating company and any mortgage bond registered in favour of an amalgamating company. A mortgage bond registered over immovable property of an amalgamating company in favour of a third-party lender (such as, for example, a bank) is certainly not the “property” of the amalgamating company, but instead is the “property” of the third-party lender.

• Sections 116(7)(a) and 116(8) of the Companies Act read with Section 3(1)(v) of the Deeds Registries Act authorizes the Registrar to deal with the transfer of “property” which is owned by the amalgamating property by way of endorsement. It does not authorize the Registrar to endorse a third-party mortgage bond.

Unfortunately, in Chief Registrar’s Circular (“CRC”) No 28 of 2013, the Chief Registrar of Deeds (“Chief Registrar”) adopted the view and practice that mortgage bonds registered in favour of third-party lenders were included in the word “property” and could be simply endorsed without the need for either (i) the cancellation of the existing bond and registration of a new bond; or (ii) the substitution of the debtor under the existing bond. In addition, the Chief Registrar registered the endorsement transfer of immovable property without requiring a transfer duty receipt or exemption certificate and without requiring a clearance certificate.

Thus, the Chief Registrar effectively ignored the provisions of the Transfer Duty Act and the Municipal Systems Act. Section 116 of the Company’s Act does not override the Transfer Duty Act and nor does it override the Municipal Systems Act.

During 2022, the writer acting on behalf of a bank, made an appeal to the Registrar of Deeds at Pretoria against its practice of the endorsement of third-party mortgage bonds as described above on the basis that because of this practice the bank’s security under the particular mortgage bonds would effectively be nullified and lost.

The Registrar of Deeds at Pretoria ruled against the appeal. As a consequence, the writer, acting on behalf of the particular bank, made an appeal to the Chief Registrar of Deeds against the ruling made by the Registrar of Deeds at Pretoria.

The Chief Registrar of Deeds on the appeal, and advised by its internal lawyers, concluded that its prior practice of (i) endorsement of third-party mortgage bonds was incorrect on the basis that a mortgage bond in favour of a third-party lender is not the “property” of the amalgamating company, and that they are the “property” of the third-party lender; and (ii) the endorsement of a transfer of immovable property requires a transfer duty receipt or exemption certificate as well as a clearance certificate.

As a result the Chief Registrar of Deeds repealed CRC 28 of 2013 and issued CRC 1 of 2022 in its place.

In the writer’s opinion, when amalgamation agreements are drafted, the draftsperson should include a condition precedent in that agreement to the effect that prior to the amalgamation date the amalgamating and amalgamated company will either (i) cancel the existing bond and register a new bond; or (ii) register a substitution of the debtor under the existing bond in terms of Section 57 of the Deeds Registries Act.

Banks need to ensure that their security under a mortgage bond is properly preserved prior to giving consent to an amalgamation being effected by any borrower company.

It may be just a matter of time when mortgage bonds “endorsed” by the Deeds Registries in terms of Section 3(1)(v) of the Deeds Registries Act, and the since repealed CRC 28 of 2013, will be challenged by creditors of the amalgamated company.

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Our courts have once again sounded the alarm to all trustees and parties transacting with trusts to have regard to the provisions of the trust deed and ensure that the manner in which decisions are taken are in accordance with the trust deed.

In the recent case of Shepstone & Wylie Attorneys v Abraham Johannes de Witt N O & Others[1], the Supreme Court of Appeal was tasked to determine the validity and enforceability of a resolution passed by a majority of trustees when authorising the signature of a deed of suretyship. This case has highlighted firmly entrenched legal principles in our Law of Trust which dictate that the trust deed defines the framework in which the trust must operate, and the manner in which the powers and authority granted to the trustees may be exercised.

Given the prevalence of the use of trusts as an effective vehicle to manage and hold assets in property and commercial related transactions, it is important to take heed of the legal principles reaffirmed in this judgment, and the factors to bear in mind when dealing with trusts.

The facts of this case are significant in understanding why the deed of suretyship was declared invalid by the Court. In this matter, a majority of trustees of The Penvaan Property Trust (the “Trust”) signed a deed of suretyship in favour of Shepstone and Wylie Attorneys (the “Appellant”) for the personal indebtedness of one of the trustees of the Trust, Mrs Volker. After due notice was given to the trustees, the meeting of trustees took place in the absence of one of the trustees. Notwithstanding the absence of one of the trustees, the two trustees present at the meeting passed the relevant resolution authorising the signature of the deed of suretyship, and thereafter proceeded to sign the deed of suretyship in favour of the Appellant.

In terms of the deed of suretyship authorised by the majority of trustees, the Trust bound itself as surety and co-principal debtor in favour of the Appellant for the due payment of any and all amounts due by Mrs Volker to the Appellant in respect of any indebtedness or obligation arising from any cause whatsoever, including legal costs or disbursements.

The fundamental issue in dispute on appeal was whether the court a quo was correct in upholding the Trust’s defence and finding that the resolution taken to sign the deed of suretyship was invalid and of no force and effect, due to the fact that the resolution was passed by a majority of the trustees.

In arriving at its decision the court considered the applicable legal principles, specifically, that it is trite law that trustees are deemed to be the co-owners of the immovable property and other assets for the purposes of administration of a trust, and are only authorised to act through competent resolutions. Equally trite is the principle that the trustees must act jointly in taking decisions and resolutions for the benefit of the trust and beneficiaries thereof, unless a specific majority clause in the trust deed provides otherwise.

In determining whether the resolution in question qualified as competent, the court considered the salient provisions of the trust deed and the appendix thereto. In terms of the specific clause of the trust deed relied upon by the Appellant, in the event of any disagreement between the trustees, the majority shall prevail. In terms of the appendix to the trust deed, all decisions and resolutions are to be taken unanimously by the trustees, acting jointly in resolving to sign documents on behalf of the trust.

The court quoted various judgments enunciating the legal principle that trustees must act jointly, especially when trustees are required to take a decision involving the assets of the trust. The court referred to the decision of the Supreme Court of Appeal in Land and Agricultural Development Bank of SA v Parker and Others[1], where it was held that when dealing with third parties, even if the trust instrument stipulates that the decision can be made by the majority of trustees, all trustees are required to participate in the decision making and each one has to sign the resolution. The court in Steyn and Others N N O v Blockpave (Pty) Ltd[2] further elaborated on this legal principle by stating that a trust operates on resolutions and not on votes.

In the court’s analysis of the arguments and legal principles applicable to this matter, the court reaffirmed that even when a trust deed provides for a majority decision, as in this instance where the decision to enter into the deed of suretyship was taken by two of the three trustees, the resolution itself must be signed by all the trustees. A majority of trustees may take a valid internal decision, but when dealing with third parties, a valid resolution that binds a trust externally must be signed by all trustees acting jointly on behalf of the trust.

The Court therefore held that the court a quo was correct in concluding that the trustees in this case did not act jointly. The resolution passed by the Trust was not an unanimous decision of the trustees, as one of the trustees did not participate in the decision. Therefore, neither the resolution signed in the absence of the one of the trustees authorising the conclusion of the deed of suretyship nor the deed of suretyship itself is valid and enforceable against the Trust.

The majority decision further noted that the where a trust deed requires trustees to act for the benefit of the trust, and for the purposes of conducting business for and on behalf of the trust, any decision to enter into a transaction or agreement for the personal benefit of a trustee or a beneficiary would be invalid.

