“As attorneys,” she says, “we have to stick to the usual debt collection process. If it becomes clear to the body corporate that the levy arrears are getting out of hand we will send the owner a letter of demand, specifying the exact amount owing, the interest which has accrued and the time by when the debt must be settled – this is usually set at ten working days.”

At this point, says Keke, the owner should, if he is to avoid further action, either pay the debt immediately or contact the attorney representing the body corporate and make an arrangement to do so.

All too often, however, she says, the offender will simply choose to do nothing. In these cases the attorney, at the behest of the body corporate, is left with no option but to institute court proceedings.

This involves sending the offender a summons to appear in court on a certain day. If the offender then does not inform the attorneys of his intention to defend the case, the attorney will request a default judgment. This means that court will issue a judgment which instructs the debtor to pay his now-confirmed debt. Such a judgment is crucial because it removes any dispute as to whether the property owner has rightfully been indebted or not.

If this too is ignored, the attorney may then apply for a warrant of execution. This confers the right to instruct the Sheriff in the particular jurisdiction to attach the offender’s movable goods in full or partial satisfaction of the debt, and put them up for sale by auction.

What lessons can be learned from all of this by bodies corporate and those struggling to meet their levy payments?

“Even if a default payment is acknowledged and paid, it has to be recognised that this is a time-consuming and often expensive process,” says Keke. “Body corporates should therefore make every effort to deal with defaulters face-to-face and as soon as possible before the situation gets out of hand and legal action becomes unavoidable.”

“From the defaulter’s viewpoint, however, the only and indeed the best advice I can give is to make contact with the attorneys representing the body corporate, and negotiate a payment arrangement, which is, in my experience, usually on an extended payment basis. It is very unwise to let matters go unheeded – eventually the size of the instalments may financially cripple the defaulting property owner. Responding to a letter of demand with an offer to pay the outstanding amount in instalments, may well persuade the body corporate to suspend legal proceedings.”

A sectional title scheme involves ownership of common property in undivided shares, whereas a homeowners’ association does not, he says. “In a homeowners’ association, the common property, sometimes referred to as ‘private or common areas’ is usually owned by the association.”

Martin Bester, Managing Director of Intersect Sectional Title Services, who sits on the board of the Residential and Sectional Title Committee of SAPOA and is a member of the Sectional Title Regulations Boardadvises that there are predominantly two different types of cluster developments: sectional title schemes and homeowners’ associations, and these differ in the way the scheme is run and where the responsibility lies.

He says in a homeowners’ association you own the house and the erf it is built upon. “Each unit has its own erf number and each owner is responsible for his/her own rates and taxes, insurance, maintenance, as well as water, sanitation and electricity.”

Bester says that a homeowners’ association, which in the Western Cape is usually registered in terms of the Land Use Ordinance at the City of Cape Town, is usually established to look after the maintenance of the roads, security and communal areas within the complex and a levy is payable by all of the homeowners for this upkeep.

In a homeowners’ association, each owner of an individual property is automatically a member and the homeowners’ association will be responsible for establishing the rules of the development.

According to Bester, when it comes to sectional title property, you own a unit, which comprises the section [which could be a flat or townhouse], and the exclusive use area(s) [which could include parking bays and or gardens, if any] as well as an undivided share in the common property.

“Sectional title therefore is a form of joint ownership in terms of which parts of buildings or complexes can be exclusively owned, in conjunction with shared ownership of other parts of the buildings and the land.”

“The owners in a sectional title development collectively form a body corporate, which, once established, is responsible for the day to day running of the scheme and the enforcement of the rules, as well to establish a fund to ensure that all bona fide costs are met and that the property is suitably maintained.”

How they are similar

Bester advises that homeowners’ associations are similar to sectional title schemes in that each raise levies in order to offset the costs associated with administering and maintaining the common property.

There is also [limited] control over individual behavior of the members in each, by way of approved rules, he says.

“Both schemes offer a form of communal living, which is attractive to certain people, based on the ‘lock up and go’ and secure lifestyles some offer.”

How they differ

Bester further advises how the two forms of development are different.

A sectional title scheme involves ownership of common property in undivided shares, whereas a homeowners’ association does not, he says. “In a homeowners’ association, the common property, sometimes referred to as ‘private or common areas’ is usually owned by the association.”

