Body Corporates and sectional title

In terms of prescribed Management Rule 25(5) (which is included in the Regulations to the STSMA, and which would apply unless the body corporate has taken a unanimous resolution to amend it as per Regulation 6(6)) a body corporate may not debit an owner’s account with any amount that is not a contribution or a charge levied in terms of the STSMA. Apart from ordinary and special levies and interest thereon, legal fees, and a reasonable photocopy fee for the inspection of documents, no other types of charges are provided for in the legislation itself.    This means that any penalty fee or “administrative” fee or “debt collection” fee charged by a body corporate to an owner, is not authorized by law and would thus be unlawful, unless they are authorized in terms of the scheme’s Conduct or Management Rules. In order for a fine or penalty to be enforceable by a body corporate, it must have been lawfully adopted by the body corporate after the taking of the appropriate resolution, and the amendment to the rules to adopt that fine or penalty must have been registered at the Deeds Office.

Penalty fees/charges and sectional title bodies corporate

For home buyers, finally owning a property is a dream come true, but sectional title owners can easily find themselves at logger heads with the trustees of their complex’s body corporate – turning a peaceful home into hostile territory.    Carte Blanche investigates whether owners know their rights and responsibilities and what to do when they fall foul of trustees and managing agents.

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In this article we look at the legality of different kinds of penalties and legal fees imposed by sectional title bodies corporate against defaulting owners in terms of the Sectional Titles Schemes Management Act 8 of 2011 (“STSMA”) and the Regulations thereto, the Conventional Penalties Act 15 of 1962, the National Credit Act 34 of 2005 (“NCA”) and the Regulations thereto and the Uniform Rules of the High Court of South Africa.

Interest

In terms of prescribed Management Rule 21(3)(c) (contained in the Regulations to the STSMA, and which would apply unless the body corporate has taken a unanimous resolution to amend it as per Regulation 6(6))) the trustees of a sectional title body corporate are entitled to charge interest (as they may determine from time to time) on arrear amounts. This interest may only be charged on the authority of a written trustee resolution, and the rate may not exceed the capped rate prescribed by the National Credit Act 34 of 2005 (as amended) (“the NCA”). This interest may be compounded monthly in arrears.

It was held in the case of Dlamini v The Body Corporate of Frenoleen[1] that the NCA finds no application to sectional title bodies corporate because the body corporate is not supplying a service to the owner of a unit and that the relationship between an owner and the body corporate is not an ‘incidental credit agreement’.

However, with the coming into law of the STSMA (particularly Regulation 21(3)(c)) the maximum interest rates prescribed by the NCA has now been expressly made to apply to the charging of interest by a body corporate. The problem is, however, that the STSMA does not explain how exactly the NCA applies.

In terms of section 101(1)(d) of the NCA (which applies to credit agreements) interest may be charged on an account in arrears and may not exceed the maximum prescribed rate determined in terms of section 105 of the NCA. Section 105 allows the Minister to prescribe maximum interest rates for different sectors of the consumer credit market. These maximum interest rates are set out in a regulation known as the “Review of Limitations on Fees and Interest Rates Regulations”. The limits are determined with reference to the type of agreement set out in Table A.

The obvious problem is that the court (as per Dlamini) has held that the relationship between the body corporate and an owner is not an incidental credit agreement. However, the relationship between a member of a body corporate and the body corporate could hardly be any other type of credit agreement provided for under the NCA. As such, it is now unclear which of the categories of credit agreement (if any) applies to the body corporate/owner relationship, and thus it is not clear to what extent (if any) interest rates charges by trustees is limited at all.

It is submitted that for the purposes of determining what the maximum permitted interest rate by sectional title schemes is, that the Dlamini case must be ignored. The writers hereof are of the opinion that the only possible category that the relationship between a body corporate and an owner could fit into in terms of Table A, would be “incidental credit agreement”, meaning that the legislature intended to override the court’s decision in the Dlamini case when it legislated prescribed Management Rule 21(3)(c). The authors are thus of the view that the maximum interest rate which affects sectional title bodies corporate is 2% compounded in any given month.

Interest may only be imposed if the consumer is in arrears and may not exceed the principal debt in value (section 103(5) of the NCA). However, the trustees will be subject to any other limitations on the maximum amount of interest imposed by the body corporate’s rules. As such, the trustees should ensure that they comply with whatever restrictions are placed on them by the rules as well as the legislation when it comes to the imposition of interest.