Commentary

This case does not introduce any new legal principles, however, when dealing with trusts as often as one does in commercial and property transactions, the passing of the resolution in accordance with the terms of the trust deed by all the trustees acting jointly and unanimously can often be overlooked. This case serves as a reminder to all parties dealing with trusts, and specifically when contracting with a  trust or transacting with trust assets, to err on the side of caution and ensure that, notwithstanding a majority decision, all resolutions are passed unanimously by the trustees acting jointly and duly signed by all the trustees.  As demonstrated in this case, an invalid trust resolution invalidates an entire agreement, and as often quoted, “one cannot revive a nullity”. All parties, specifically financial institutions, should therefore heed the warning given by the court in this matter and ensure that the necessary due diligence is conducted prior to entering into a transaction with a trust, and ensure that the various legal requirements to ensure the validity of the decisions taken by trustees on behalf of a trust are satisfied. It is always best to seek further legal advice as to whether a trust may enter into a specific transaction in order to avoid the potential consequences of having a transaction or agreement being

[1] (1270/2021) [2023] ZASCA 74

[2] 2005 (2) SA 77 (SCA); [2004] 4 All SA 261 (SCA)

[3] 2011 (3) SA 528 (FB)

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In an unreported case[1] of the High Court of South Africa, Mpumalanga Division, Middelburg (“Court”), a number of owners of farm portions in rural areas (collectively, “Applicants”) brought an application (“Court Application”) against a number of local municipalities and the Registrar of Deeds at Mpumalanga (“Registrar of Deeds”). The Applicants attacked the constitutionality and validity of certain sections of municipal planning by-laws which prohibit the transfer of immovable property without a “SPLUMA certificate” having been issued by the local municipality under whose jurisdiction the particular property falls and prohibit the Registrar of Deeds from transferring property unless the lodged transfer documents include a “SPLUMA certificate”.

At the outset it’s important for the reader to note that the municipal planning by-laws of a municipality are framed in terms of the Spatial Planning Land Use and Management Act 16 of 2013 (“SPLUMA”). SPLUMA is an act of parliament and thus is a law of national application. Municipal by-laws need to be within the parameters of what SPLUMA lays down and cannot exceed the functional area of “municipal planning”.

The municipal planning by-laws of the particular local municipalities who were respondents in the Court Application are all very similar to each other. For simplicity, in this article we’ve chosen to look at Sections 74 and 76 of the Municipal Planning By-laws of the Govan Mbeki Local Municipality as the point of departure. The Govan Mbeki Local Municipality (“Municipality”) opposed the Court Application.

The relevant parts of Sections 74 and 76 of the Govan Mbeki Municipality By-law (collectively referred to as “Specific By-laws”) read as follows: –

“74. Restriction on Transfer and Registration

1) ….

2) No erf/erven and/or units in a land development area, may be alienated or transferred into the name of a purchaser, nor shall a certificate or registered title be registered in the name of the owner, prior to the municipality certifying to the Registrar of Deeds that-

a) all engineering services have been designed and constructed to the satisfaction of the municipality, including guarantees for services having been provided to the satisfaction of the municipality as may be required; and

b) all engineering services and development charges have been paid; and

c) ….

d) all conditions of the approval of the land development application have been complied with or that arrangements have been made to the satisfaction of the municipality for the compliance thereof within three months of having certified to the Registrar in terms of this Section that registration may take place; and

e) that the municipality is in a position to consider a final building plan; and

f) ….”

“76. Certification by Municipality

1) A person may not apply to the Registrar of Deeds to register the transfer of a land unit, unless the municipality has issued a certificate in terms of this Section.

2) The municipality may not issue a certificate to transfer a land unit in terms of any law, or in terms of this by-law, unless the owner furnishes the municipality with –

a) a certificate of a conveyancer confirming that funds due by the transferor in respect of the land have been paid;

b) proof of payment of any contravention penalty or proof of compliance with a directive contemplated in Chapter 9;

c) proof that the land use and buildings constructed on the land unit comply with the requirements of the land use scheme;

d) proof that all common property, including private roads and private places originating from the subdivision, has been transferred;

e) proof that the conditions of approval that must be complied with before the transfer or erven have been complied with; and

f) proof that all engineering services have been installed or arrangements have been made to the satisfaction of the municipality.”

The cumulative effect of the Specific By-laws is that in order for the Applicant to apply to the Municipality for a SPLUMA certificate, the Applicant is required to obtain –

• a rates clearance certificate in terms of Section 118 of the Local Government : Municipal Systems Act, 32 of 2000 (“Systems Act”) [3] which involves a lengthy period before the rates clearance certificate is issued. Once the rates clearance certificate has been issued it’s only valid for a period of sixty days from its issue date;[4]
• a zoning certificate in terms of the applicable land use scheme;
• an occupancy certificate in terms of the National Building Regulations and Building Standards Act, 103 of 1977 which involves an inspection of the buildings on the property by a building inspector of the Municipality to ensure that the buildings have been erected in accordance with building plans approved by the Municipality and the zoning applicable to the particular property as reflected in the zoning certificate. An occupancy certificate is only valid for three months.

The Specific By-laws prohibit a person from applying to the Registrar of Deeds to register a transfer of a property unless the Municipality has issued a certificate in terms of Section 76 (1) thereof, commonly known as a “SPLUMA certificate”. In addition, the effect of Section 76 (2) is that the Municipality itself cannot issue any other type of certificate, including a Section 118 Certificate, unless a SPLUMA certificate certifying compliance with all the elements in Section 76 have been complied with by the owner of the particular property.

The Registrar of Deeds, independently of the Municipality, also requires a SPLUMA certificate to be lodged with the transfer documents, failing which the transfer is rejected by the Registrar of Deeds. There is no act of parliament that requires this action by the Registrar of Deeds, who seems to have adopted it purely on the basis of an internal policy to accommodate the particular municipalities.

SOME OF THE ISSUES REQUIRED TO BE DETERMINED BY THE COURT

Before coming to a decision, the Court had to consider whether the Specific By-laws are unconstitutional and in connection therewith whether they –

• constitute an arbitrary deprivation of property as envisioned in Section 25(1) of the Constitution of the Republic of South Africa, 1996 (“Constitution”);
• exceed the functional area of “municipal planning” of the Municipality in that the Specific By-laws regulate transfer of property.

Whether the Specific By-laws are lawful and in connection therewith whether they are –

• an “incidental power” as envisaged in Section 156 (5) of the Constitution;
• authorised by SPLUMA;
• conflict with Section 118 of the Systems Act.

SOME OF THE FINDINGS OF THE COURT

Do the Specific By-laws infringe Section 25 (1) of the Constitution?

Section 25 (1) of the Constitution states that “No-one may be deprived of property except in terms of law of general application, and no law may permit arbitrary deprivation of property”.

In examining whether the effect of the Specific By-laws led to an arbitrary deprivation of property the Court quoted with approval  the judgment given in Mkontwana v Nelson Mandela Metropolitan Municipality & Another 2005 (1) SA 531 (C C) where the Constitutional Court found that “the right to alienate property is an important incident of its use and enjoyment” , but that “deprivation of property” within the meaning of Section 25 (1) of the Constitution only occurs if the particular law being challenged either fails to provide “sufficient reason” for the deprivation or is “procedurally unfair”.

Given the rural locality of the farm portions which constituted the properties owned by the Applicants, the requirements of the Specific By-Laws make it virtually impossible for the Applicants to obtain SPLUMA certificates as at the time buildings were erected on those properties and the buildings were first occupied the properties : (a)  were not within the jurisdiction of a municipal authority; (b) were not included in a town planning scheme  ; (c) were not required to be zoned and thus no zoning certificates could be obtained; and (d) building plans were not required .

The Court found that the Specific By-laws “constitute a substantial obstacle to alienation and a deprivation of property within the meaning of Section 25 (1) of the Constitution “.

Are the specific By-laws unconstitutional because they exceed the functional area of “municipal planning” and if so, could they still be lawful because they are an “incidental power” as envisioned in Section 156(5) of the Constitution?

