Brief Summary

Municipal Law — Sale of municipal property — Validity of sale agreement — Applicant sought transfer of property from municipality following a sale agreement; municipality contended agreement invalid for non-compliance with section 14 of the Local Government: Municipal Finance Management Act, No. 56 of 2003 — Court held that the sale agreement was invalid as it did not comply with statutory requirements for disposal of municipal assets, rendering the power of attorney for transfer also invalid.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings consisted of an application and a counter-application concerning a municipal immovable property, being erf 4247, Bergsig, Bethlehem (“the property”). The applicant, Thabo Daniel Lephondo, sought relief directed at compelling the respondent, Dihlabeng Local Municipality, to place certain proposals before its municipal council with a view to ratifying (or reconsidering) the sale of the property to him and enabling transfer. The respondent opposed that relief and pursued a counter-application for declaratory orders that the purported sale and related transfer documentation were invalid.

The matter arose against a background where a written agreement of sale had been concluded between the applicant and the municipality, and the applicant thereafter attempted to obtain transfer. The municipality refused to take steps necessary for transfer (in particular, refused to issue a rates clearance certificate), contending that the transaction was invalid for non-compliance with section 14 of the Local Government: Municipal Finance Management Act 56 of 2003 (“the MFMA”).

Procedurally, the court was required to determine, first, whether the agreement and associated steps were legally effective, because it was common cause (and conceded for the applicant) that if the sale agreement was invalid, the applicant’s requested relief would be pointless. The dispute therefore centred on the validity and enforceability of the sale arrangement in light of the statutory framework governing municipal disposal of capital assets.

2. Material Facts

The material facts accepted by the court as common cause began with the municipality’s own internal governance position. At a municipal council meeting held on 28 November 2005, the council noted counsel’s opinion on the interpretation and effect of section 14 of the MFMA and resolved, among other things, that the municipality would follow a fair, equitable, transparent and competitive process when disposing of assets, and that no transfer of immovable property could be effected in the absence of a bid process.

Despite that resolution, and despite the absence of any bid process, a written sale agreement for the property was signed on 9 December 2006. The signatories for the municipality were the then mayor and the director of housing. The purchase price recorded was R15 709,20. The agreement contained a provision (clause 8(a)) that transfer would be given upon payment of the full purchase price and interest, if any. It also contained clause 8(b), which purported to entitle the purchaser, upon paying 50% or more of the purchase price, to demand transfer simultaneously with the registration of a first bond in favour of the seller to secure the balance.

The agreement was expressly stated (in clause 12) to be subject to the Alienation of Land Act, No. 68 of 1991, but it contained no reference to, and did not make provision for compliance with, the requirements of section 14 of the MFMA.

During October 2007, the applicant paid R15 000,00 towards the purchase price. Thereafter, he persistently sought transfer relying on clause 8(b). On 8 November 2007, the municipal manager signed a power of attorney authorising transfer pursuant to the sale agreement. The power of attorney was handed to the applicant on 19 February 2008.

Transfer did not proceed because the municipality refused to issue the necessary rates clearance certificate, and it justified that refusal on the basis that the sale agreement was invalid due to non-compliance with section 14 of the MFMA. It was common cause that the contemplated transfer or disposal of the property was not considered in a meeting of the municipal council open to the public as required by section 14(2), and the statutory decision-making contemplated by section 14 had not occurred in relation to this transaction.

3. Legal Issues

The central legal questions the court was required to determine were, first, the proper interpretation of section 14 of the MFMA, and in particular whether the statutory wording dealing with “transfer ownership” or “otherwise dispose of” a capital asset encompassed the conclusion of a sale agreement (as opposed to the later act of transfer or disposition).

Secondly, the court had to determine whether, given the admitted absence of compliance with section 14’s procedural and substantive requirements, the sale agreement concluded on 9 December 2006 was invalid and unenforceable, and whether the associated power of attorney to pass transfer was similarly invalid. This included the question whether the applicant had any enforceable right to compel transfer, and whether the relief sought in the notice of motion (directing the tabling of proposed council motions aimed at ratification or reconsideration) could stand.

The dispute was predominantly one of law, involving statutory interpretation and the legal consequences of non-compliance with statutory requirements regulating municipal dealings with capital assets, together with the application of those legal rules to facts that were largely common cause.

4. Court’s Reasoning

The court approached the interpretation of section 14 of the MFMA by applying established principles of statutory interpretation. It emphasised that the task is to determine the ordinary meaning of the words used, in their context, and that context extends beyond the immediate wording to the statute’s scope, purpose, and (within limits) its background. The court referred to authoritative guidance that “context is everything”, particularly where words have multiple ordinary meanings.

On the respondent’s argument, the statutory phrase “or otherwise dispose of a capital asset” was said to include the act of entering into an agreement to transfer ownership, such as a deed of sale. The respondent relied, among other things, on dictionary meanings and on REX v STEIN 1947 TPD 442. The court rejected that interpretive submission. It reasoned that, within section 14’s context, “dispose of” bore the meaning of making a disposition in the sense of getting rid of or making over an asset, and it did not extend to the preliminary juristic act of concluding an agreement aimed at later transfer.