Another fundamental difference, Bester says is that the owner in a homeowners’ association is responsible for the repairs and maintenance as well as the house owners’ insurance for his/her own property; whereas in a sectional title scheme the body corporate is responsible for the repairs and maintenance of the common property, which includes the external parts of the buildings, as well as for insuring the buildings and fixtures contained in the scheme – and finances are the same by means of the levy raised.

“Sectional title can provide for ownership in different levels on one piece of land that forms part of the common property, whereas in a homeowners’ association each separately owned building is on a separate erf.”

Also, in sectional title, he says it is usual to have some parts of the common property made subject to specific rights of exclusive use infavourof particular owners or groups of owners. “This concept is not ordinarily part of a homeowners’ association.”

Additionally, Bester says the common property, sections and registered exclusive use areas in sectional title schemes are shown on one or more sectional plans, whereas the property in a homeowners’ association is shown on a general plan or separate diagrams.

They have such sessions regularly in Cape Town.  The aim of the Johannesburg workshop was to explain the amendments to the Sectional Title Act of 2010 and certain aspects of insurance as it applies to sectional title.  All IHFM newsletter subscribers and clients were invited.

Marina Constas of the legal firm, BBM Law Inc., spoke on the Act, Mike Addison, a director of Addsure, on insurance.

“In both cases,” said Michael Bauer, general manager of IHFM, “thorny issues were raised.  Constas, reminding us that the Sectional Title Amendment Act has now been promulgated but is not effective yet, warned that under the new rulings a member will be entitled to hold only two proxies on behalf of other members.  This, while eliminating the danger of control by motivated minorities with their own agendas, could also result in meetings time and again failing to achieve a quorum.”

Constas, said Bauer, also discussed the proposed Ombuds Community Scheme Services Bill which will make it possible for members, tenants, and trustees of sectional title schemes, homeowners associations and share blocks to apply for arbitrated resolutions in disputes without going the long and possibly expensive route of taking High Court action.

“The concept here, we were given to understand,” said Bauer, “is logical and worth pursuing – but there does appear to be a grave danger that the nine regional ombudsmen will find it difficult to recruit appropriately experienced arbitrators with expertise in sectional title law, building knowledge, and  accounting skills.  As there are now 800 000 sectional title owners in South Africa and as it has been estimated that 15 to 25% of these are experiencing problems (often relating to levy collection and maintenance), the task facing these ombudsmen and their arbitrators is indeed formidable.”

Mike Addison, said Bauer, had reviewed prescribed management rule 29 (4) as it effects payment of insurance excesses and recovery of these from owners.  Addison made it clear the contract between the body corporate and the insurers make excesses the responsibility of each section affected.

Insurance claims become especially complicated, said Bauer, when more than one section is damaged as a result of a single accident, e.g. a geyser burst, a flood or an electrical fire.

Here, said Bauer, the insurance excess costs have to be allocated proportionately to the damage repair costs incurred in each section.

Where the damage is clearly the result of negligence, the insurance company is still obliged to fund the repairs but, said Bauer, Addison said that the insurance company can then sue the guilty party to recover costs – and this does happen regularly.

Also discussed by Addison were public liability claims on illegally erected extensions on common property.  Illegal extensions, said Bauer, occur more often than many body corporate members realise and such extensions are not covered by the body corporate’s insurance.  In these cases, he said, the trustees have to get the illegal extension removed and should inform the insurer about their new insurance risks.

Addison also pointed out, that on insurance claims owners will try to claim directly from the insurer – but prescribed management rule 27 states that the legal documents on behalf of the body corporate have to be signed by two trustees or the managing agent and trustee – and this includes the claim form because, as mentioned, the policy is between the body corporate and the insurer.

Bauer said that the success of the first Midrand workshop has convinced him that such free trustee workshops for sectional title owners and trustees are worth the effort they require.

“We have therefore decided to have more regular free trustee workshops on all matters relating to sectional title and homeowners associations.  Those who would like to be invited in future should subscribe to our newsletter on www.ihfm.co.za or email Michael Bauer on michael@ihfm.co.za.”

“We have recently,” says Michael Bauer, general manager of IHFM, “come across cases where, usually as a result of the sectional title scheme not having an experienced managing agent, quite flagrant departures from the prescribed rules have taken place and we have covered this subject in our newsletter (which can be subscribed to by going to www.ihfm.co.za).”

