When concluding a lease agreement the amount payable for consumption charges for water and electricity supplied to the leased premises is a factor both parties pay little attention to. Most lease agreements will stipulate that the tenant is liable for the consumption charges. What happens if the tenant does not make payment in terms of the agreement? The tenant’s breach of the lease agreement can have significant legal consequences for the owner of the premises. In terms of Section 118(1) of the Local Government Municipal Systems Act 32 of 2000, a limit is placed on the owner’s right to transfer immovable property.
On 29 May 2017 May, the Supreme Court of Appeal (SCA) confirmed certain municipal powers when it comes to collecting outstanding municipal debts. In the case of Pearson (Pty) Ltd v eThekwini Municipality (SCA) the court confirmed the power of a municipality to transfer credits between two different municipal accounts.
The case dealt with two sections of the Local Government Municipal Systems Act 32 of 2000 (the Act)
Sec 102(1)(b) – ‘A municipality may:
(b) credit a payment by such a person against any account of that person’; and
Sec 118(3) – ‘An amount due for municipal service fees, surcharges on fees, property rates and other municipal taxes, levies and duties is a charge upon the property in connection with which the amount is owing and enjoys preference over any mortgage bond registered against the property’.
The facts of the case was:
A tenant occupied two different properties owned by different property owners. The tenant opened a municipal account for each property for the supply of utilities and municipal services to the respective properties. The tenant was subsequently placed in voluntary liquidation with outstanding amounts owing to the municipality in respect of each municipal account. At one point, prior to liquidation, the tenant made payments to the municipal account associated with the appellant’s property (the first property). The municipality, acting in terms of s 102(1)(b) of the Act, elected to credit the payments made in respect of the first property to that of the tenant’s other municipal account held in respect of another property (the second property).
As a result, the amount owed by the tenant for its account in respect of the second property was regarded as paid in full, while the amount owing for the account for the first property (owned by the appellant) did not record the payment which had been made by the tenant, leaving the appellant liable for a municipal account of approximately R 3,1 million. The municipality subsequently terminated the services supplied to the appellant’s property due to non-payment. In the end, the appellant paid an amount to the municipality, under protest, in order to restore the service supply to its property. Included in this payment was the sum of approximately R 1,4 million, which the appellant claimed it should not be held liable for as this amount was unlawfully credited by the municipality to the municipal account of the second property instead of the appellant’s property.
While the appellant acknowledged the municipality’s right in terms of s 102(1)(b) of the Act, it argued that the exercise of this right by the municipality meant that the municipality should not then be entitled to invoke s 118(3) of the Act to hold the appellant liable to discharge the tenant’s debt, which was related to another property not owned by the appellant.
The inquiry before the SCA was whether the conduct of the municipality in holding the appellant responsible for the full outstanding balance on the municipal account related to its property was rendered unlawful by the municipality’s prior exercise of its right in terms of s 102(1)(b) of the Act to transfer credits between accounts, which had the effect of increasing the amount owing on the account related to the appellant’s property.
The court noted that s 229 of the Constitution vests a local authority with the power to impose ‘rates on property and surcharges on fees for services provided by or on behalf of the municipality’, which power is further regulated by national legislation in the form of the Act. The Act refers to the responsibility of municipalities to collect its debts and to adopt a credit control and debt collection policy for this purpose. The court turned to the municipality’s credit control and debt collection policy and found the following:
- In terms of Section 118(3) of the Act an amount due for municipal service fees, surcharge on fees, property rates and other municipal taxes, levies and duties is a charge upon the property in connection with which the amount is owing and enjoys preference over any mortgage bond registered against the property.
- Accordingly, all such Municipal debts shall be payable by the owner of such property without prejudice to any claim which the Municipality may have against any other person.
- The Municipality reserves the right to cancel a contract with the customer in default and register the owner only for services on the property.
- Except for property rates, owners shall be held jointly and severally liable, the one paying the other to be absolved, with their tenants who are registered as customers, for debts on their property.
- For consolidated accounts the Municipality may in accordance with section 102 of the Act credit any payment by a customer against any account of that customer.
- The Municipality’s allocation of payment is not negotiable and the customer may not choose which services to pay.’
