“We are proud of our association with Chico Premjee and Rasik Soni of Trapezoid Investments,” says David Schaefer, regional Director of Trafalgar KZN. “We manage 4 of their successful developments on the Ridge, and are certain that Seasons Court will be another success.”

The first building in 2006, Platinum Towers, was followed soon after by Il Palazzo and The Quartz. More recently in 2012 the 98-unit One on Herwood came onboard.

Trapezoid’s track record and expertise in the Umhlanga Gateway precinct is unrivalled. Once the dust settles, however, the good or bad management of a sectional title complex can mean the difference between a good or bad investment, says Schaefer. He believes that involving property management expertise before the roof is on is what has made the Trafalgar and Trapezoid association a success.

“The Managing Agent is best placed to prepare the initial budget and the calculation of the levies and common area expenditure which will set the foundation for the Body Corporate’s financial success,” adds Schaefer.

Effective management and conduct Rules, clear exclusive use areas and common property all ensure a complex can be successfully managed and we are able to add value here. Clearly and correctly discerning the responsibilities of the developer and those of the new body corporate is crucial during the transitional phase. Together with arranging and facilitating the inaugural meeting and finalising the developers reconciliation, the successful handover from developer to Body Corporate is vital.

It is important for potential buyers to enquire from the outset about a developers future plans with regard to the management of a scheme, says Schaefer. “Good sectional title scheme management is a skill which requires knowledge of the applicable legislation and rules as well as active participation by owners, trustees, the chairperson and the managing agent.”

The important factors to establish about a managing agent include: number of years experience, the experience and qualifications of staff, and the range of services. A leading national property management company, such as Trafalgar, is able to deal effectively with arrears collection and disputes and will provide full accounting services for budgeting and year end accounting.

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The first thing to do as a new trustee would be to hold a trustees meeting where the points of business such as the levy budget for the next year are established, and pass a resolution for this budget.

However, Johann le Roux, executive director of Propell says many are elected to do the ever-important job of being a trustee without being trained or given all the materials needed to do so.

The board of trustees is elected by the members of the scheme and they are mandated to manage the funds and affirm rules and policies within the scheme, says le Roux.

He says every trustee should have copies of the Registered Management Rules, the conduct or house rules, a copy of the Sectional Titles Act and the Amendments Act, the sectional plan of the scheme, as well as the ability to keep a cool head and think logically.

The trustees are volunteers and are not remunerated for the work they do, which can often be onerous, but they can be reimbursed for expenses that they incur while doing that job.

The first thing to do as a new trustee (after being elected at the AGM), would be to hold a trustees meeting where the points of business such as the levy budget for the next year are established, and pass a resolution for this budget. If there is no resolution the levies cannot be collected legally.

The powers that the trustees are given are governed by the Sectional Titles Act and the rules of scheme. The roles of trustees are to appoint agents and employees, including a managing agent if necessary, borrow funds for the performance of their functions (if the amount needed is large and is preferred to raising a special levy) and give security for such loans, including the cession of levies. They also need to buy or rent items such as lawnmowers and tools needed for the body corporate, establish and maintain recreation facilities, gardens and lawns on the common property wherever practical and invest any funds not immediately required.

All monies received or spent by the trustees must be recorded and proper financial statements must be prepared and audited by a professional accounting firm.

Trustees should obtain services by contracting with various service providers, e.g. garden services, painters and electricians, etc and let (for the benefit of the body corporate) parts of the common property to owners and occupiers, such as parking bays as well as gain access to sections and exclusive use areas for maintenance purposes and delegate duties to individual trustees where necessary.

Trustees must perform these functions in order to manage the scheme well, says le Roux. These are determining, collecting and administrating levies in respect of sections and exclusive use areas, opening and maintaining a bank account and insuring all building improvements including sections and making sure that it is for an adequate amount (but not their contents). It is also maintaining common property (including exclusive use areas), keeping minutes, keeping and administrating all records, including financial records of all body corporate transactions and keeping a record of the current conduct rules. Functions such as arranging and conducting the AGM and, when necessary, special general meetings and preparing the documentation to be presented at each AGM, including the budget and audited financial statements are also important.