Bauer reminded those involved in such meetings that in terms of Prescribed Management Rule 60 a resolution put to the meeting has to be decided on by a show of hands.  This rule, he said, applies unless prior to or on the declaration by the chairman of the result of a show of hands, a poll involving all members is demanded by any person entitled to vote at the meeting.

PMR 62, said Bauer, lays it down that the owners of sections have one vote per section.  Attempts to block multiple voting by owners of many sections are, therefore, misguided.

PMR 66, said Bauer, stipulates that where two or more co-owners are entitled to exercise one vote jointly, that vote can only be exercised by one person jointly appointed by the owners to vote on their behalf.  However, the voting representative need not be one of the legal vote holders – he can be appointed by the others as their proxy.

Bauer reminded sectional members that PMR 64 debars them from voting at the annual general meeting (on majority resolutions, but not on special or unanimous resolutions) if any contributions owed by them on their unit have not been paid by the stipulated date or they are in breach of any rule of the scheme.

Members are also debarred from voting if they are deemed by the trustees to have persisted in breaking conduct rules despite written warnings.  However, a disqualified owner-bondholder is entitled to vote as such a member’s proxy.

According to Pam Golding Properties (PGP) national sales executive, John Herbst, the sale of sectional title properties makes up a substantial 28 percent of all units (over the selling price of R10 000) sold in Johannesburg.

According to Pam Golding Properties (PGP) national sales executive, John Herbst, the sale of sectional title properties makes up a substantial 28 percent of all units (over the selling price of R10 000) sold in Johannesburg.

“Many sectional title residential developments offer sound value for money and a well-run complex can offer a sound return on investment over the long term,” says Herbst.

He explains that the fact that residents together contribute to the upkeep of the complex and the maintenance of facilities means that many sectional title developments are able to offer a high standard of living.

The ability to share costs such as maintenance, water, insurance, security and garden services keeps the cost of living more affordable.

For the security conscious, sectional title developments are considered secure environments in which to live as many have access control, perimeter electric fences and other security measures in place.

Residents find living in secure estates convenient in that they are able to literally ‘lock up and go’ at short notice.

They value community living, as well as excellent amenities such as clubhouses, restaurants, swimming pools, tennis courts and other facilities, offered by many sectional title developments, he says.

Herbst points out that when buyers purchases a property in a sectional title complex they are buying exclusive ownership of the unit or section that they have purchased.

At the same time they become a joint owner of the common property of the development.

Depending on the type of property purchased, the buyer may also be entitled to the exclusive use of a garden, parking space and staff quarters.

He says the buyer’s section is usually a flat or townhouse and it may be situated within a gated community or estate.

Buyers value community living, as well as excellent amenities such as clubhouses, restaurants, swimming pools, tennis courts and other facilities, offered by many sectional title developments, he says.

“Sectional title schemes are strongly regulated by the Sectional Titles Act, which covers all aspects of owning this kind of property, affording any would-be buyer a good measure of protection.”

Herbst says the value of a sectional title property can vary considerably and depends on such factors as the size of the property, its general condition, how well it is maintained, how attractive communal areas are and what amenities are offered.

Sectional title units are priced from as little as R280 000 and up to R50 million.

Jason Shaw, manager of the PGP office in Fourways/Dainfern, says sectional title unit owners automatically become members of the body corporate when purchasing a property in a sectional title development.

This is an association of titleholders, which has a say in the running of the complex including the maintenance of the common property.

Trustees are elected to handle the day-to-day management of the sectional title scheme and protect the interests of owners.

Shaw says there is very often a direct correlation between how well the sectional title scheme as a whole is managed and maintained and the value of one’s property.

It is therefore important that the body corporate and trustees are competent and well organised.

Another advantage of the sectional title system is that owners can become involved in the body corporate and in the running of their own sectional title development.

“It is recommended that owners become actively involved in their body corporates and attend general meetings,” says Shaw.

Just how do you tell whether a sectional title scheme is well managed?

Shaw says there are a number of aspects to consider:

It is also important for you to ascertain whether the financials are correctly audited and budgets are properly drawn up. Without proper budgeting the viability of the scheme is placed in danger, as it may not be able to meet its financial obligations.

1. Any would-be buyer is entitled to examine the books of the scheme to establish whether the development is financially sound and well governed.

2. Does the development have a positive cash flow and is it up-to-date in its payments to creditors?

If it is heavily indebted and struggling to make payments, this would be a cause for concern.

