“Who do you think you are?” – the perils of misclassified identities for community schemes

“Disguise, I see, thou art a wickedness.”[1] This line from William Shakespeare’s Twelfth Night perfectly encapsulates the unintended chaos that follows when identity is misunderstood or misrepresented. Like Viola, who adopts the guise of Cesario and inadvertently creates romantic confusion, emphasising the fluidity of perception, the community schemes in this case faced the complications of being treated as something they believed they were not. While they perceived their respective community schemes as purely residential, with some peripheral spin-off recreational areas, the presence of lifestyle centres revealed a dual identity that carried financial consequences (ultimately, for owners).

This full bench judgment from the Johannesburg High Court, in Malakite Body Corporate and Another v City of Johannesburg Metropolitan Municipality and Another[2] (“Malakite”), serves as a powerful reminder of the dangers of misclassification and the need for clarity in matters of identity, especially in the age of the development of layered schemes, lifestyle estates and mini-cities for residential living.

The case arose from an appeal against a ruling by a single judge, who dismissed the community schemes’ efforts to classify their properties as residential for billing purposes.[3] The appellants, two sectional title residential estates, contested the classification of their lifestyle centres – a gym and restaurant – as non-residential facilities.[4] They argued these facilities were ancillary to the residential use of the estates, but the court held otherwise, leading to the imposition of commercial tariffs for electricity.[5]

Both estates are zoned “Residential 3”, a zoning category allowing for ancillary uses such as recreational clubs or small taverns.[6] While charges for rates and refuse are billed directly to individual units, electricity is billed as one account for the entire sectional scheme.[7] The City of Johannesburg (‘the City’) classified the estates as mixed-use properties, levying a commercial tariff on the basis that the lifestyle centres were not strictly residential.[8] The community schemes emphasised that the facilities generate no income, cater exclusively to residents, and provide no public access.[9] They contended that no commercial benefit exists to justify the application of a business tariff.

The City based their case on municipal legislation, asserting that tariff classifications are determined by property use. As per the Local Government: Municipal Systems Act[10] (“the Systems Act”) and other applicable legislation, properties with mixed domestic and non-domestic loads must be billed at a commercial tariff unless split meters are installed.[11] The City proposed recalculating past electricity charges for the estates if split meters were installed, but this offer was declined.[12] The City insisted their approach aligned with established laws, policies, and by-laws, including provisions allowing municipalities to impose commercial tariffs for such mixed-use developments.[13]

The Rulings

The first court dismissed the application, finding the community scheme’s arguments unconvincing.[14] It ruled that the lifestyle centres were not ancillary to residential use, thus requiring commercial tariffs unless split meters were installed.[15] Notably, the first court did not engage in evaluating the fairness of the tariff policy itself but rather focused on whether the community schemes’ claims regarding classification were consistent with existing policies and by-laws.[16]

The full bench of three judges, on appeal, emphasised that the Systems Act mandates municipalities to adopt tariff policies allowing for differential treatment of users as long as it does not result in unfair discrimination.[17] Similarly, the Electricity Regulation Act[18] grants the National Energy Regulator of South Africa (NERSA) oversight over tariff determinations.[19] The Municipality’s by-laws and policies clearly outlined the requirement for communal mixed-use loads to be billed under non-domestic tariffs unless split metering was implemented, with associated costs borne by the property owner.[20]

Ancillary or Commercial Use?

A critical aspect of the community scheme’ argument was their assertion that the lifestyle centres were ancillary to the estates’ residential purpose.[21] However, the High Court rejected this claim, noting that the facilities operated as commercial ventures.[22] The restaurant, for instance, sells food and beverages to residents and their guests at a profit. The High Court stated:[23]

“It sells food to residents and their guests at a profit. The fact that a business is located in an estate surrounded by residential dwelling units does not make it ancillary to the residential use. It is merely convenient for the residents of the dwelling units to have a restaurant in the estate. It does not change the status of the restaurant from non-domestic to domestic. To have a restaurant in an estate is clearly a ‘perk’, but at the end of the day the restaurant is commercial in nature and non-domestic. It is not merely ‘ancillary’ to the residential units”.

The argument that meals sold at the restaurant were “not overly expensive” was dismissed as unsubstantiated, failing to address the central issue of the facility’s commercial nature. The High Court stated:[24]

“The appellants further make the bald allegation that the meals sold at the restaurant are not overly expensive. The fact that patrons ultimately pay the restaurant for their meals and beverages is not a point of contention among the respondents. Once more, this issue fails to advance the dispute.”

The High Court further explained that properties zoned as residential but used for business purposes, or properties with mixed domestic and non-domestic loads, must comply with tariff structures requiring commercial tariffs unless split metering is implemented.[25] The electricity usage patterns of gyms and restaurants are fundamentally different from those of residential dwellings, warranting distinct tariff classifications.[26]

The case demonstrates the importance of carefully examining tariff structures when planning or managing property developments. Mixed-use properties, even those within residential estates, may face significant cost implications if facilities like gyms or restaurants are classified as non-domestic. Developers and property owners must be mindful of these policies to avoid unexpected liabilities.

Just as Viola’s disguise in Twelfth Night creates romantic entanglements that spiral beyond her control, the community schemes’ efforts to frame their estates as solely residential unravelled in the face of municipal by-laws. The High Court’s ruling underscores the reality that facilities like gyms or restaurants may alter the nature of a property’s classification, no matter the intent. As Viola learned, mistaken identity carries unintended consequences. Developers and community schemes must avoid disguising the nature of their properties and instead confront the realities of tariff classifications to ensure financial and legal harmony or get split meters.

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FOOTNOTES:

[1] Shakespeare Twelfth Night Act II, Scene II.

[2] (A2023/050651) [2024] ZAGPJHC 397 (15 April 2024).

[3] Para 1.

[4] Para 2.

[5] Para 2.

[6] Para 3.

[7] Para 4.

[8] Para 5.

[9] Para 6.

[10] Act 32 of 2000.

[11] Para 7.

[12] Para 8.

[13] Paras 7 and 8.

[14] Para 9.

[15] Para 9.

[16] Para 10.

[17] Para 11.

[18] Act 4 of 2006.

[19] Para 11.

[20] Paras 13 to 15.

[21] Paras 6 and 20.

[22] Para 22.

[23] Para 22.

[24] Para 18.

[25] Para 24.

[26] Para 23.