The Msunduzi Municipality v Capital City Housing NPC and Others

Capital City Housing NPC is an accredited social housing institution and an approved public benefit organisation (PBO) registered under s 30 of the Income Tax Act 58 of 1962. It owns three large residential properties in the Msunduzi municipal area (Acacia Park, Aloe Ridge and Signal Hill), together comprising 1 656 units and registered as three cadastral units. The Municipality classified the properties as residential property under s 8(2)(a) of the Local Government: Municipal Property Rates Act 6 of 2004 (the Rates Act), entitling Capital City to only a nominal rebate (R15 000 excluded value per cadastral unit, totalling R45 000 in aggregate). Capital City contended that if classified as PBO property under s 8(2)(h) of the Rates Act, it would receive far larger rebates. It applied to the Municipality on 30 July 2019 under the rates policy to have the properties determined as PBO properties. The Municipality refused on 29 August 2019 because the definition of 'specified public benefit activity' in s 1 of the Rates Act and clause 1.32 of the rates policy refers only to items 1, 2 and 4 of Part I of the Ninth Schedule to the Income Tax Act, expressly excluding item 3 (land and housing). On 19 February 2021, Capital City and its business rescue practitioner launched a high court application seeking a declaration that the impugned definition and policy clause are constitutionally invalid, a textual amendment to include item 3, and consequential rates relief. The high court refused the constitutional relief, but granted relief of its own motion under s 8(3) of the Rates Act, ordering the Municipality to determine the properties as an additional category of 'social housing properties', to amend its rates policy accordingly, and to recalculate rates from inception. The Municipality appealed with leave; Capital City cross-appealed against the refusal of constitutional relief.

• Whether the high court was entitled to grant relief mero motu under s 8(3) of the Rates Act compelling the Municipality to create an additional category of rateable property when that relief was not sought by any party.
• Whether the definition of 'specified public benefit activity' in s 1 of the Rates Act and clause 1.32 of the Municipality's rates policy are inconsistent with the Constitution (ss 9, 26 and the principle of legality) for excluding item 3 (land and housing) PBOs from rates relief.
• Whether the principle of constitutional subsidiarity bars a direct challenge to the Rates Act under s 26(2) of the Constitution, where the Social Housing Act and Housing Act are the legislative measures giving effect to the right of access to adequate housing.
• Whether the differentiation between PBOs whose activities fall under items 1, 2 and 4 of Part I of the Ninth Schedule to the Income Tax Act and those under item 3 is rationally connected to a legitimate government purpose.
• Whether the constitutional challenge should be remitted to the high court for reconsideration in light of unventilated issues such as spatial justice, non-retrogression, s 16(3)(a) standing and sectionalisation.
• Whether the Biowatch costs principle precludes an adverse costs order against Capital City.

Condonation for the late filing of the notice of appeal was granted, with the appellant to pay the costs of that application. The appeal was upheld, the cross-appeal was dismissed, and the high court order was set aside and replaced with: 'The application is dismissed. There is no order as to costs.' There was no order as to costs in the Supreme Court of Appeal.

1. A court in an adversarial system is not entitled to grant relief mero motu that was not sought by any party and that is based on a statutory provision not raised in the pleadings or arguments. 2. The principle of constitutional subsidiARITY precludes a litigant from circumventing the statute enacted to give effect to a socio-economic right (the Social Housing Act and Housing Act in the context of s 26 of the Constitution) by attacking an unrelated statute (the Rates Act) directly under the constitutional provision. 3. The differentiation between PBO activities listed in items 1, 2 and 4 of Part I of the Ninth Schedule to the Income Tax Act (which qualify for rates relief) and those in item 3 (land and housing, which are excluded) is rationally connected to a legitimate government purpose and does not violate s 9(1) or the principle of legality, because housing PBOs receive substantial direct state subsidisation through other mechanisms. 4. Where a constitutional challenge has been fully ventilated on appeal and has no reasonable prospect of success, remittal to the high court is not warranted.

1. Observations that s 16(3)(a) of the Rates Act provides a legislative mechanism for sectors of the economy to request the Minister of Finance to evaluate evidence that a rate is materially and unreasonably prejudicing national economic policy, indicating that avenues exist for representations of the kind Capital City wished to make. 2. Remarks that the Biowatch costs principle is not absolute and does not insulate from adverse costs orders litigation that is essentially commercial in character but formulated in constitutional terms. 3. Observations that concepts such as 'spatial justice' and 'non-retrogression', while important strands of socio-economic rights jurisprudence, had hitherto been deployed primarily in eviction and relocation contexts and were not pleaded in support of a free-standing duty on municipalities to grant rate rebates to housing PBOs. 4. The suggestion that an amicus curiae (such as the Socio-Economic Rights Institute of South Africa) could have applied to the SCA, but none did. 5. Observations that a complaint under s 229(2)(a) of the Constitution is generally not justiciable because it raises political and intergovernmental considerations.

The judgment reinforces the fundamental adversarial principle that South African courts may not grant relief not sought by the parties or based on issues not traversed in the pleadings. It applies the principle of constitutional subsidiarity to challenges under s 26 of the Constitution, holding that litigants must ordinarily attack the implementing legislation (the Social Housing Act and Housing Act) rather than collateral statutes such as the Rates Act. It confirms the constitutional validity of the Rates Act's exclusion of 'land and housing' from the definition of 'specified public benefit activity', holding that the differentiation is rational because housing PBOs receive other direct state subsidies. The decision underscores that property rating and categorisation involve polycentric policy choices lying at the core of municipal autonomy, which courts will not lightly disturb. It also illustrates the limits of the Biowatch costs shield where constitutional form essentially cloaks a commercial financial objective.