The power of the national and provincial governments to make law in respect of local municipality matters is limited to the passing of framework legislation.  In turn, the power of local municipalities to make law is subject to the framework legislation. Any By-law which conflicts with the framework legislation (in this case SPLUMA) is invalid in terms of Section 156 (3) of the Constitution.

In it’s judgment, the Court quoted the following with approval from the judgment in Ex parte Western Cape Provincial Government & Others: In re DVB Behuising (Pty) Ltd v Northwest Provincial Government & Another 2001 (1) SA 500 – “The process of land registration is already a matter unequivocally dealt with in national legislation, namely the Deeds Registries Act …the national competence with regards to deeds registration (including registration of transfer of properties) is not a municipal function. In consequence a municipality may not regulate registration of transfer of properties. It is part of the plenary powers of the national legislature”.

The Court went on to find that the Specific By-laws are neither original powers of the municipalities, nor are they assigned to local municipalities in terms of applicable national or provincial legislation.

Before the Court could conclude that the Specific By-laws were unconstitutional it had to consider whether they are reasonably “necessary for, or incidental to, the effective performance of a municipality’s planning function” as envisaged in Section 156 (5) of the Constitution. The Court found that the specific By-laws were not reasonably necessary for nor incidental to the Municipality’s effective performance.

Thus, the Court found that the Specific By-laws are unconstitutional because they are inconsistent with Sections 25 and 156 of the Constitution.

The Court also concluded that since the SPLUMA does not authorise the Specific By-laws, there is no statute into which a municipal power for municipalities to regulate transfer of property can be read. The registration of transfer of property has been expressly regulated by the Deeds Registries Act, 47 of 1937. There is no room for an implied municipal power to regulate the Registrar’s statutory power to register transfer of properties.

Finally, the Court concluded that Section 76 (2) of the Specific By-laws, which has the effect that the Municipality itself cannot issue a Section 118 of the Systems Act Certificate without first having issued a SPLUMA certificate, is invalid as it conflicts with Section 118 of the Systems Act.

The judgment of the Court is being appealed by the Municipality

Footnotes

[1] IN THE HIGH COURT OF SOUTH AFRICA MPUMALANGA DIVISION, MIDDELBURG (LOCAL SEAT)  – CASE NUMBER: 2607/2019, In the matter between:  GLENCORE OPERATIONS SOUTH AFRICA (PTY) LTD (First Applicant), DUIKER MINING (PTY) LTD (Second Applicant), TAVISTOCK COLLIERIES (PTY) LTD (Third Applicant), UMCEBO PROPERTIES (PTY) LTD (Fourth Applicant), IZIMBIWA COAL (PTY) LTD (Fifth Applicant) and STEVE TSHWETE LOCAL MUNICIPALITY (First Respondent) GOVAN MBEKI LOCAL MUNICIPALITY (Second Respondent), EMALAHLENI LOCAL MUNICIPALITY (Third Respondent), THE REGISTRAR OF DEEDS, MPUMALANGA          (Fourth  Respondent), THE MINISTER: RURAL DEVELOPMENT AND LAND REFORM (Fifth Respondent), THE MINISTER: CO-OPERATIVE GOVERNANCE AND TRADITIONAL AFFAIRS (Sixth Respondent), THE MEMBER OF THE EXECUTIVE COUNCIL FOR AGRICULTURE, RURAL DEVELOPMENT, LAND AND ENVIRONMENTAL AFFAIRS, MPUMALANGA (Seventh Respondent) THE MEMBER OF THE EXECUTIVE COUNCIL FOR CO-OPERATIVE GOVERNANCE AND TRADITIONAL  AFFAIRS, MPUMALANGA PROVINCE (Eighth Respondent)

[2] This is a certificate required in addition to a Section 118 of the Systems Act certificate. It concerns information peculiarly within the knowledge of the Municipality, not the Conveyancer.

[3] Section 118 of the Systems Act has the effect that a Registrar of Deeds may not register the transfer of property except on production to that Registrar of a prescribed certificate issued by the municipality in which that property is located certifying that all amounts due, in the two years preceding the date of application for the certificate for municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties have been fully paid.

[4] The alignment of all the time frames required for compliance with each process set out above is mismatched (e.g. No sooner has the occupancy certificate been issued then the clearance certificate expires and vice versa) and practically makes it impossible for all the certificates to be issued and valid simultaneously.

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On 13 January 2020, the Minister of Mineral Resources and Energy published a draft Regulation for the Mandatory Display and Submission of Energy Performance Certificates for Buildings (hereinafter referred to as, Regulation) under section 19(1)(1) of the National Energy Act No 34 of 1998 (National Energy Act).

The Regulation was subsequently gazetted on 25 November 2022 and requires all registered owners of non‑residential buildings to publicly display an “energy performance certificate” at the entrance of all buildings by no later than 7 December 2025 (Deadline Date).

An energy performance certificate (Energy Certificate) must be issued by an accredited body (being the body accredited by the South African National Accreditation System, a member of the recognition arrangements of the International Laboratory Accreditation Cooperation or the International Accreditation Forum) indicating the energy performance of that particular building.

This certificate is issued in accordance with the South Africa National Standard SANS 1544: 2014 published by the South Africa Bureau of Standard in terms of the Standards Act No 8 of 2008.

For purposes of interpretation, the term “energy performance” has been defined in the Regulation as including the net energy consumed in kilowatt hours per square meter per year to meet the different needs associated with the use of a particular building.

These uses may include heating, hot water heating, cooling, ventilation and lighting but specifically excludes measured or assessed energy consumed by garages, car parks and storage areas as well as energy consumed by outdoor services.

In instances where land is owned, operated or occupied by a person or an entity which does not constitute an organ of state, such property owner, operator or occupier has until the Deadline Date to publicly display an Energy Certificate at the entrance of any building constructed on such land.

Section 3(2) of the Regulation requires an Energy Certificate to be displayed if the building in question ‑

• has a dominant occupancy classification in terms of Regulation A20 of the National Building Regulations under the National Building Regulations and Building Standards Act No 103 of 1977, published by the Minister of Trade and Industry (National Building Regulations) as “A1” (entertainment and public assembly), “A2” (theatrical and indoor sport), “A3” (places of instruction), or “G1” (offices); and
• is in operation to meet a particular need associated with the use of the building for a period of two years or longer, and has not been subject to a major renovation (being any changes to a building or structural changes that require planning approval from a relevant local authority in terms of the National Building Regulations and Building Standards Act) within the past two years of operation; and
• has a total net floor area of over 2,000m²

The above mentioned principles also apply to buildings constructed on land owned, operated or occupied by an organ of state (as defined in section 239 of the Constitution of the Republic of South Africa, 1996); provided that the total net floor area is over 1,000m².

Once an Energy Certificate has been obtained by a property owner, operator or occupier (as the case may be), a certified copy of same must, within three calendar months of the date of issuance of the certificate, be submitted to the South African National Energy Development Institute, established under section 7 of the National Energy Act (SANEDI).

An Energy Certificate will remain valid for a period not exceeding five years from the date of issuance. SANEDI has been tasked with maintaining a National Building Energy Performance Register, which must include the particulars of all valid Energy Certificates, whereas the Department of Mineral Resources and Energy has been tasked to monitor the display of Energy Certificates at the entrances of all non‑residential buildings.

Persons and entities who/which own, operate or occupy commercial buildings are encouraged to appoint an appropriately qualified professional to apply for and obtain an Energy Certificate and ensure that same is publicly displayed at the entrance of such buildings on or before the Deadline Date. The failure to publicly display such an Energy Certificate is an offence in contravention of the National Energy Act.

In this regard, section 20(1) of the National Energy Act provides that a person who contravenes or fails to comply with any provision of the National Energy Act shall be guilty of an offence and be liable on conviction to

1. a fine not exceeding R5,000,000 (five million Rand); and/or
2. imprisonment for a period not exceeding five years.