Trustees must keep financial records for the scheme. All monies received or spent by them must be recorded and proper financial statements must be prepared and audited by a professional accounting firm. It is of utmost importance that these documents be signed by the trustees and auditor.

Le Roux says the body corporate finance function should be dealt with as any business would as there are often large sums of money being paid over, and the enormity of the financial responsibility to keep these funds in good hands is often underestimated.

Apart from dismissal by the members of the scheme, a trustee is automatically removed from office when his levies are in arrears for 60 days, if he tenders his resignation or if legally declared to be of unsound mind. He can also be removed if he is sequestrated or convicted for an offence involving dishonesty.

It goes without saying that any person subject to any of the above disqualifications may not be appointed as trustee in the first place, says le Roux.

The role of trustees within a body corporate is an important one, and it is crucial to the well-being of the scheme, says le Roux. “A good board of trustees will be able to ensure that the scheme yields positive financials while running it effectively and smoothly, and keeping the occupants happy.

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Homeowners’ Associations and property developers will be relieved to know that they can veto transfer of a property in a security estate where the owner of that property has failed to pay all outstanding levies to the Homeowners’ Association.

This is according to Izanne van Zyl, a candidate attorney at Norton Rose South Africa. She explains that in Cowin and Sekati NO vs Kyalami Estate Homeowners Association, one of the property owners in the Kyalami security estate, Silver Tunnel Investments 7 (Pty) Ltd, was liquidated.

The liquidators had sold the property and wanted transfer of the property to be registered in disregard of the title conditions in favour of the Homeowners’ Association.

According to the title conditions:

“Every owner of the erf or any subdivision thereof or any unit thereon as defined in the Sectional Titles Act, shall automatically become and shall remain a Member of the Homeowners’ Association and be subject to its constitution until he ceases to be an owner as aforesaid.

Neither the erf nor any subdivision thereof nor any interest therein nor any unit thereon shall be transferred to any person who has not bound himself to the satisfaction of such Association to become a Member of the Homeowners’ Association.

The owner of the erf or any subdivision thereof or any interest therein or any unit as defined in the Sectional Titles Act, shall not be entitled to transfer the erf or any subdivision thereof or any interest therein or any unit thereon without a clearance certificate from the Homeowners’ Association, stating that the provisions of the Articles of Association of the Homeowners’ Association have been complied with.

The terms “Homeowners’ Association” in the aforesaid conditions of title shall mean Kyalami Estate Homeowners Association (Incorporated Association not for gain).”

The liquidators argued that the title conditions in favour of the Homeowners Association merely created a personal right against Silver Tunnel Investments 7 (Pty) Ltd, thus rendering it unenforceable against the liquidators.

The registration of the conditions against the title deed clearly created a real right that could be enforced against the whole world. If this was not the case a simple contract between the parties would have sufficed.

The registration of the conditions subtracted from the ownership rights in the land, since it restricted the owner from dealing with the land in whichever way it wanted.

When conditions are registered, it elevates Homeowners’ Associations to the level of bodies corporate and municipalities in relation to the transferred property, she says.

The liquidators further argued that the Homeowners’ Association only had a concurrent claim against the insolvent estate for all monies owed to it.

Because no distinction can be drawn between bodies corporate and municipalities on the one hand and Homeowners’ Associations on the other hand, this argument did not hold water.

Much like bodies corporate and municipalities, Homeowners’ Associations have a right to veto transfer of a property within a security estate if money is due and payable to them.

Homeowners’ Associations together with bodies corporate and municipalities have the right to veto transfer of a property to ensure payment of the levies and that they remain concurrent creditors in the insolvent estate.

The Kyalami Estate Homeowners Association, therefore, had a real right in terms of the title conditions and transfer of the property could not be registered without a clearance certificate being issued by them.

