A landlord and his company lost a court bid to not pay for rates of an apartment building in Hillbrow after accumulating millions of rand in debt to the City of Johannesburg.
The SME financing company, Trust for Urban Housing Financing (TUHF), which financed the property purchase, brought the claim because its security was being threatened by the millions in municipal debts.
The Supreme Court of Appeal (SCA) said companies can’t use disputes with municipalities to get out of obligations owed to contracting partners. The judgment stands as a precedent for other contracting companies, who find contracting partners breaching financial arrangements because of disputes with municipalities.
The court ruled that in not paying for more than eight years, the landlord and his company’s “conduct is particularly egregious and unconscionable”.
The company, which has bonds listed on the JSE and more than R7bn on its loan book, finances businesses for the purchase and refurbishment of affordable rental properties. It has financed more than 700 building projects, mostly in the inner cities around SA.
The businessman, Mark Farber, concluded a loan agreement in 2013 with TUHF to help his company, Wolmarans, purchase and refurbish an apartment building in Hillbrow, Johannesburg.
TUHF advanced almost R6m to Wolmarans so he could buy the building, which has about 200 tenants. As further security TUHF registered a bond over the property for R8.6m.
Part of the loan agreement stipulated Wolmarans had to pay rates and taxes to the City of Johannesburg.
Since then, Wolmarans collected rent and paid the monthly instalments towards the loan it obtained from TUHF. However, it soon became apparent that, since 2015, it was not paying rates and taxes for municipal services.
By 2019, Wolmarans’ account with the city stood at R3.2m.
TUHF’s lawyers wrote to Wolmarans, placing it on terms to comply with the loan agreement and the specific term to pay the outstanding amounts. TUHF’s concern was that continued nonpayment of the rates was placing its security over the property “at risk”.
Wolmarans said there had been an ongoing dispute between itself and the City of Johannesburg for years. The city had been incorrectly debiting Wolmarans’ account using wrong readings on the electricity meter and had even disconnected the property in 2016. As a result of this dispute, it had been advised not to pay.
However, TUHF’s lawyers said the billing dispute regarding electricity had nothing to do with all the other rates Wolmarans had to pay the city. As a result, the company remained in breach of the loan agreement.
In 2020, TUHF then took the matter to the Johannesburg high court, where it lost.
However, TUHF appealed to the full court, and it found that Wolmarans had breached its obligations, even if it did not like it. The court said Wolmarans, by not paying, “had destroyed the commercial purpose of the contract as the significant municipal arrears impair [TUHF’s] security”.
TUHF told the court that central to its entire business model was the right to protect properties for which it provided loans. This meant doing what it could to prevent the value of the property reducing. Failure by borrowers to pay municipal accounts was one event, it said, that would have a “material impact” on the property’s value.
This was why TUHF made the payment of rates and taxes part of the loan agreement. Wolmarans, TUHF said, was in breach by nonpayment for almost R5m.
Having lost in the full court, Wolmarans sought leave to appeal to the SCA.
On Monday, the SCA dismissed the appeal bid.
Writing for a unanimous court, acting SCA judge Rishinad Seegobin said Wolmarans’ arguments were “clearly not sustainable”.
Noting the city’s “billing crisis”, Seegobin said this provided Wolmarans with “an ideal opportunity to exploit the situation by withholding all payments”. Seegobin noted that SA law insists people adhere to contracts.
“Public policy,” he wrote, “requires parties to honour their contractual obligations undertaken freely and voluntarily”. The court will interfere only “if a constitutional value was limited by a contractual term”. Such was not the case here.
Seegobin dismissed the case with costs.
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