The Minister of Mineral Resources and Energy is empowered to amend the fine amount in order to counter the effect of inflation.

Parties to commercial property transactions may agree, in the underlying agreement, which party will be responsible for obtaining and publicly displaying an Energy Certificate at the entrance of a commercial building. By way of example, if commercial property is managed by a third party operator, the property owner may wish to include obtaining a Energy Certificate as a service to be rendered by the property manager.

In a landlord and tenant arrangement, the parties may also wish to contract on this obligation. Finally, where immovable property is being sold, the seller and the purchaser may agree on which party will be responsible to obtain the Energy Certificate prior to the transfer date, much like other property compliance certificates. Visit Real Estate.

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The COVID‑19 pandemic has had a devastating effect on the South African economy not least of all, the residential, commercial and industrial property markets. Property owning companies and individuals are falling victim to loss of income and there has been an upsurge in liquidations and insolvencies as a result. Property auctions have become the order of the day in an attempt to realise some return and minimise losses to creditors.

Upon the liquidation of a juristic person or the sequestration of a natural person, a question that arose recently was, as to how much the relevant municipality is entitled to claim from the insolvent estate for rates, taxes and utilities owing on a property, in order  to issue and to provide the conveyancers attending to the transfer of the property, with the required rates clearance certificate (“Certificate“).

As a general rule, section 118(1) of the Local Government: Municipal Systems Act No 32 of 2000 (“Municipal Systems Act“) provides that the Registrar of Deeds may not register the transfer of immovable property except on the production of a prescribed certificate issued by the relevant municipality, certifying all amounts that became due in connection with that property during the two years preceding the date of application for the certificate, have been fully paid. These amounts relate to municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties (hereinafter collectively referred to as, “Municipal Charges“).

In addition, section 118(2) of the Municipal Systems Act provides that in the case of the transfer of property by a trustee of an insolvent estate, the provisions of section 118 of the Municipal Systems Act shall be subject to section 89 of the Insolvency Act No 24 of 1936 (“Insolvency Act“). Although section 118(2) of the Municipal Systems Act refers to the transfer of property by a “trustee of an insolvent estate”, the Supreme Court of Appeal in the City of Johannesburg v Kaplan No and Another 2006 (5) SA 10 (SCA) (hereinafter referred to as, the “Kaplan Judgment“) found that a liquidator of a company or a close corporation are equally as liable to pay the charges referred to in section 118(1) as natural persons are. In this regard, the municipality’s need for protection is no more or less in one case than in the other. Accordingly, the court held that there is no rational ground for applying section 89 of the Insolvency Act to section 118 of the Municipal Systems Act in the context of the sequestration of an individual, but excluding it from the liquidation of a juristic person and to do so would “lead to an absurdity so glaring that the legislature could not have contemplated it”.

Section 89(1) of the Insolvency Act provides, inter alia, that all “taxes” form part of the costs of realisation. For purposes of interpreting this section, “tax” is defined in section 89(5) of the Insolvency Act as meaning “any amount payable periodically in respect of that property to the State or for the benefit of a provincial administration or to a body established by or under the authority of any law in discharge of a liability to make such periodical payments, if that liability is an incident of the ownership of that property“. In this regard, any “tax” which is or will become due on the immovable property being sold in respect of any period not exceeding two years immediately preceding the date of the sequestration of the estate in question and in respect of the period from that date to the date of the transfer of that property by the trustee of that estate, with any interest or penalty which may be due on the said tax in respect of any such period, shall form part of the costs of realisation.

The two-year period provided for in section 89(1) of the Insolvency Act differs from that provided for in section 118(1) of the Municipal Systems Act in that (i) the former relates to the relevant municipality’s secured claim for the payment of “taxes” for a period of two years prior to the date of liquidation; and (ii) the latter relates to the payment of Municipal Charges for a period of two years prior to the submission of an application for a Certificate required to be lodged in the deeds office as part of the conveyancing process giving effect to the transfer of immovable property.

The Supreme Court of Appeal in the Kaplan Judgment found that once a debtor has been liquidated, the position is as follows, provided the municipal debts are “taxes” as defined in the Insolvency Act:

(i) no property may be transferred unless the Certificate certifies full payment of municipal debts that have become due during a period of two years before the date of application for the Certificate;
(ii) the preference accorded by section 118(3) of the Municipal Systems Act in favour of the municipality over that of a holder of a mortgage bond is limited to claims which fell due during the period laid down in section 89(1) of the Insolvency Act (i.e. two years prior to the date of liquidation up to the date of transfer);
(iii) interest charged on the secured claim of the municipality is secured as if it were part of the municipality’s claim.

In the matter of Barnard NO v Regspersoon van Aminie en ‘n Ander 2001 (3) SA 973 (SCA)(hereinafter referred to as, the “Barnard Judgment“), the court held, inter alia, the starting point is to determine whether the municipality’s claim is for a “tax” in its ordinary sense and, only if the answer is positive, to apply the restrictive provisions of section 89 of the Insolvency Act. In this regard, the court stated it was of the view that property rates are “taxes” within the definition provided for in the Insolvency Act, and service charges which are a quid pro quo for a measured consumption are probably not.  This principle should be used as a guideline and consideration should also be given to the applicable by‑laws which govern the relevant municipality.

Consumption of water and electricity

Although utility charges fall within the definition of Municipal Charges as it relates to the provision of services by the municipality, the consumption thereof falls outside of the definition of “taxes” as provided for in the Insolvency Act as stated in the Barnard Judgment. Accordingly, it will be necessary to comply with the provisions of section 118 of the Municipal Systems Act in respect of all service charges levied by a municipality relative to the provision of water and electricity, but excluding the actual consumption thereof.

Section 10(1) as read together with section 11(d) of the Prescription Act No 68 of 1969 (“Prescription Act“) provides, inter alia, a debt shall be extinguished by prescription after the lapse of a period of three years. In order to determine whether such a period has lapsed, consideration must be made as to when the debt became due for purposes of calculating when prescription started running. In this regard, section 12 of the Prescription Act provides that:

(i) prescription shall commence to run as soon as the debt is due;
(ii) if the debtor willfully prevents the creditor from coming to know of the existence of the debt, prescription shall not commence to run until the creditor becomes aware of the existence of the debt; and
(iii) a debt shall not be deemed to be due until the creditor has knowledge of the identity of the debtor and of the facts from which the debt arises, provided a creditor shall be deemed to have such knowledge if he could have acquired it by exercising reasonable care.

In the matter of Argent Industrial Investment (Pty) Ltd v Ekurhuleni Metropolitan Municipality 2017 (3) SA 146 (GJ), the facts were such that the municipality made a submission that a debt in respect of the consumption of water only became due after the municipality’s reading of the installed meter and the subsequent issuing by the said municipality of an invoice to the debtor. The court rejected this argument as this would “entitle the respondent to ignore its constitutional duties, which include debt collection, indefinitely”. Furthermore, the court emphasised it is the municipality’s duty to take reasonable steps to collect what is due to it. In this regard, the court held that any obligation to pay charges for the actual consumption of water and electricity older than three years from the date of invoice had extinguished by prescription due to the municipality’s failure to take reasonable steps to collect what was due to it.

In conclusion, the municipalities are:

(i) entitled to claim payment of all rates, taxes and property charges which fall within the definition of Municipal Charges for a period of two years preceding the date of application for the Certificate as contemplated in section 118(1) of the Municipal Systems Act, together with all interest accrued on such amounts regardless of the solvency status of the relevant person; and
(ii) secured for the payment of “taxes”, as defined in section 89(5) of the Insolvency Act, for a period of two years prior to the date of liquidation, together with all interest accrued on such amounts, in preference to any holder of a mortgage bond.