3. Check whether insurance payments are up to date and that the policy offers proper cover.

It is also important for you to ascertain whether the financials are correctly audited and budgets are properly drawn up.

Without proper budgeting the viability of the scheme is placed in danger, as it may not be able to meet its financial obligations.

Herbst points out that the process of finding a suitable sectional title scheme to invest in is best undertaken with an experienced agent who understands the market and who has your best interests at heart.

This will help to ensure that you choose a property that is right for you and that will grow in value.

“Sectional title schemes tend to be more affordable while offering residents an excellent lifestyle.

Shaw adds that for these reasons, he believes there will be a continued demand for them into the foreseeable future.

On many schemes, says Ulrik Strandvik of Gunstons Attorneys, the owners or those living there as tenants are not aware that a homeowners’ association will – or should – have been set up at the outset – this is a legal requirement.

They may also not be aware that the developer will have had to draw up a homeowners’ constitution before handing over the scheme to them and this is operative and binding even if they have never heard of it.

“Quite often the developers simply fail to tell them that they do in fact have such a constitution and must organise meetings to decide how the scheme will be run.”

In these situations, says Strandvik, problems arise if and when an owner decides to sell because this cannot be done without the consent of the other homeowners. If no HOA meetings have taken place and the association is not operating, the usual procedure, he said, is for the attorney handling the sale to request that a meeting of owners or their elected representatives and to ask them to approve the sale. This, he added, can take time because owners may not be living in the scheme and may be difficult to trace.

Alternatively, the attorney can arrange for a sufficient number of owners to sign a form allowing one or two of their colleagues to represent them in this matter. This, too, he said, can take time to achieve.

Should these measures bear no fruit, as a last resort the attorney can apply to the courts for permission to go ahead with the sale.

The lesson to be learned from all this, says Strandvik, is that owners in schemes should check whether by law a homeowners’ association should have been established for their scheme, should set it up if it is not in place and should ensure that they have a constitution.

The types of difficulty described by him, Strandvik added, are most commonly found in small schemes with, say five to ten units.

“In the bigger schemes developers almost always know and observe the rules applying to homeowners’ associations and some really conscientious types own a unit or two in their own schemes and are trustees in the HOA.”

ARE YOU AWARE OF THE pending new legislation w.r.t Sectional Titles Schemes Management Bill and Community Schemes Ombud Services Bill as well as the amended Prescribed Management Rules, and the new Companies Act, and how these changes will affect trustees in Sectional Title Schemes?

IHFM (Pty) Ltd in conjunction with BBM Law Inc., Addsure, and Propell will be hosting a free informative trustee workshop on Tuesday the 8^th of May 2012 at the Bytes Conference Centre in Midrand.

The objective of the trustee workshop is to provide practical understanding of the fiduciary responsibilities of trustees w.r.t insurance in sectional title schemes and the pending new legislation w.r.t Sectional Titles Schemes Management Bill and Community Schemes Ombud Services Bill as well as the amended Prescribed Management Rules, and the new Companies Act, and how these changes will affect trustees and owners in Sectional Title Schemes.

EVENT SPEAKERS:
Mike Addison (Director of Addsure (Pty) Ltd)

Marina Constas (Director of BBM Law Inc.)

Venue:                          Bytes Conference Centre
Date:                            8 May 2012
Location:                      Bytes Business Park, Block C 241 Third Road, Midrand, Johannesburg

Start Time:                   18:30pm for 19:00pm

Finish Time:                 21:00pm
Cost:                            Free

Tea, coffee and snacks will be served, seats are very limited…

Book early to avoid disappointment…

For reservations:

Contact:                       Rene Scholtz
Company name:           IHFM (Pty) Ltd
Telephone number:      021 424 7595
Email address              rene@ihfm.co.za

These comments were sparked off by a recent sectional title court case (Cassim vs Property Management 2011), which was one of several reviewed by Professor Henk Delport in his recent update on property legislation given bi-annually to members of the Western Cape Institute of Estate Agents.

In this case, two members of the body corporate objected to the fact that the trustees had not only borrowed a sum of money from Voyager Property Management but had apparently done so without consulting their members and had not disclosed the size of the loan.

At the body corporate’s 2004 annual general meeting the two owners proposed that the loan agreement be cancelled – but this was rejected by a large majority of the members.

