By Maike Gohl, Senior Associate and Lauren Squier, Candidate Attorney
This article canvases, at a basic level, some of the aspects that you, as a prospective or current sectional title owner, would need to know about the law regulating sectional title schemes and how same should be run before you buy into such a scheme.
Becoming a member of a body corporate
Once you purchase a property in a sectional title scheme, you will automatically, by operation of the law, become a member of the body corporate. You cannot purchase a property in a sectional title scheme and then refuse to become a member of the body corporate. You will automatically be bound by the rules of the body corporate, whether you were given a copy of them before you purchased/became the owner or not and regardless of whether you agreed to them or not.
Trustees of a scheme
These are persons elected by the owners (also called members) of the body corporate to run the scheme. They are like the board of directors of a company, or the trustees of a trust. They administer the day-to-day management of the scheme, but their power to do so may be limited by restrictions imposed on the them by members at a general meeting. However, if no restrictions are placed on trustees they may exercise all the functions and powers of the body corporate.
The trustees might be mandated by the members of the scheme to appoint a managing agent (a managing agent or agency is an individual or company that has the expertise to manage the scheme and provide the majority of the services needed for the day-to-day management of a scheme) to assist them (the trustees) in carrying out their duties in terms of the Sectional Titles Act 95 of 1986 ( “The Act”), Sectional Title Schemes Management Act 8 of 2011 (“the STSMA”), it’s Regulations and the Prescribed Management Rules (“PMR”).
Types of property in a scheme
Every sectional title scheme comprises of three elements, owners’ sections, exclusive use areas and common property. There is also the concept of an owner’s unit (which is different to that a scheme). It is important for you to understand the differences, so that you know, as an owner, what is yours and what is not, and what use/entitlements you are paying levies toward.
Owners’ sections are the houses within a scheme that are individually owned and are registered in the name of the owner. These areas can sometimes include gardens, storerooms or garages. The extent of your section is determined from the sectional plans filed in the Deeds Office. You should always check precisely what you are buying, before you buy it. It often happens that estate agents and even sellers are unaware of what they own and that unsuspecting owners are ‘given’ less than they bargained for when transfer takes place.
A unit is comprised of a section in a scheme, together with an undivided share of the common property in the scheme, calculated in accordance with the owner of the unit’s participation quota in the scheme. When you buy into a scheme you don’t only buy your section, you also buy a bit of the common property and you own a bit of the common property along with every other owner, but in undivided shares (ie it can’t physically be divided up and allocated to each of the co-owners individually).
Exclusive use areas are portions of the common property in respect of which an owner will pay a levy for the exclusive right of use of the said area and which can then be used exclusively by the owner, to the exclusion of all other owners in the body corporate. Common types of exclusive use areas include parking bays, gardens, storerooms, and balconies. However, as above, you need to check the sectional plans (and sometimes the body corporate rules) to determine whether a particular piece of ground is an exclusive use area, part of a section or part of the common property. There are two types of exclusive use right – those shown on the sectional plan and those recorded in the scheme’s rules. Exclusive use areas are transferred or allocated to an owner in a scheme in a different way to which a unit is transferred to an owner, so you need to check that any parking bay, storeroom, garden, etc, that you are buying, is being ceded or otherwise allocated to you at the same time as transfer passes to you of your unit.
Common property is the remainder of all of the land that comprises the scheme (including exclusive use areas but excluding owners’ sections). All common property is owned by all of the owners in the scheme in undivided shares based on the owner’s participation quota, and is for the use and benefit of all members of a scheme. An example would include a pool area or a communal garden or the driveway. The rights of use of common property areas can, however, be limited in terms of the rules of the scheme. It is essential to check the rules thoroughly to ensure that you are happy with them, before you sign your sale agreement purchasing a unit in the scheme.
Funds applicable to a scheme (which you as an owner would be liable for)
It should be noted that once you become a member of a body corporate, you are legally obligated to pay contributions to the body corporate, which are called levies.
Before the implementation of the STSMA, schemes were comprised of just one fund from which all expenditure was paid, however, as from 7 October 2016 (the date that the STSMA came into force) it is required that two separate funds are provided for within a scheme. The applicable funds are the administration fund and the reserve fund.
The administration fund covers the day to day running costs of a scheme, whereas the reserve fund is used to cover the cost of future maintenance and capital expenditure in relation to the land/buildings that are required within the scheme.
In addition to the implementation of the reserve fund, the STSMA calls for the creation of a 10 year maintenance plan to be drafted in respect of a scheme. A maintenance plan is a budget that sets out the anticipated maintenance needs of the scheme over the next 10 years. The intention of the Legislature in creating the reserve fund and 10year maintenance plan requirements was seemingly to negate the need for the implementation of special levies (which are most commonly raised for ad hoc maintenance needs that have not been properly planned/budgeted for).