This is reassuring for all Homeowners’ Associations, investors in security estates and property developers.

In recent years security estates have become a very popular choice for not only homeowners but also property developers and investors, and not surprisingly so.

They are well-known for their excellent security measures and the fact that public access is restricted and controlled. These estates are generally well-managed and they have well-maintained facilities.

If a Homeowners’ Association of a security estate cannot entrench its rights by way of registration of title conditions, the whole structure and management of the security estate will be in jeopardy. This will result in some of the benefits and attractions of a security estate being lost, she explains.

“We, however, want to ring a warning bell. A condition in favour of a Homeowners’ Association in a document should be drafted in such a way that it constitutes a real right.

For example, if a condition only obliges the homeowners in a security estate to become members of the Homeowners’ Association of the estate without limiting the homeowners’ rights to alienate their property, it would not constitute a real right.”

Such a condition will not be registered by the Registrar of Deeds. Section 63 of the Deeds Registries Act clearly states that a deed or condition in a deed that creates a personal right or which does not restrict the exercise of any right of ownership of immovable property, will not be capable of registration.

The condition must, for example, provide for a restriction regarding the alienation of the property such as: “The property may not be alienated without the consent of the XYZ Homeowners’ Association.”

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According to Martin Bester, Managing Director of Intersect Sectional Title Services, a sectional title specialist company based in the Western Cape, of particular relevance to owners and occupiers in sectional title schemes are the amendments to Annexure 8 (the Prescribed Management Rules or PMR) of the Act.

“Prescribed Management Rule number 7, which deals with the way in which the trustees of a body corporate are to be elected, was amended to exclude nominees who are, at the time, in persistent breach of the Conduct Rules (notwithstanding a written warning to refrain from same); and further to exclude any nominee who is indebted to the body corporate,” says Bester.

“This amendment applies predominantly to nominees who are also owners or occupiers within the body corporate, as only they could be indebted to the body corporate or in breach of its rules. However, the Act does not require that a trustee be either.”

The next amendment sees the insertion of Prescribed Management Rule 13 (g). Bester explains that PMR 13 (a-f) deals with the disqualification of trustees, whereas PMR 13 (g) now provides further for any trustee indebted to the body corporate for a period in excess of 60 days to be disqualified should they fail to settle the debt within seven days of being notified to do so.

Lastly Prescribed Management Rule 31 (4A), which allowed trustees to, at their discretion, increase the levies charged by up to 10% at the beginning of the financial year, was replaced by PMR 31 (4B). This amendment now requires that levy increases form part of the proposed budget and be applied for and approved at the AGM.

According to Bester this amendment is not ideal as being able to increase levies at the beginning of a financial year allowed the trustees to effectively ensure that the levies for that applicable year were in line with the expenses and budget accordingly (provided the levy increase required was under 10%), whereas the AGM is typically three to four months after the beginning of the financial year.

“This simply means that should a body corporate require a levy increase within a financial year, the 1st quarter of the financial year is missed and the resultant increase could be greater or it could result in backdated increases which are a particular problem in commercial or VAT registered schemes.”

“PMR 31 (4B) on the other hand basically allows for the trustees to call for special levies or contributions from the members for expenses or costs, over and above those already provided for in the approved budget, and for these to be paid in whichever way the trustees deem fit,” concludes Bester.

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With effect from 14 April 2013 the following changes were made to Annexure 8 (known as prescribed management rules) of the Sectional Titles Act of 1986. In particular changes were made to prescribed management rules 7 and 13.

Notable changes to prescribed management rule 7 with regards to nominations:

“Nominations by owners for the election of trustees at any annual general meeting shall be given in writing, accompanied by the written consent of the person nominated, so as to be received at the domicilium of the body corporate not later than 48 hours before the meeting: Provided that trustees are also capable of being elected by way of nominations with the consent of the nominee given at the meeting itself should insufficient written nominations be received to comply with rule 4 (1) : Provided further that no nomination or appointment as trustee, of a person in breach of rule 64(1) or 64(2), may be made or accepted.”;

In the past, if an owner was in arrears or in breach of any rules, he could be nominated and elected by the owners of a sectional title scheme as trustees. This change will prevent this in future.