Insofar as charges relative to actual consumption of water and electricity are concerned, municipalities have a claim in relation thereto provided the amounts have become due and the debtor has been requested to make payment thereof. Any failure on the part of the municipality to take reasonable steps to collect these amounts, may result in the municipality’s claim being extinguished by prescription, after the lapse of a period of three years.

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1. On 15 March 2020 a national state of disaster was declared in terms of section 27 of the Disaster Management Act No 57 Of 2002 (“Act“) by the South African government (“Government“). On 18 March 2020, regulations were published by the Department of Co‑operative Governance and Traditional Affairs, in terms of section 27(2) of the Act, to provide the procedures to be followed during the period of the national lockdown (“Regulations“).
   
2. On 23 March 2020 President Cyril Ramaphosa, in order to combat the Covid‑19 pandemic, announced a nationwide lockdown in South Africa for 21 days (“Lockdown“). The Regulations commenced at midnight on Thursday, 26 March 2020, and were originally in effect for 21 days until midnight on Thursday, 16 April 2020. After the commencement of the Regulations there have been four amendments made to the Regulations, the latest being on 16 April 2020, which extended the Lockdown until midnight 30 April 2020 (“Lockdown Period“).
   
3. On 29 April 2020, new regulations were published by the Department of Co‑operative Governance and Traditional Affairs, in terms of section 27(2) of the Act, which provide for the different alert levels (“New Regulations“) to ease South Africa phase by phase into the re-opening of its economy. The New Regulations came into effect on 1 May 2020. In terms of regulation 3(1) of the New Regulations, chapter 1 and 2 of the New Regulations will apply for the duration of the national state of disaster.
   
4. In addition, in terms of regulation 2 of the New Regulations, the Regulations have been repealed. However, despite the repeal, for the purposes of the disposal of any investigation, prosecution or any criminal or legal proceedings the Regulations will still apply.
   
5. The Regulations provided, amongst other matters, for the restriction of the movement of people and certain goods. Regulation 11B(1)(a) provided that “for the period of lockdown every person is confined to his or her place of residence, unless strictly for the purpose of performing an essential service, obtaining an essential good or service, collecting a social grant, pension or seeking emergency, life-saving, or chronic medical attention“.
   
6. Regulation 11B(1)(a), the counterpart of which in the New Regulations is New Regulation 16, provides that every person is confined to his or her place of residence and may only leave their place of residence to perform an essential or permitted service, as specified in the New Regulations. During ‘Alert Level 4’, the New Regulations now permit people to walk, run or cycle between the hours of 06h00 and 09h00, within a 5 kilometre radius of their place of residence, provided that this activity is not done in organised groups.
   
7. Both Regulation 11B(1)(a) and the New Regulation 16, limit our rights to freedom of movement and residence provided for in section 21 of the Constitution of the Republic of South Africa, 1996 (“Constitution“). In terms of section 21 everyone has the right to freedom of movement and every citizen has the right to enter, to remain in and to reside anywhere in the Republic (“Section 21 rights“).
   
8. However, in terms of section 36 of the Constitution the rights in the Bill of Rights (under which section 21 falls), may be limited in terms of a law of general application provided that the limitation is reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom taking into account various relevant factors. In the recent court decision of Mohamed and Others v President of the Republic of South Africa and Others (21402/20) [2020] ZAGPPHC 120 (30 April2020) , in relation to the use of places of religious worship and the movement to and from places of religious worship under the authority of a permit issued by the head of the religious institution, the court found that the restrictions imposed by the Regulations are neither unreasonable nor unjustifiable.
   
9. We have received a number of queries as to the applicability of the Regulations, in particular Regulation 11B(1)(a) and New Regulation 16, to common use areas in sectional title schemes and residential communities governed and managed respectively by the Sectional Titles Schemes Management Act No 8 of 2011, property and homeowners associations’ constitutions or memoranda of association.

Sectional Title Schemes (“Sectional Schemes”) as well as Property and Home Owners Associations (collectively “HoA’s”)

10. In terms of the Sectional Titles Act No 95 of 1986 (“Sectional Titles Act“) a unit is defined as “a section together with its undivided share in the common property apportioned to that unit in accordance with the quota of that section“. Section 16 of the Sectional Titles Act provides that the common property shall be owned in undivided shares by the owners of sections and further states that a section and its undivided share in the common property shall together be deemed to be one unit.
    
11. This raises the question as to whether or not the term ‘place of residence’, as used in the Regulations and the New Regulations, is inclusive of the common property in a Sectional Scheme or if it only applies to the physical dwelling section. The Regulations, and the New Regulations, do not provide a definition of ‘residence’ and therefore the ordinary dictionary meaning must be considered. Dictionary.com defines ‘residence’ as being “the place, especially the house, in which a person lives“. Other dictionaries define ‘residence’ in a similar manner. Thus, it appears that the word ‘residence’ only applies to the actual house or apartment in which a person lives and does not include the common use areas surrounding the house or apartment.
    
12. The Community Schemes Ombud Service (“Ombud Service“), under section 3 of the Community Schemes Ombud Service Act No 9 of2011 (“CSOS Act“), issued a directive on 21 April 2020 (“Ombud Directive“) which ‘community schemes’ are obliged to implement. In terms of the Ombud Directive a ‘community scheme’ includes Sectional Schemes and home or property owners’ associations.
    
13. The Ombud Service is empowered under section 36 of the CSOS Act to issue practice directives in relation to any matter pertaining to the operation of the Ombud Service and community schemes. The directives published by the Ombud Service are binding on community schemes. In terms of section 34(1)(b) of the CSOS Act any person, which includes ‘scheme executives’, (described in the Ombud Directive as being trustees of Sectional Schemes and members or directors of home or property owners’ associations), who fails to comply with a directive issued under the CSOS Act is guilty of an offence and is liable on conviction to a fine or imprisonment not exceeding five years or to both.
    
14. In terms of the Ombud Directive “owners and occupiers (including tenants) living in community schemes may only use the common property (such as the common driveway shared by all residents in the scheme or essential common property facilities such as the laundry room or the refuse removal area) insofar as access is for necessary and/or essential use” and “are not permitted to walk around or perform any sort of activity on the common property, unless such activity is classified as essential by the scheme executives irrespective of each and every unit owner’s share in the common property in relation to the participation quota.“.
    
15. The Ombud Service has issued the Ombud Directive to enforce the Regulations. This directive provides that “these implementation measures… do not require prior CSOS approval insofar as they enhance compliance with the Regulations, are fair and of general application to all residents (which include owners and occupiers) and are not prejudicial to any person residing within the community scheme.” The Ombud Directive further provides that “transgression of the Regulations may result in a fine or imprisonment as it is a criminal offence to breach these Regulations as stipulated in Section 11 of the Regulations issued in terms of Section 27(2) of the Disaster Management Act, 2002.“
    
16. As the law stands, community schemes are required to operate within the confines of the Ombud Directive, the Regulations and the New Regulations. Irrespective of whether or not community schemes have made provision in their constitutional documents and rules for inclusion of the Regulations, the New Regulations or the Ombud Directive, the latter will, for the duration of the Lockdown and national state of disaster, override anything to the contrary contained in the management and conduct rules of a Sectional Scheme or the constitution, MOI or rules of a HoA.

Policing, Enforcement and Penalties

17. In terms of Regulation 11G any person who contravenes Regulation 11B(1)(a) “commits an offence and is, on conviction, liable to a fine or to imprisonment for a period not exceeding six months or to both such fine and imprisonment“. These Regulations are mirrored in New Regulations 16(1) and (2) and 31(2), which apply during ‘Alert Level 4’.
    