The court held that the municipality had acted in accordance with s 102(1)(b) of the Act, which it was entitled to do. In addition, its conduct matched that which is set out in its credit control and collection policy adopted in terms of the Act.
The appellant had only been asked to make payment for municipal services supplied to its property. The fact that the amount owed on its property account would have been reduced had the municipality not exercised its power to transfer payments from one account to another in terms of s 102(1)(b), did not have any bearing on the municipality’s right to collect the full amount owing in relation to the appellant’s property.
While the municipality’s actions may have had an unfair result on the appellant, the court found that they were not unlawful. The court noted that the municipality’s actions were tempered by the fact that the municipality had only transferred payments made by the tenant to the second property account and in that way had not used any of the appellant’s funds. In addition, the appellant was only being asked to settle the account for municipal services provided to its property and not that of the second property.
This case confirms a municipality’s power –
- to transfer credits between accounts held by a single account holder but in respect of two different properties with two different owners; and
- to claim from the owner of a property, any unpaid amounts due by the account holder based on the municipality’s right to hold the property as security for charges levied.
Since a property is regarded as security for any unpaid municipal charges, transferring credits between municipal accounts has the effect of increasing the contingent liability of one property owner, while the contingent liability of the other property owner is decreased.
Property owners are cautioned to monitor their tenant’s municipal accounts in order to manage any contingent liability in relation to their property. We suggest some of the following in order to avoid nasty surprises:
- Prepaid electricity meters
One of the simplest ways to avoid disputes over electricity bills is to install a prepaid electricity meter. This is becoming more and more common in rental properties. The landlord has the comfort of knowing the electricity is paid for, and the tenant has control over consumption. Many municipalities no longer allow electricity accounts to be in any name other than the registered property owner
- Other utility bills
If the municipal account is still in the tenant’s name and the tenant is responsible for payment, the landlord can ask the tenant for proof of payment each month. If this is not forthcoming or there is any suspicion of arrears, you as registered owner are entitled to ask the municipality for a copy of the account. If you exercise diligence in ensuring these accounts are up to date, you will avoid any nasty shocks at the end of the rental period.
- “All-in” rent
An option some landlords prefer is to take on the liability for all bills The rent is then adjusted to accommodate this. This is known as an “all-in rent”. There are pros and cons to this arrangement for both parties. For the tenant, it can be helpful, certainly in terms of budgeting, to have one monthly fee to pay. The cost of living in the property won’t vary summer to winter with changing consumption patterns. The downside, from the tenant’s perspective, is that there is no financial benefit to be gained from minimising consumption. The tenant also does not have any utility bills in their name, which can be a problem when address verification is needed for credit or other applications. However, the lease will usually suffice.
For the landlord, there are no concerns about unpaid bills. Everything is under their control. However, the adjusted rent is based on past average consumption. If the tenant is wasteful in their use of water, gas or electricity, the owner can be faced with a bill in excess of what has been included in the rent. The solution to this is a clause in the lease agreement stating that the landlord reserves the right to make a surcharge should consumption exceed reasonable amounts The landlord will also bear the burden of rate hikes, as they cannot increase the rent until the lease is due for renewal.
- The alternative – charging utility bills to the tenant as they arise
A more transparent, albeit more labour-intensive, solution is to charge the utilities to the tenant as they arise. This means the landlord will always carry one month’s obligation for these costs and may still be left with unpaid bills at the end of the tenancy, but any liability will be limited and should be covered by the deposit. If this process is adopted, property owners should remember that tenants have a right to be treated fairly and equitably. It is good practice to:
- Provide the tenant with copies of bills and meter readings
- Give the tenant a formal invoice for their share of the costs as set out in the lease agreement
- Avoid charging the tenant an estimate if the meter reading has not been done for the period.
- Provide the tenant with a monthly statement and keep a record of all communications pertaining to utilities
It’s important to note that a property owner may not charge property taxes to the tenant. The cost can be factored into the rent, but may not be passed on to the tenant in a literal sense. Whether you opt for an all-in rent or charging the tenant on a “pay as you go” basis, this can be a workable solution, particularly for a property owner who has been saddled with unpaid bills in the past. At the end of the lease, it is reasonable to deduct any amounts owing from the deposit, and this should not trigger a dispute, particularly if clearly stated in the lease.