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IOLProperty - South African Property For Sale
Tuesday May 15, 2012

Tenant's unpaid municipal service charges is landlord's responsibility

A Constitutional Court judgement made in 2004 has had serious widespread ramifications throughout the commercial property sector - and has placed further risk on the shoulders of landlords, says Jason Lee, of Rawson Property.

In the case Mkontwana vs Nelson Mandela Municipality, said Lee, the court held that the landlord was responsible for all municipality service debts run up by his tenant - and this principle is now adhered to countrywide.

This, said Lee, effectively makes a third party (the landlord) responsible for the debits of a main contracting player (the tenant) even though he (the landlord) did not incur the debt himself.

Lee said that in his view this whole situation needs reviewing, especially in the current scenario where tenants are increasingly finding it difficult to pay both their rentals and their utilities accounts.

"They know only too well," he said, "that they can walk away from a lease when it expires without the municipality having any way of extracting payment from them. The pressure is now transferred to the landlord and, it has to be added, to the banks which are often financing the acquisition."

The landlord's predicament, said Lee, is made more difficult by his being debarred by law from cutting off services to a tenant. The municipality does have the right to do this in the case of electricity bills but only does so once the bill is at a substantial level, putting the landlord at huge risk. In the case of water supplies, they are by law prevented from ever cutting those off. Sewage services and rubbish removal will also remain in place no matter how much money is owed.

Just how seriously these utility bills can mount up, said Lee, is shown by the fact that he has recently seen two cases where sums of R200 000 to R500 000 had not been paid - and eventually had to be met by the owner who could not otherwise sell the building. (A rates clearance certificate is mandatory before a transfer is processed.)

What are the lessons that landlords can take to heart to avoid these situations?

Lee says that the old rule of checking and rechecking the tenant's credit and previous leasing record is now even more important than before. Then, too, in today's market the landlord simply has to get two or three months rental deposit paid prior to occupation as well as a three months utilities deposit.

"If this chases the tenant away (as it sometimes does) this exit may be something for which the landlord will later be grateful," said Lee. "Securing big deposits gives peace of mind."

Wherever possible, he added, the landlord should also install a prepaid electric meter - and insist on the tenant servicing it.

"Quite often," said Lee, "it looks draconian or suspicious to impose these sorts of "conditions" upfront and a landlord may be tempted to ease up on them. To do so is fatal - history shows that a tenant who is given leeway time and again exploits the landlord. Be strict."

Rawson Properties Press Release

 
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