Take note if you are conducting a business from your private residence

People who are currently using their homes to conduct a business, whether operating a guesthouse, providing student accommodation or using it as office space, should take note of a recent judgment by the Supreme Court of Appeal (SCA).

In terms of the judgment municipalities are allowed to impose a penalty rate on the property if its use is in contravention of its zoning provisions.

The rate can be imposed without having to recategorise the use and publish the change of the valuation roll in the provincial gazette.

Property lawyer Neels Engelbrecht, who represented the ratepayer in the case between the City Council of Johannesburg v Zibi and another, says there are literally “thousands of people” in many of the large metropolitan areas who are operating a business from a residentially zoned property in contravention of their zoning provisions.

He adds that people who are simply renting out a room or flatlet on their property should not be concerned about the judgment. In his view it only becomes a concern when the purpose and nature of use has changed completely.

The process

In terms of the Rates Act municipalities must formally inform ratepayers if they are in breach of their zoning category. One of the sub-categories in the rezoning policies of metropolitan areas is “illegal and unauthorised use”.

If a property is used outside its zoning the municipality can change the category of use to unlawful or uncategorised use and increase the municipal rates in accordance with the new category.

“This can result in a 300% increase in your monthly rates and taxes account,” says Engelbrecht, adding that his client’s account increased from R800 to R3 500 per month.

The council continued to levy the penalty, despite his client having discontinued renting rooms to students.

“In our opinion it should be a once-off penalty and if the ratepayer does not comply, [they] can be penalised again.”

His client’s account now stands at more than R700 000.

Engelbrecht’s firm took the matter to the Johannesburg High Court, which found that the council did not adhere to the act or its own policies. The council took the decision on appeal before the SCA.

The outcome

The majority judgment in the appeal court upheld the city’s appeal, arguing that municipalities are entitled to levy the penalty rates based on the Municipal Structures Act. This act is the umbrella or empowering act under which the Rates Act falls.

They also argued that it would place an “unreasonable” burden on city councils if they had to publish a supplementary valuation roll for every unlawful use of a property.

The minority judges agreed with the Johannesburg High Court’s decision. They also found that the higher rate penalised the conduct of the ratepayer and was therefore not a rate but a penalty. The imposition of such a penalties does not fall under the Rates Act.

Engelbrecht says the majority judgment is clearly wrong.

“One cannot rely on the empowering act [Structures Act] where there is specific legislation [Rates Act] that governs certain issues. This is trite law,” he adds. The Rates Act regulates the imposition of all property taxes.

His firm has approached the Constitutional Court for the final say.

“The matter is of national importance as the penalty rate is levied widely.”

Need for zoning

Engelbrecht notes that there is a good reason for zoning. The city council must plan the development of its municipal area.

This is to ensure that nobody operates a chicken farm in the middle of a residential area and that no heavy industries open up shop in a commercial area.

The council must consider issues such as noise, traffic and smells for proper town planning.

He advises ratepayers who are uncertain about their position to consult a town planner in their area. They will know what is allowed and what is not, since municipalities do not grant every rezoning application.

“It will be worth their while as rezoning is tedious, expensive and can take up to two years to be finalised.”