18. The Minister of Police, Bheki Cele (“Minister“) issued a statement, on 25 March 2020, saying that the “police will be responsible to ensure the restriction of movement of persons and goods” and that “anyone found to be in contravention of the Regulations, shall be found guilty and on conviction, will be liable to a fine, or imprisonment for a period not exceeding six months, or both“. The Minister has requested that any infringement of the Regulations be reported to the South African Police Service.
    
19. In conclusion, irrespective of what is stated in the management and conduct rules of a Sectional Scheme or in the constitution, MOI or rules of a HoA, Sectional Schemes and HoA’s are obliged for the duration of the Lockdown to follow the Regulations, the New Regulations and the Ombud Directive.

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There has been some confusion created by recently published press articles about the requirement to have a “SPLUMA certificate” referred to in section 53 of the Spatial Planning and Land Use Management Act No 16 of 2013 (“SPLUMA“) for purposes of giving effect to the transfer of immovable property. The articles suggest that all property transfers require a SPLUMA certificate and that such a certificate is a brand new requirement without precedent. In reality, only some property transfers require a certificate issued in terms of section 53 of SPLUMA (“SPLUMA Certificate“) and similar certificate requirements already existed under older legislation even before the enactment of SPLUMA.

Section 53 of SPLUMA states that, “… the registration of any property resulting from a land development application may not be performed unless the municipality certifies that all the requirements and conditions for the approval have been complied with.“

For purposes of interpreting section 53 of SPLUMA, it is necessary to consider the definition of “land development” contained in section 1 of SPLUMA, which lengthy definition includes, “…the change of use of land, including township establishment, the subdivision or consolidation of land…“. A land development application includes an application in relation to the aforegoing. Thus, a SPLUMA certificate is required where (i) any new erf’s title deed is being applied for or any such erf is being transferred in a new township; or (ii) any new subdivided erf’s certificate of registered title is being applied for or a new erf resulting from a subdivision is being transferred; or (iii) any new certificate of consolidated title is being applied for or a new erf resulting from the consolidation of two or more erven is being transferred (collectively, in this article referred to as “New Erf“).

SPLUMA sets up a national framework for spatial planning and land use management and directs municipalities to determine the procedures relative to the approval of a land development application. In this regard, section 54 of SPLUMA enables the Minister of Rural Development and Land Reform to publish regulations in terms of SPLUMA and, in terms of Regulation 14 of SPLUMA, a municipality is obliged to determine the procedures relevant to land development applications. To this end, the City of Johannesburg (“COJ“) published the City of Johannesburg Metropolitan Municipality Municipal Planning By‑Law (“COJ By‑Law“) as required under the provisions of SPLUMA.

Although a SPLUMA Certificate is required in terms of the provisions of SPLUMA, the specific conditions and requirements to be met in order for such a certificate to be issued by a municipality are set out in the particular municipality’s by‑laws. By way of example, we will look at the relevant provisions of the COJ By‑Law which requires certain certificates to be issued by the COJ and/or written consent to be obtained from the COJ in respect of the transfer of the following New Erven –

• a New Erf in a new township (section 29(1)(d) of the COJ By‑Law);
• a New Erf resulting from a subdivision of another erf (section 33(1)(a) read together with section 34(5) of the COJ By‑Law);
• a New Erf resulting from the consolidation of two or more erven (section 33(1)(b) read together with section 34(6) of the COJ By‑Law); and
• the registration of a sectional title scheme on any property (section 53 of the COJ By‑Law).

The abovementioned provisions of the COJ By‑Law restrict the powers of the Registrar of Deeds (“Registrar“) to register a new title deed (certificate of registered title or a certificate of consolidated title) or a deed of transfer in respect of a New Erf unless the municipality has certified that certain requirements and conditions stipulated by the municipality have been complied with.

The following table summarises the essential requirements and conditions to be met by a property owner in order to successfully obtain a certificate from the COJ in terms of the relevant provisions of the COJ By‑Law ‑

The concept of a certificate being required to be issued by a municipality to permit the transfer of a New Erf in the deeds registry is not a new one. Even before the commencement of SPLUMA, under the different provincial town‑planning ordinances, similar certificates and consents were required. By way of two examples ‑

1. in terms of section 82(1) of the Town‑Planning and Townships Ordinance No 15 of 1986 (“Old Ordinance“), before the transfer of a New Erf in a new township could be registered in the Deeds Registry, the municipality was required to certify that it would be able to provide the relevant erf with the appropriate engineering services as it deemed necessary and that it was prepared to consider an application for the approval of a building plan in respect of the particular erf (“Old Section 82 Certificate“). The new section 29(1) of the COJ By‑Law is very similar to the Old Section 82 Certificate; and
2. insofar as subdivisions of erven were concerned, Regulation 38 of the Old Ordinance (“Old Regulation 38“) provided that the property owner had to have the power of attorney in respect of the transfer endorsed by the municipality confirming that the property owner had complied with the conditions imposed or that arrangements (usually a guarantee) in respect of such compliance had been made to the satisfaction of the municipality. The Old Regulation 38 certification is almost identical to the new one set out in section 34(5) of the COJ By‑Law.

In conclusion, only a New Erf requires a SPLUMA Certificate to be obtained from the municipality for purposes of registering a new title deed in respect thereof or for purposes of registering the transfer of a New Erf and the specific requirements to be complied with are set out in each municipality’s by‑laws. No such certificate is required in respect of any property which is not a New Erf.

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The Gauteng Division of the High Court of South Africa declared section 118(3) to be unconstitutional and invalid to the extent that the charge can be transferred from one owner to a new owner. This declaration of unconstitutionality must be confirmed by the Constitutional Court. The Tshwane municipality cross appealed the matter prior to its arrival at the Constitutional Court.

The Constitutional Court held that the section was not unconstitutional if it was interpreted correctly. The correct interpretation provided by the court is one where the charge on the property is not transferred from a previous owner to a new owner.

Charge on the property refers to any municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties.

In Jordaan, the Constitutional Court joined together three similar matters, the applicants in all of the matters were owners, or corporations acting on behalf of the owners, of property in Tshwane and Ekurhuleni. In each case the recent transferee had complained that the relevant municipality had suspended the provision of municipal services and refused to conclude a consumer services agreement until the historical debts pertaining to the immovable property had been satisfied.

SUPREME COURT OF APPEAL

In previous judgments the Supreme Court of Appeal (“SCA”) found that the new owner of an immovable property could be held liable for the historical debt relating to that property.

In City of Tshwane Metropolitan Municipality v Mathabathe and Another^[2] the SCA found that the municipality erred in assuming that upon registration of a transfer it lost its rights to claim under the Act. The SCA stated that section 118(3) leads to, “the security provided by the subsection amounting to a lien having the effect of a tacit statutory hypothec”.^[3] The combined effect of which was that a claim for a charge on the property  by the municipality was a preferential claim to any other creditor and could be transferred to the new owner when a property was sold.

In Tshwane City v Mitchell^[4] the SCA confirmed that section 118(3) created a statutory hypothec over the immovable property in favour of a municipality for payment of historical debts. The statutory hypothec was held not to be extinguished when the property in question was transferred from one owner to another. The SCA also specifically stated^[5] that it did not matter if the sale was pursuant to a sale in execution, public auction or by way of private treaty.

CONSTITUTIONAL COURT

In Jordaan, the Constitutional Court found that it was not necessary to declare section 118(3) to be unconstitutional as the section was capable of being interpreted in a manner that was not outside of the boundaries of the Constitution or its principles.^[6]

The court held that when a charge upon a property is capable of being transferred from one person to another it is a requirement that the charge is registered in the Deeds Office. As section 118(3) does not require the charge to be registered or noted on the deeds registry, the charge can only be satisfied by the current owner and cannot be transferred to the new owner.