The court’s conclusion on this point was tied to the structure of section 14 itself. In particular, it considered that the words “transfer ownership” in section 14(1) referred to the act of transfer (by registration or delivery) rather than an undertaking to do so. It further held that, in context, the phrase “or otherwise dispose of” was restricted and qualified by the preceding phrase “may transfer ownership” and therefore referred to conduct akin to transfer, namely the actual parting with or handing over of an asset, rather than merely contracting to do so.

Although the court thus rejected the respondent’s broad interpretation of “dispose of” as including the conclusion of a sale agreement, it nevertheless held that the sale agreement was invalid on different grounds arising from the statutory scheme and the contract’s content.

The court accepted (and recorded as properly conceded) that a transfer of ownership or other disposition of a municipal capital asset that occurs without compliance with section 14 is invalid. Against that, the sale agreement in issue did not provide that transfer would be subject to compliance with section 14, nor did it refer to compliance at all. Instead, it purported to confer a right to obtain transfer subject only to payment-related conditions (as contained in clauses 8(a) and 8(b)). Viewed in that way, the contract was characterised as a contract to commit an act made unlawful by statute, because it purported to oblige or entitle conduct (transfer pursuant to the agreement) in circumstances where statutory prerequisites had not been met and were not built into the agreement as conditions.

Applying the principle that contracts to perform unlawful acts are void, the court held that the sale agreement was void and of no force and effect. The court referred to the statement of principle in Christie’s The Law of Contract in South Africa that where an act is made unlawful by statute, a contract to commit that unlawful act must be void, and so too a sufficiently closely connected contract facilitating the unlawful act.

Once the sale agreement was found to be invalid, the court treated the power of attorney signed pursuant to it as likewise invalid. It followed that the applicant had no enforceable right to obtain transfer, and the municipality was not obliged to transfer the property. Given that conclusion, the court held that the applicant’s attempt to compel the municipality to table motions aimed at ratification or consideration could not succeed, because the underlying contract on which the relief was predicated was legally ineffective.

On costs, the court found no basis to depart from the ordinary principle that costs follow the result, and therefore awarded costs to the successful party.

5. Outcome and Relief

The court dismissed the applicant’s application and granted the declaratory relief sought in the counter-application (as confined during argument). It declared that the agreement of purchase and sale concluded on 9 December 2006 in respect of erf 4247, Bergsig was invalid and of no force and effect, and that the power of attorney signed on 8 November 2007 authorising transfer pursuant to that agreement was also invalid and of no force and effect. The court further declared that the applicant had no enforceable right to obtain transfer and that the municipality was not obliged to transfer the erf.

The applicant was ordered to pay the respondent’s costs in the application, and was also ordered to pay the costs of the counter-application.

Cases Cited

REX v STEIN 1947 TPD 442.

JAGA v DÖNGES, NO AND ANOTHER; BHANA v DÖNGES, NO AND ANOTHER 1950 (4) SA 653 (A).

KPMG CHARTERED ACCOUNTANTS v SECUREFIN (644/07) [2009] ZASCA 7 (13 March 2009).

Legislation Cited

Local Government: Municipal Finance Management Act 56 of 2003 (section 14 and reference to section 111).

Alienation of Land Act, No. 68 of 1991.

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that, although the phrase “or otherwise dispose of a capital asset” in section 14 of the MFMA did not, in context, mean the conclusion of a sale agreement, the sale agreement in issue was nonetheless void because it purported to create enforceable rights to obtain transfer without making transfer subject to compliance with section 14, in circumstances where non-compliance rendered the contemplated transfer or disposition unlawful and invalid.

It further held that the power of attorney executed pursuant to the invalid sale agreement was itself invalid, with the result that the applicant had no enforceable right to transfer and the municipality had no obligation to effect transfer. The applicant’s application was dismissed with costs, and the respondent succeeded in the counter-application with costs.

LEGAL PRINCIPLES

Statutory interpretation requires ascertaining the ordinary meaning of the words used in their context, where context includes the broader statutory setting, purpose, and background, and where words may bear more than one ordinary meaning such that “context is everything”.

In the context of section 14 of the MFMA, the concept of “transfer ownership” refers to the act of transfer (such as transfer by registration or delivery), and “or otherwise dispose of” is construed as conduct akin to that act of transfer or disposition, rather than the preliminary act of merely entering into an agreement aimed at a future transfer.

Where a statute renders an act unlawful, a contract to commit that unlawful act is void; and a contract that sufficiently closely facilitates or encourages the commission of the unlawful act is also void. In the municipal asset-disposal context, where the statutory prerequisites for a valid transfer/disposal have not been met and the contract does not make transfer conditional upon those prerequisites, the agreement may be treated as an impermissible contract to commit an unlawful act and therefore invalid.

Lephondo v Dihlabeng Local Municipality (7493/2008) [2009] ZAFSHC 99 (25 June 2009)