By Chantelle Gladwin, Partner and Maike Gohl, Partner
When auditing Body Corporate municipal accounts, Schindlers often discovers that the account is still in the name of the developer. Legally, this is incorrect, and it can cause significant prejudice to all parties concerned. In Part 1 of this article we consider whose responsibility it is to open bulk utility accounts for the Body Corporate and whether you can just change the name of the account rather than open new owns. In Part 2 we consider the consequences of not holding the account in the name of the Body Corporate, specifically how disputes can arise between the various parties as to the liability on the account, and how they can be remedied.
Establishment of Body Corporate
Establishment of a sectional title scheme occurs when the scheme’s founding documents are registered in the Deeds Office. But, the Body Corporate of a sectional title scheme only come into existence on the date that the developer transfers the first unit in the scheme to a third party. Normally, the developer will transfer one or more units in the scheme to purchasers simultaneously to the establishment of the scheme. But it can also happen that a sectional title scheme is established and the developer never sells any of the units and retains ownership of all of them. In this instance, no Body Corporate comes into existence (until the first unit is transferred to a third party).
The account holder of the water and electricity bulk utility accounts should be the entity that is consuming the services providedby
the municipality, or alternatively, the entity that is responsible for payment of the charges billed for the services consumed. When dealing with Body Corporates, this means that the Body Corporate (rather than the managing agent or the developer) should ideally be the account holder.
Body Corporate accounts in other entities’ names
It is not wrong for the managing agent or meter reader to be the account holder – but, it does sometimes create difficulties when disputes arise, because then the municipality might start questioning who has the power to act in terms of the account. The same sort of legal problem arises when a tenant is allowed to open an account, and either the property owner or the tenant raises a dispute with regard to the charges billed to the municipal account. Normally this is not legally insurmountable and a good attorney will pre–empt this by obtaining consent / powers of attorney before engaging with a municipality in respect of a dispute. However, if you find yourself in the situation where the managing agent or third party is the account holder, and you as the Body Corporate disagree with the way in which the account is being managed, but the managing agent/metering company disagrees and refuses to give you a power of attorney to deal with disputes, etc, you might find yourself in hot water. Regardless of this, when you get to court, the court itself or the opposition might raise arguments based on the issue of who has legal standing to launch the application, who is cited as a party to the application, and in what capacity, and why. Rather avoid this by holding the account in the name of the Body Corporate. Any other party who needs to be given permission to manage it can be authorized through a power of attorney.
If the property owner needs to go to court to rectify something on the account but the account isn’t in its name, it might be substantially prejudicial to the property owner because the property owner will have to expend further time and legal fees proving to the court that the account in question was, or is, its account and that it should be entitled to approach the court for relief in respect of the account.
Schindlers see many cases where managing agents and meter readers cease to exist (inasmuch as they are deregistered or liquidated), or they encounter problems with payment (where their funds are frozen) or even where they simply receive payment of amounts from owners for utilities, but do not pay those amounts over to the municipality. The Body Corporate then discovers that its municipal accounts are in massive arrears, and tries to deal with the municipality to arrange a payment plan or to stave off disconnection, and is denied this opportunity because the municipality does not recognise the Body Corporate’s right to act in terms of the account which is in the meter reader or managing agent’s name. The Body Corporate may also be prevented from gaining access to the municipal statements for its own account, because of strict privacy laws that some municipalities enforce, which allow only the account holder access to the accounts.
Unfortunately, this happens often. We would recommend avoiding this possibility by simply holding all Body Corporate municipal accounts in the name of the Body Corporate directly.
Developer’s liability for all units in scheme – When no Body Corporate exists
Where a developer is the owner of all of the units in the scheme and he/she/it developed the scheme, then no body corporate comes into existence until the first unit is sold to a third party. This means that the developer can continue to receive services from the municipality for the units in the scheme, and can continue to be charged for these units (as well as rates and taxes) in terms of municipal accounts opened in the developer’s name.