Legal Costs

Should any of the owners fall into arrears on their account, prescribed Management Rule 25(4) (contained in the Regulations to the STSMA, which will apply unless amended by the body corporate by unanimous resolution) states that an owner of a section will be liable for all reasonable legal costs that the body corporate incurred in recovering the money owed to it by the owner (as taxed or agreed between the body corporate and the owner).

Unfortunately, the STSMA does not explain whether ‘taxed’ means taxed by the Law Society of South Africa or a provincial Law Society, or taxed in terms of the Uniform Rules of the High Court. There is thus some controversy in our law relating to which method of taxing will satisfy the requirements set out in the NCA.

The Conventional Penalties Act 15 of 1962 (“the CPA”)

It is questionable whether this piece of legislation applies to bodies corporate at all, because it appears that it can only apply to a contractual scenario where there is a penalty imposed. As above, prescribed Management Rule 21(3)(c) seems to indicate the legislature has classed the relationship between bodies corporate and their owners as being “incidental credit agreements”, which would render the CPA applicable. However, this flies in the face of the Dlamini finding.

Section 2(1) of the CPA provides that a creditor cannot recover both damages and penalty fees, or claim damages in lieu of a penalty. It has been held by our courts[2] that interest charged on overdue amounts (such as levies) is a form of damages. As such, if the CPA applies (which it might not) a body corporate cannot lawfully recover both interest and penalty fees for the same breach of the legislation or rules. The above, however, does not apply where a creditor relies on an express provision of an agreement entered into by himself and a debtor. In the absence of such a provision, then a body corporate may only be able to recover interest.

Conclusion

  • Sectional title bodies corporate can charge interest, provided that it is a maximum of 2% per month compounded and that the trustees have approved the rate in writing (and if necessary the relevant body corporate rules have been amended properly to authorize the levying of such interest) and that the interest charged does not exceed the capital debt or exceed the capital amount;
  • should legal action be taken by the body corporate to recover the money owed to it, legal fees can only be recovered if such costs were reasonable and agreed to by the defaulting owner, or if the bill was ‘taxed’ (presumably in terms of the Uniform Rules of Court or by a law society or other body with the jurisdiction to tax such bills (such as the Legal Practice Council or one of its provincial councils));
  • sectional title bodies corporate cannot lawfully impose any other types of charges apart from levies and special levies other than the interest and legal fees referred to above, unless they are authorized by the body corporate’s rules, and they are reasonable, constitutional and applied systematically to everyone. Any other type of charge would be unlawful;
  • sectional title bodies corporate will most likely be found by our courts not to be subject to the CPA.

https://www.golegal.co.za/body-corporate-sectional-title-penalty/

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2017  –  In the past 10 years, the number of sectional title schemes in SA has risen exponentially, and the latest figures show that there are currently well over 700 000 sectional title homes in the country, estimated to house more than 6-million people. 

“What is more,” says Bill Rawson, chairman of the Rawson Property Group, “property data company Lightstone puts the total value of sectional title property at around R665-billion, so it is increasingly important for the owners of sectional title units, and the banks that hold the mortgages on 58% of them, to understand how sectional title schemes are supposed to be set up and run.
“However, there is still widespread misunderstanding of even the basics, starting with the Body Corporate and how it is established, as well as what its functions and powers are. And this often gives rise to many problems and disputes in sectional title schemes which could quite easily have been avoided.

Quite simply, he says, the Body Corporate of each sectional title scheme is made up of all the unit owners in that development, and it is legally responsible for the day-to-day and financial management of the scheme.

“It is established – automatically – when the first unit transfer from the developer of a sectional title scheme to a new owner is registered, and then it steadily gains more members until the last unit is sold and transferred, at which point the developer or development company ceases to be a member.”

The designated tasks of the Body Corporate, Rawson notes, include the following:

  • To ensure the payment of any levies and other contributions owed to the scheme and any interest payable on arrears;
  • To set up bank accounts for the scheme and ensure that its finances are properly managed;
  • To arrange insurance for the scheme and ensure that the annual or monthly premiums are paid;
  • To arrange with the local authority for the bulk supply of services such as electricity, water and rubbish removal and ensure that the accounts for such services are paid;
  • To establish and maintain the scheme’s common property, including gardens, passageways, lifts, security equipment and recreational facilities, for the benefit and use of all residents;
  • To select, hire, oversee and pay any suppliers, service providers and contractors who may be needed to perform work for the scheme;
  • To appoint agents and employees to assist in the running of the scheme if necessary;
  • To borrow money if necessary to improve the scheme or put it on a sound financial footing;
  • To do all that is necessary to enforce the rules of the scheme;
  • To establish a reserve fund as stipulated by the Sectional Titles Amendment Act and invest any surplus funds on behalf of the scheme; and
  • To ensure that the scheme meets its obligations as regards registration and payment of the required fees to the office of the Community Schemes Ombud.