A body corporate must be able to justify the budget amounts taking in to account reasoned and costed estimates. Any individual who has a material interest in the finances of the body corporate and is dissatisfied with the amount budgeted by members for the administrative or reserve fund may approach the Community Schemes Ombud Service (the “CSOS”) for an order declaring the amount unreasonable and adapting the amount sufficiently.
Special levies are amounts that the trustees of scheme are allowed to levy against the owners in certain instances, which are levied to provide for unbudgeted expenses that are not included in the normal levy. Often bad planning leads to the implementation of a special levy, and in particular in relation to maintenance costs, which tend to be put off until the last moment when the situation becomes critical. This is why the Legislature introduced the 10 year maintenance plan and reserve fund – to try and plan in advance for and collect funds for necessary and anticipated maintenance needs.
The Annual General Meeting (AGM)
As the name suggests, an annual general meeting needs to be held once a year, furthermore, the requirement is that it needs to be held within four months of the scheme’s financial year end. It is a compulsory meeting to be held with all of the owners in the scheme. Only in circumstances where good reasons are provided, should the AGM be held outside of this timeframe. If your AGM is being held late or not being held at all, you should be asking questions as to why. It is important to note that in order for an AGM to be legally constituted, a specific number of members in the body corporate need to be present at same (accordingly a quorum is necessary). It is best that each owner is present, but it is possible to request someone else to attend same on your behalf, which is called a proxy.
The trustees might also call special general meetings to discuss important business that falls outside the scope of the AGM, or is so urgent that it cannot wait until the next AGM.
There are provisions in the STSMA, Regulations and PMR that provide for AGMs and SGMs to be held electronically, or with no or less notice than prescribed, or even to be waived if everyone is in agreement with certain resolutions that can be taken round robin rather than at a formal meeting. However, these apply in very limited instances. The provision for waiver of the AGM is intended to allow successfully managed schemes, where there is little conflict between members, to avoid the expense and trouble of holding an AGM.
Ways to increase a levy
Each year, before the AGM, the managing agent (if applicable) or the trustees of a scheme will draw up a budget and the trustees will approve same. The budget should contain all of the anticipated day to day running expenses of the scheme for the next financial year. The levy that owners pay is calculated based on this budget, as the levies are collected in order to fund the anticipated expenses.
Only once the budget is approved by the members of the scheme at the AGM will the new levy be correctly authorised in terms of the STSMA. There is an exception to this rule, however, because levies can be increased by a maximum of 10% before the AGM (after the end of the prior financial year) by the trustees, exercising their discretion to do so, until such time as the budget for the next financial year is approved at an AGM. The body corporate will then need to ratify the increase at the AGM whenever the AGM is finally held.
It is important to note that levies may NOT be backdated and that this practise, although occurring frequently, is in contravention with the laws and regulations governing sectional title schemes. However, a body corporate may charge its members interest on overdue levies, but the interest must not be more than the maximum rate as per the National Credit Act and must be compounded monthly in arrears.
A proxy is an authorisation given to a person other than the owner to represent an owner/ member and vote on their behalf at scheme meetings. Subsequent to the implementation of the STSMA a limit has been placed on the number of proxies that can be held per person. A person will now not be able to be a proxy for more than two members. It is therefore important to check with the person whom you wish to authorise as your proxy, that they are not already representing too many other persons, to ensure that your voice is heard in the meeting.
Community Schemes Ombud Service
The community schemes ombud service (CSOS) was created by the Community Schemes Ombud ServiceAct 9 of 2011 and its functions include the vetting of conduct and management rules, resolving of community scheme disputes and educating members of sectional title schemes, home owners’ associations and other forms of community schemes.
Members of sectional title schemes paying levies in excess of R2500.00 per month are required by law to pay a R40.00 monthly levy over to CSOS. The CSOS levy is included in the monthly levy that owners pay to their managing agent in return for the abovementioned functions. The managing agent/trustees then pay the amounts collected from owners for the CSOS levy over to CSOS once a year.
Although the concept of CSOS sounds good in theory, it is reported by many as having fallen short in practise. As a result, many members of sectional title schemes choose to take disputes to court rather than have them heard by the CSOS. It should, however, be remembered that CSOS is still a very new system (as it has only been in place for approximately two years) and they are doing their best to “hash out” all of their kinks.
The above is only a very brief summary of a very complex area of the law. Should you have any disputes with your body corporate, or with your managing agent, we suggest that you approach a lawyer with the requite expertise in sectional title law, as it is very easily misunderstood, which could result in you not obtaining the results you wish.