The two aggrieved owners then got themselves elected as trustees – and in their individual capacities sued the body corporate, Voyager Property Management and the other trustees and the managing agent for the loan sum to be recovered.  They claimed that the loan agreement was invalid as one of those involved in signing for it had not at that time been a trustee.

In August 2005, the High Court suspended all the trustees from office because the scheme was in financial difficulties.  However, the two trustees persisted with their claim.  When the case came to court the judgement was that the two owners, no longer being legal trustees, had no rights in this matter and the claim was dismissed.

The owners then appealed to the Supreme Court which also dismissed their claim, confirming that, as the owners had been suspended from their trustee positions, they had no legal standing.  If, as unit owners, they wished to lodge a complaint against their body corporate they should do so in terms of Section 41 of the Sectional Title Act.

This section states that an owner has to serve notice on the body corporate calling on it to institute proceedings to recover losses or damages.  If the body corporate fails to do this within one month, the plaintiffs can apply to the court to appoint a curator to investigate whether instituting proceedings is the wise course of action.  Should the curator recommend this course, the court will usually go ahead on this track.

Referring to Professor Henk Delport’s comments on this case, Brock said that, while sectional title remains the fastest growing sector in the property industry and the one giving the best returns, it has to be accepted that a percentage of South Africa’s schemes are badly managed and will require financial rescue of some kind as well as the replacement of the trustees.  Furthermore, the resolution of disputes here is, due to the democratic structure of sectional title management, a cumbersome procedure under the Act as it now stands.

Those buying into such schemes, she said, should meticulously check their schemes’ latest AGM accounts – and estate agents selling such schemes, she warned, can no longer hide behind “ignorance”: if they have sold a unit in a financially unstable sectional title scheme to a buyer without disclosing the dangers openly, they could be deemed culpable in terms of the Consumer Protection Act, which insists not only on 100% transparency but also on the consumer being thoroughly acquainted with the product.

Exclusive use areas (EUAs) in sectional title schemes are parts of the common property whose use has been granted to certain owners for their exclusive use.

And yet, says Berry Everitt, managing director of the Chas Everitt International property group, they are often misunderstood and the cause of serious disharmony and even disputes among residents.

“An EUA could be a parking bay, a carport, a lock-up garage, a storeroom, a private garden or even a balcony, but it is important to realise that it is not defined by limited access or non-use by anyone else,” he says.

“Essentially an EUA must be specifically created and protected by the rules of the scheme, or specifically registered in terms of the Sectional Titles Act, in which case it will be shown on the sectional plan and can even be bonded – and bought and sold among members of the body corporate.

Writing in the Property Signposts newsletter, Everitt says the second important thing that sectional title owners really need to know about EUAs is that the Sectional Titles Act provides for any owner who has the benefit of an EUA, either registered or rule-created, to make an extra contribution to the levy fund to cover costs of rates and taxes, insurance and maintenance.

“And this extra contribution must not be confused with a normal levy. It is not calculated according to a participation quota, as EUAs do not have quotas. The calculation is based on actual costs incurred for the EUA.”

The tasks of a managing agent generally include, but are not limited to, the sending of monthly levy statements, the collection of monthly levies and all other monies due by owners to the body corporate, keeping the scheme’s financial records up to date and arranging an annual audit, preparing the annual budgets for approval at the annual general meeting, arranging for quotations for repairs and maintenance needed at the scheme. Also, sending out notices and generally assisting the trustees with tasks that arise in administering a body corporate.

As there are no formal prescribed activities for a managing agent, these need to be agreed upon and formulated in a contract, which will be signed by the trustees, on behalf of the body corporate.

Jurisdiction for a managing agent lies under the watchful eye of the Estate Agents Affairs Board (EEAB), therefore all managing agents/agencies are under a legal obligation to register with the EEAB.

When appointing prospective managing agents, it is important to request references to ensure the proposed managing agent is reputable. It is equally important to remember that the one with the cheapest quote may not necessarily be the one to render an efficient service, which could easily cost the body corporate more in the long run. Contractually speaking, managing agents are initially appointed for a period of 1 year and the appointment is then automatically renewed from year to year unless the body corporate notifies the managing agent to the contrary.

In most cases managing agents are able to improve the general performance of bodies corporate, assisting them to be more cash flush in the future. Through their contacts, good supplier base and knowledge of the market, good managing agents are worth their fees considering the benefits they bring to the scheme and the hours of work they put in monthly.

Article written by Johan Le Roux, Executive Director of Propell Levy Finance.