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Landlord's inclusion of rates and taxes charge on rental amount of property leased out

10 March 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

The answer to this query is based on legislation as at 2014/03/10.

Q: Can the landlord charge tax and rates on the office rented in her premises in term of tax law?

 

A: The answer to your question is two-fold. Tax legislation is silent as to whether the owner may include property rates in the monthly rent charged to its tenants, however according to contractual and common law principles, there is nothing preventing the owner from setting his monthly rent, at the time the contract is entered into, at such a level that it would allow him/her to settle the property rates with the amounts paid by the tenants to him/her. The Property Rates Act, however provides for a ‘collection mechanism’ where the municipality may recover the property rates from the tenant if the landlord fails to pay it over. 

Property rates are charged in terms of the Local Government: Municipal Property Rates Act (No. 6 of 2004) (hereinafter referred to as ‘the Act’). Section 7(1) of the Act states the following: 

‘7. (1) When levying rates, a municipality must, subject to subsection (2), levy rates on all rateable property in its area or, in the case of a district municipality, on all rateable property in the district management area.  

The section therefore states that property rates must be levied on all ‘rateable property’. ‘Rateable property’ is defined in section 1 of the Act as follows:

‘... means property on which a municipality may in terms of section 2 levy a rate, excluding property fully excluded from the levying of rates in terms of section 17’. 

No exemption is provided for commercial accommodation in section 17 of the Act. Furthermore, paragraph (a) of the definition of property would include offices rented from a landlord and states the following: ‘"property" means -(a)   immovable property registered in the name of a person, including, in the case of a sectional title scheme, a sectional title unit registered in the name of a Person...’ It is therefore evident that the offices may be subject to property rates. Section 24 of the Act states the following: 

‘24. (1) A rate levied by a municipality on a property must be paid by the owner of the property, subject to Chapter 9 of the Municipal Systems Act...’ Therefore the owner of the property are liable for the property rates – not the tenant. Paragraph (a) of the definition of owner in section 1 of the Act states the following: ‘...in relation to a property referred to in paragraph (a) of the definition of "property", means a person in whose name ownership of the property is registered...’. 

Section 28 however provides the municipality with a mechanism to recover the property rates from the tenants if the owner fails to settle the outstanding property rates, which settlement must then be deducted from the rent owed to the owner. Section 28 states the following: 

‘28. (1) If an amount due for rates levied in respect of a property is unpaid by the owner of the property after the date determined in terms of section 26(2), the municipality may recover the amount in whole or in part from a tenant or occupier of the property, despite any contractual obligation to the contrary on the tenant or occupier. The municipality may recover an amount only after the municipality has served a written notice on the tenant or occupier .

(2) The amount a municipality may recover from the tenant or occupier of a property in terms of subsection (1) is limited to the amount of the rent or other money due and

payable, but not yet paid, by the tenant or occupier to the owner of the property.

(3) Any amount a municipality recovers from the tenant or occupier of the property must be set off by the tenant or occupier against any money owed by the tenant or occupier to the owner.

(4) The tenant or occupier of a property must, on request by a municipality, furnish the municipality with a written statement specifying all payments to be made by the tenant or occupier to the owner of the property for rent or other money payable on the property during a period determined by the municipality.’ 

Conclusion 

As stated above, property rates are levied on the ‘owner’ (not tenant) of ‘rateable property’. Section 28 however allows the municipality to recover the rates from the tenant without causing any prejudice to the tenant. This is caused by the fact that the amount that may be recovered from the tenant is limited to the amount of rent due and payable, but not yet paid. Furthermore, the amount of rates so paid by the tenant must be deducted from the rent owing to the owner. 

It is however submitted that most of the landlords take property rates into account when determining the amount of rent that must be paid to them by the tenants. It is submitted that they do not break the contracts down to such an extent that they for example state that the monthly rent of R 5000 would include R 500 for property rates.


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