A municipality had sufficient time and numerous means to proceed against the previous owner in order to recover an outstanding charge. The municipality is notified of an impending sale in terms of section 118(1) of the Act, as a municipality is required to provide a clearance certificate which confirms that all municipal charges have been paid for the preceding two year period. Upon receiving a request for such a certificate a diligent municipality would surely attempt to recover any charges outstanding in terms of the property.

The court held that the charge on the immovable property against the existing owner, and the preference for a municipality’s charge against the existing owner over the claim of a mortgagee against such an owner, when coupled with the warning that a municipality receives by the request for a clearance certificate in terms of section 118(1), provides sufficient opportunity for the municipality to reclaim any outstanding amounts from a would be seller before the transfer of an immovable property occurs.

As a last resort, if the municipality is unable to recover outstanding charges from a seller before a sale occurs, the municipality can apply for an interdict preventing the transfer of the immovable property until the seller satisfies the outstanding charges.

The court stated that allowing a debt to transfer with the property from an historical owner to a new owner would amount to an arbitrary deprivation of property which would violate section 25(1) of the Bill of Rights. As a result section 118(3) would have to be interpreted in a way that this could not occur. The court provided the correct interpretation of the section as a declaratory portion of the order and stated that; “upon transfer of a property, a new owner is not liable for debts arising before transfer from the charge upon the property under section 118(3).”^[7]

The court also highlighted the fact that a municipality has certain duties to perform. One of which is a duty to do everything possible to reduce the amounts owing to it by timeously collecting all monetary amounts that are due and payable to it, and by implementing credit controls and debt collection policies a municipality would make this task easier. Another is a duty to provide services to its residents. A municipality which allows the transfer of an immovable property to take place and then refuses to open a new account for the new owner to receive such services until they satisfy any charge on the property pertaining to the immovable property is not providing any services to that new owner.

OUTCOME OF THE JUDGMENT

A purchaser of an immovable property is protected from a claim by a municipality for any charge on the property pertaining to the immovable property.

Section 118(3) of the Act still applies, and a municipality can proceed with a claim against a current owner of a property at any time before the debt prescribes (30 years). Such a claim will rank in preference to that of a mortgage bond registered over the property.

In terms of section 118 of the Act, a municipality is entitled to claim outstanding debt from the seller for a period of two years prior to being obliged to issue a certificate, however, a municipality is entitled to prevent a transfer of an immovable property by applying for an interdict preventing the transfer before the settlement of the charge on the property by the seller.

The municipality will not lose the claim against the seller if the property is transferred, but rather loses the security for the claim provided by the statutory hypothec over the property, as this security cannot be transferred to the new owner. In a scenario where a municipality is owed outstanding charges which are older than two years, the municipality would be entitled to claim the outstanding amount which is older than two years from the seller, but would have to do so on an unsecured basis.

[1] [2017] ZACC 31.

[2] 2013 (4) SA 319 (SCA).

[3] Ibid p325.

[4] 2016 (3) SA 231 (SCA).

[5] Ibid p238, “No distinction can therefore be drawn between property sold either at a sale in execution or in a private sale when considering the question whether the hypothec created by s118(3) survives transfer.”

[6] See University of Stellenbosch Legal Aid Clinic and Others v Minister of Justice and Correctional Services and Others 2016 (6) SA 596 (CC) p639 where the learned Judge Cameron said, “Since Hyundai, it has been gold-plate doctrine in this court that judges must embrace interpretations of legislation that fall within constitutional bounds over those that do not, provided that the interpretation can be reasonably ascribed to the section. Where a legislative provision is reasonably capable of a meaning that places it within constitutional bounds, it should be preserved. Only if this is not possible, this court has held, should resort be had to the remedy of notional severance.”

[7] Jordaan and Others v City of Tshwane Metropolitan Municipality and Others [2017] ZACC 36.

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A traffic standstill is rarely the result of retail specials; however, on 28 April 2016 the greater Johannesburg area had a gridlock on major highways on the opening day of a new mall. Various real estate developments are expanding the larger metropolitan cities of South Africa and investment is growing in the real estate industry. Specialised investment vehicles or products have been developed internationally and locally, and one such investment vehicle is the Real Estate Investment Trust (“REIT”).

INTRODUCTION

On 13 May 2016 the South African Revenue Service (“SARS”) released a draft interpretation note on the taxation of REITs and controlled companies. One of the four elements to ensure the efficacy of a tax according to Adam Smith is certainty, meaning a taxpayer can determine with ease what amounts are taxable, the applicable tax rate, and the reason for the particular type of tax. The taxation of REITs has prior to the legislation to which this draft interpretation note applies, and even to the new legislation, been a matter of interpretation by tax advisers, academics, and SARS of the various provisions in each factual circumstance. The interpretation included the applicability of various provisions such as the corporate rollover relief to REITs. Taxpayers have also been able to apply for tax rulings if a clear interpretation was required prior to concluding a transaction. The interpretation note once finalised will provide the certainty needed in the alignment of tax policy with revenue growth for the fiscus and economic development.

On the introduction of the section to create a unified taxing system for real estate investment vehicles such as REITs, Treasury indicated in the Explanatory Memorandum to the Taxation Laws Amendment Bill, 2012, that there was a growing investor demand to invest in real estate investment vehicles and that the special features of a REIT made it a preferred investment vehicle.

Section 5 of the Tax Administration Act states that a practice generally prevailing is a practice set out in an official publication regarding the application or interpretation of a tax Act. An interpretation note does not enjoy equal weighting with a practice note, however it is an official publication regarding the interpretation of a tax Act. The draft interpretation note on REITS will become an official publication once published with a date subsequent to conclusion of the public consultation process after the end of July 2016.

The rationale for creating the REIT structure was to ensure that the taxing of returns made on these investment vehicles did not require an evaluation of substance over form of the returns on investment and that all investment vehicles were subject to regulation. The special features of a REIT are the income generated from the compulsory annual distribution, of the majority of profits, similar to interest on a loan. In addition a REIT provides the ability to raise debt against the rental income generated by the underlying immovable property.

A REIT is defined as a resident company that is listed on an exchange with its shares classified as a REIT as defined in the JSE Limited Listing Requirements. A controlled company is defined as a subsidiary of a REIT. The Explanatory Memorandum raised that although the term REIT suggests the legal form of a trust it may also take the form of a company. A portfolio of a collective investment scheme in property may also qualify to be deemed a company if it meets all the other requirements to be considered a REIT.

To qualify as a controlled company, in essence the REIT needs to directly or indirectly hold 50% or more of the voting rights in the controlled company and have the ability to govern the financial and operating policies of the controlled company so as to obtain benefit from its activities. For controlled companies as the IFRS subsidiary definition includes a trust, a controlled company may also be a trust. An associated property company is one which is held at least 20% by a controlled company or a REIT.

Prior to the REIT structure, there were two investment vehicles providing similar benefits. The first type of investment was termed a Property Unit Trust (“PUT”) and the second type was termed Property Loan Stock (“PLS”). Investors in a PUT would hold units in the trust and distributions would be taxed as ordinary revenue in the hands of investors. Investors in a PLS would hold a share in the company and a debenture, with virtually all of the value attributable to the debenture, and interest on the debentures would be taxed in the hands of the investors. Only the PUT was subject to Financial Services Board (“FSB”) regulation. Investors in PLS were therefore not afforded the protections that existed for PUT investors and enjoyed interest income which was analogous to a dividend in substance. The tax policy decision was to tighten controls and take advantage of the growth in the REIT investment market for South African property companies and the development of industrial and commercial property.