“However, this is by no means an exhaustive list and in bigger sectional title schemes especially, it would be very impractical for every owner to be involved in day-to-day operations and decisions, so the Body Corporate will usually elect a smaller group of owners as Trustees to act on its behalf.

“Sectional title legislation makes provision for this and gives Trustees the power to make certain decisions without always having to revert back to the Body Corporate for a mandate.”

And by and large, he says, Trustees work very hard on behalf of their fellow-owners and try their best to protect and enhance the value of everyone’s investment. “But the fact remains that most are amateurs when it comes to real estate. It is also becoming difficult to comply with all the requirements of the increasingly complex Sectional Title legislation, so most Trustees (and Bodies Corporate) could really do with the help of a professional managing agent.

“Time and again it has been shown that sectional title schemes that employ competent managing agents have fewer problems with levy arrears, for example, and are also cleaner, more secure and better maintained – and this should please even those members of the Body Corporate who are not interested in serving as Trustees themselves.

“However, Trustees do need to check the credentials and references of managing agents very carefully before making any appointment, and must ensure that their agent is a member of the National Association of Managing Agents with a valid and current Fidelity Fund Certificate.”

Sectional title bodies corporate explained: What it is and what it does

21 September 2015

Know what you’re buying into, says property manager.

What many people do not realise when signing an offer to purchase a sectional title unit is that in doing so they are agreeing to the conditions of buying into that scheme and they become members of a group, the body corporate, who are responsible for the day to day running and financial management of the scheme, says Shan Hulbert, sales manager at Knight Frank Residential SA.

The body corporate is the collective name given to the owners of the units and common property within a sectional title scheme and this comes into being when the developer transfers the first unit to its new owner. The developer, in fact, needs to call a meeting within 60 days of the body corporate being formed and at this inaugural meeting, according to the Prescribed Management Rules, will hand over the sectional plan and a certificate from the local authority indicating that all the rates due by him have been paid. In addition, the body corporate should receive paperwork pertaining to the income and expenditure regarding management of the scheme and any money received in, in time between the first handover of a unit and the formation of the body corporate, said Hulbert.

The body corporate’s function is to manage and maintain the property, which includes the common property (the driveways, common green spaces, swimming pool clubhouse, etc.) and exclusive use areas. To do this they will appoint trustees to act on their behalf and the trustees’ duties will include:

  • establishing a fund via levies paid by the owners for maintenance, management and administration of the common property and payment of taxes, water, electricity, insurance and other necessary services;
  • opening a bank account;
  • insuring the buildings;
  • maintaining the common property;
  • arranging repair of any damage caused once insurance has paid out or has been covered by whoever responsible;
  • informing the Registrar of Deeds and local authorities what the official address of the body corporate will be; and
  • maintaining all the instruments and machines that form part of the common property.

Initially, the key role-players in a sectional title scheme would be the developer, body corporate, trustees and management agents. The developer forms the company who has built the scheme and he/the company will cease to be a member once he/she no longer has a share in the common property. What some developers do is hold onto the ownership of some of the land and retain the right to develop at a later stage – which is what buyers should watch out for, says Hulbert. If this is the case, buyers should ask questions as to what the developer intends to build there and whether there is a limit as to how long he can take to develop the land and height restrictions etc.

Sectional title schemes have many benefits in that expenses are shared between the owners, which allows residents many “extras” that they might not be able to afford if living in a freestanding home, said Hulbert. Many schemes have full security, and often have amenities such as swimming pools, gyms, tennis courts, laundromats, clubhouses, and large green communal gardens, all of which cost extra to maintain.

This is why sectional title property has become so popular, the convenience and the communal living, which often offers a higher standard of living at a lower cost. Owners, however, just need to be aware of what their responsibilities are when deciding to buy into a scheme, she said.

https://www.knightfrank.co.za/news/sectional-title-bodies-corporate-explained-what-it-is-and-what-it-does-07441.aspx

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