Legal Articles

The issue of engineering contribution figures that are demanded by the municipality, has been one that frequently arises and needs to be examined more closely.

Common municipal practice

Most municipalities will require payment of engineering contribution figures levied (but not yet paid) at the time when rates clearance figures are applied for. This has the effect that the seller will have to pay the rates and all engineering contributions not yet paid at the date of transfer.

Industry norm

In many instances, developers will apply for additional rights in terms of the property which will be granted to them, but the developer will then sell the property before these rights are utilized. Developers will “pass on” the costs associated with engineering contribution figures.

When a seller has to pay all engineering contributions levied, even where these additional rights have not been utilized it reduces the sellers’ profits and forces the seller to pay for something that the seller will never use.

It has become a contentious issue whether municipalities can demand these engineering contributions before these additional rights have been utilized. 

Many sellers do not plan to use these additional rights in relation to which those figures are demanded at clearance stage, as they would rather pass the costs on to the seller.

In most instances, these amounts demanded can range from a few hundred thousand to a few million rands in most developments. 

The Illovo properties case

In the case of Illovo Opportunities Partnership #61 V Illovo Junctions Properties and City of Johannesburg, the Supreme Court of Appeal was called upon to decide exactly when these engineering contribution figures were payable.

The court concluded that the engineering contribution figures are payable either at the transfer or at the time when the additional rights granted in respect of the property is utilised, whichever is the latter.

This essentially means that a Seller does not have to pay the engineering contributions called for in terms of the additional rights at transfer unless he has utilised them. If the seller is selling the property after the approval and promulgation of those rights, but before they are utilised, the seller can pass the engineering contributions on to the purchaser.

Implications in sale agreements

Sellers, when drafting the sale agreements, must be very clear as to whether engineering contributions have been levied and who is liable for payment of these engineering contributions. Should the seller pass this on to the purchaser, it should be clearly stated.

Should a seller not clearly disclose to the purchaser that engineering contributions are payable in respect of exercising these additional rights, the seller might face a potential damages claim from the purchaser. The purchaser may claim that the engineering contributions is a latent defect and the seller fraudulently misrepresented the situation.

It might be more difficult for the purchaser to claim should a voetstoots clause be inserted whereby the purchaser declares that he had sufficient time to inspect the property and has concluded his due diligence.

The Illovo judgement has gone a long way to clarify when engineering contributions are payable and all developers are urged to contact us should the need assistance in drafting the Offer to Purchase.