GENERAL TAXATION PRINCIPLES

The general taxing principle of a REIT is the flow through principle so that income and gains are taxed in the hands of the investor and not in the REIT. Amounts received in respect of financial instruments by a REIT or a controlled company are revenue. However receipts by a REIT in respect of the disposal of immovable property, a share or linked unit in a REIT or a property company (i.e. REIT or controlled company that holds 20% or more of the equity shares or linked units in the company and, in the previous year of assessment, 80% or more of the value of the assets of the company are directly or indirectly attributable to immovable property) are only revenue if they are held on revenue account. If the immovable property, share or linked unit is held as a capital asset the capital gain is exempt from CGT.

For SA resident shareholders in a REIT, whether they are natural persons, trusts, or companies, any dividend or interest income (deemed a dividend) does not qualify for the dividend exemption and is thus subject to normal tax. For non-resident shareholders any dividend or interest income (deemed a foreign dividend) is subject to dividends withholding tax (reduced where relevant by a double tax agreement).

A REIT or controlled company can make a distribution to its shareholders from income that in the prior year was comprised 75% or more of rental income or other income from specified property entities (“qualifying distribution”). In the year of incorporation a REIT needs to meet the 75% rule in respect of its current year gross income resulting from rental income. The REIT receives the qualifying distributions from a controlled company as “rental income”. A qualifying distribution by an associated property company is rental income in the hands of the controlled company or REIT.

Rental income is amounts received by or accrued to a REIT or controlled company, as follows:

• any amounts received by or accrued for the use of immovable property, including any penalty or interest charged on the late payment of such amount;

• any REIT dividend, excluding a share buy-back from a company that is a REIT at the time of the distribution of that dividend, but including interest paid on a debenture forming part of a linked unit held in a REIT;

• a qualifying distribution from a company that is a controlled company at the time of that distribution; and

• a dividend or foreign dividend from a company that is a property company at the time of that distribution.

In terms of deductions, the REIT is allowed a deduction of distributions and interest where the investment vehicle included a debenture portion linked to the units (i.e. PLS type investment vehicle). However deductions are only allowed where the REIT or controlled company made a qualifying distribution and remained a resident REIT or resident controlled company on the last day of that year of assessment. In other words, unlike ordinary companies, dividends to shareholders are deductible in determining taxable income.

Deductions are also limited to the taxable income before the inclusion of capital gains, any assessed loss carried forward and the distribution deduction. This ensures that the REIT or controlled company cannot create an assessed loss or increase an assessed loss carried forward by means of a qualifying distribution. Any qualifying distribution amount in excess of the deductible amount is forfeited.

No capital gain or loss is recognised, or no capital gains tax liability arises, in a REIT or controlled company on the disposal of immovable property, a share or linked unit in a REIT or a share in a controlled company. A REIT or controlled company cannot claim any capital allowances related to immovable property. A REIT or controlled company may still claim a depreciation allowance on assets excluding immovable property. The investors (shareholders) in a REIT will however need to include any capital gain or loss on the disposal of a share or linked unit in a REIT.

Where a REIT or controlled company is the vested beneficiary of a foreign trust, which is liable for tax in the country where it is established or formed, with no right of recovery of the tax by any person, then any foreign tax that the foreign trust is under an unconditional legal liability to pay will be available as a deduction against the income attributable to the REIT or controlled company. Any losses carried forward to a subsequent year of assessment do not qualify as a right of recovery of a tax. The foreign tax will have to be shown to be a tax on income that is substantially similar to a tax in terms of a South African tax Act. Interest, penalties, and fines are excluded from being considered taxes on income. Withholding taxes that constitute an advance payment of the foreign tax liability or that do not meet the abovementioned criteria will not be considered taxes on income.

REITs and controlled companies may deduct bona fide donations of up to 10% of their taxable income, after taking into account any deductions for foreign taxes, made to public benefit organisations that are authorised to provide certificates confirming the deductibility of donations. Any donations made in excess of the 10% limitation will be forfeited from being deductible.

A REIT or controlled company may be liable for capital gains tax on the disposal of assets that are not immovable property, a share or linked unit in a REIT or a share in a controlled company.

When a REIT or controlled company ceases to satisfy the requirements of their respective classifications, their year of assessment ends on that day and a new year of assessment begins on the following day. The taxing of the entity will thereafter follow the taxing principles of an ordinary trust, company, or collective investment scheme.

SPECIAL PROVISIONS

The interest on a debenture forming part of a linked unit that constitutes a hybrid debt instrument, or hybrid interest, is deemed a dividend in specie, is exempt from dividends tax but subject to income tax in the hands of the investor. The REIT or controlled company may be able to deduct the deemed dividend as a qualifying distribution.

The limitation of interest deductions on reorganisation or acquisition transactions using a formula applies to the interest on a linked unit issued by a REIT or controlled company from 31 December 2015.

The corporate rollover provisions in respect of substitutive share-for-share transactions apply where a share in a linked unit is disposed of and substituted for an ordinary share in the same REIT, controlled company, or property company.

The corporate rollover relief provisions applicable to companies in amalgamation transactions extend to a collective investment scheme that qualifies as a REIT (i.e. a PUT).

A REIT or controlled company does not qualify for the corporate rollover relief provisions applicable to unbundling transactions due to the unintended double taxation that would result.

There is no mention in the draft interpretation note of the following corporate rollover relief provisions: asset for share transactions, intragroup transactions or transactions relating to liquidation, winding up or deregistration. However, there seems to be no reason why these provisions cannot apply, at any rate to a REIT which is a company

The transfer of shares in a REIT is exempt from securities transfer tax. These exemptions do not extend to the transfer of shares in a controlled company which is not a REIT.

CONCLUSION

Interpretation Notes are not binding, however they provide taxpayers with an indication of the manner in which SARS will apply the taxation principles to particular types of income or amounts.

REITs provide a means of investing in immovable property and receiving annual income. The taxation of REITs takes place mainly at the level of the investor who receives dividends or interest income. The general taxation principles applied to REITs and controlled companies indicate why even though a REIT is a company it is taxed using the conduit principles of applied to trusts.

Increased clarity on the deductibility of foreign taxes, reorganisation and acquisition transactions and transfer taxes is welcomed. The absence of clarity on intragroup transactions for REITs and controlled companies does mean the draft interpretation note may change prior to becoming an official publication.

Immovable property is a major feature of national and international tax policy and therefore tax in this area will continue to develop encouraging investment and growing revenue for the fiscus.

The post REITS – some clarification of the taxation of investment vehicles in real estate in the form of REITS and controlled companies appeared first on Werksmans Attorneys.

INTRODUCTION

In the matter between City Tshwane Metropolitan Municipality v PJ Mitchell (38/2015) (2015) ZASCA, the court held that the right of the municipality to perfect its security in terms of the hypothec can be enforced at any time before the debt prescribes (a term of 30 years) and, further, that section 118(1) of the Act, in terms of which an owner of a property is liable for municipal debt dating back only two years in order to obtain a rates clearance certificate, does not limit the duration of the hypothec.

The hypothec enjoys preference over any mortgage bond registered over the property.

THE OUTCOME OF THE JUDGEMENT

The effect of the judgment is that the municipality is entitled to perfect its hypothec over immovable property, which ranks in preference to any other security over the property, for any outstanding municipal debt in relation to that property incurred within the last 30 years. This appears to be the case regardless of whether the property has been sold in execution, by private treaty or by public auction and transferred to a new owner.

In order to safeguard against risks which may be created by or which may arise following the judgment, purchasers of immovable property and indeed creditors funding the purchase of such properties, should ensure that adequate contractual protections are put in place.

These may include warranties from the seller that there is no outstanding municipal debt in respect of the relevant property, and an indemnification in favour of the purchaser, that should any future claim relating to outstanding municipal debt arise against the purchaser (or any of its successors or assigns), as the new owner of the property, the seller shall indemnify the new owner for such claims. Unfortunately these contractual protections will not be obtainable in sales of execution where the property is disposed of by the Sheriff. It has been suggested that purchasers take out insurance should there be a concern.

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