However, because the law provides that the owner of each sectional title unit must be billed for property rates for that unit, the municipality will open a number of rates accounts in the developer’s name – one for each of the units. It is likely that the developer will continue to be billed for the water and electricity supplied to the scheme on its old account number(s) that existed prior to the establishment of the scheme.
Body Corporate uses Developer’s Account
What happens when the developer finally sells at least one of the units to a third party? A Body Corporate comes into being. Let us consider what happens when a Body Corporate fails to open its own account in its own name with the municipality for the supply of services, and simply continues to receive services billed to the developer’s account. The municipality will continue to supply the services to the property and to bill for these services on the developer’s old account, which is linked to the underlying property on which the scheme was built (and which property no longer exists). Presumably, the developer will forward the bills to the Body Corporate for payment, and the Body Corporate will make payment (to avoid being cut off or subject to another form of credit control action following non-payment of the account). This will go on until there is a dispute (a) between the developer and the Body Corporate as to how much of the charges on the account are for the account of the respective parties; and/or (b) a dispute arises between the Body Corporate and the municipality, or between the developer and the municipality, regarding the charges on the account.
Most often, the latter kind of dispute triggers investigation into what comprises the disputed amounts on the developer’s account, and it is discovered that part of those charges relate to the period before the scheme was established. This means that a part of those charges is the developer’s liability, and the rest are the Body Corporate’s liability. This often leads to the former kind of dispute arising between the developer and the Body Corporate.
Consequences of Body Corporate using Developer’s account
In such a situation an apportionment of the liability on the account must be done by a suitably qualified person who is knowledgeable in the manner in which the municipality bills for service charges. This kind of reconciliation is often complicated by the fact that the municipality may still be charging sewer and rates and refuse charges to the account based on the assumption that the property still exists in an undeveloped form. Another common complication is where developments are completed in phases, and the municipality has not been advised as to how many units are at the property at any given point in time (or, having been advised, has not billed correctly based on this important information). This causes the tariffs applied to be incorrectly applied, not allowing for the relevant number of units in existence at the scheme, which results in an incorrect and inflated bill.
Between a rock and a hard place
If the above occurs, the municipality might refuse to adjust the developer’s account to provide that there are multiple units at the property, because it will insist on the Body Corporate opening up its own account, putting down its own deposit, and billing the Body Corporate for the services it consumes on an account opened in the name of the Body Corporate. So, the parties are at an impasse – unless they can employ someone who can calculate not only what the charges on the municipal account should legitimately be, but also the split out what the Body Corporate owes as opposed to what the developer owes whilst at the same time calculating how much of the charges on the bill are incorrectly billed and are not owed at all. The developer might give the Body Corporate power of attorney to deal directly with the municipality in respect of the account, or it might refuse to do so if a dispute has arisen between the two.
Practically speaking, the result is that it is the Body Corporate that is subject to cut-off for the ‘arrears’, because the account is linked to the property, even though the account is not in the Body Corporate’s name. This is despite the fact that the Sectional Titles Act expressly states that the Body Corporate may not be held liable for any debts of the developer in relation to the scheme, because, in the situation we are describing, at least some of the debt on the developer’s account is actually the Body Corporate’s debt. If this occurs, one ought to dispute the charges with the municipality and show that the charges are not by the Body Corporate’s responsibility and arrange for the accounts to be suitably adjusted, to avoid disconnection. As above, however, this is quite tricky and you may require legal assistance to achieve this, depending on the stance of the municipality at the time.
To avoid a situation where a Body Corporate disputes its liability to the municipality, but is precluded from being able to deal with the municipality directly because the account is in the developer’s, managing agent or metering company’s name, or a situation where a Body Corporate disputes its liability to the developer of the scheme in relation to charges billed to the service account for services consumed pre– establishment of the scheme, it is best for Body Corporates to open their own bulk service municipal accounts immediately after establishment of the scheme and, further, to hold that account in their own names, rather than allowing their meter readers or managing agents to hold the accounts in their own names. If you as the Body Corporate are prejudiced by the manner in which someone else is holding your account, it can be rectified (with a bit of effort). This is especially necessary in circumstances where there are still amounts on the account which are due by the developer or where there is a dispute.