Notable changes prescribed management rule 13 with regards to disqualification:

“by the substitution in rule 13 for paragraph (g) of the following paragraph:

(g) if he is in arrears for more than 60 days with any levies and contributions payable by him in respect of his unit or exclusive use area (if any) and if he fails to bring such arrears up to date within 7 days of being notified in writing to do so.”;

A trustees will be automatically retired or disqualified from being a trustee if he remains in breach of the new rule 13 (g).

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Roughly 20% of South Africa’s sectional title schemes experience financial difficulties at some stage in their existence and a fairly high proportion of these actually end up in liquidation or having to arrange substantial loans. This was said recently by Tony Clarke, Managing Director of the Rawson Property Group.

“One has to accept that the controlling bodies of sectional title schemes, the body corporates, are often made up of people who have little or no accounting or financial experience. In some cases they may have agreed to move onto the board because the chairman asked them to do so in order to achieve a quorum.”

In these situations, said Clarke, the levies charged are often insufficient to meet the scheme’s expenses – and the problem is compounded by the levies not being efficiently collected, allowing some members to fall far behind on their payments. This, in turn, he said, leads to the building and grounds not being properly maintained, the insurance payments lapsing and security becoming neglected.

“Inevitably the value of the units then declines,” said Clarke, “and at some point a massive intervention by funding organisations and/or management experts will be necessary to put the matter right.”

What lessons should be learned from these all too common problems?

The first, said Clarke, is that all potential buyers of sectional title units should postpone their decision until they have seen the body corporate’s financial accounts. By law, he said, these have to be made available to any member of the public who asks for them and the estate agent with whom they are dealing should regard this as his duty to get a copy for them.

Once they have bought into the scheme, added Clarke, they should then also see it as a primary duty to attend every single annual general meeting, where the finances should be carefully scrutinized again.

“The main reason why many schemes do get into financial difficulty,” said Clarke, “is that attendance at annual general meetings tends to be low and the committee is therefore unable to make decisions and operate in a way that is beneficial to the scheme as a whole.”

Clarke also warned potential buyers contemplating purchasing in new multi-unit sectional title projects to beware of those where full sell out has not taken place yet and may take a very long time.

“In our experience it can be disastrous for a scheme to have large numbers of unoccupied units for months on end. Empty units are often not maintained and give a hollow, lifeless feeling to the complex. Furthermore, a high proportion of empty units will prevent the sold units from appreciating in value. It is essential, therefore, for the potential buyer to find out how fast the scheme is selling and to avoid one which is obviously sticking.”

It is also important, said Clarke, to ascertain what percentage of the occupants are likely to be tenants.

“While it is true that many very successful projects have a high tenant proportion, in general, it can be said that owner-occupiers take more care of their homes than tenants do, especially in low cost areas.  A big predominance of tenants could and possibly should serve as a warning sign to potential buyers.”

In a well-run, adequately financed scheme, said Clarke, the residents will benefit for a wide variety of reasons. They will, for example, not be burdened with any of the usual external maintenance costs as these will be extracted from the levies.  They will also enjoy security at a level difficult to achieve in a freestanding home and they can lock up and go in the knowledge that the unit will be safe.

In addition, said Clarke, they may also benefit from interaction with neighbours and participate in the scheme’s communal activities, such as weekend braais, pool parties, gymnasium sessions, talks and film shows. This can be especially helpful to single people, single parents and those who are new to an area.

“Sectional title schemes continue to be the fastest growing property sector in South Africa,” said Clarke, “and there are good reasons for this – but do take care not to buy into a badly run, inadequately financed scheme.”

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Owners who want to extend their sections must pay all the legal and administrative costs of changing the sectional plan and getting it approved and registered themselves.

Before they can begin any building work they will need:

1. The approval of the body corporate, authorised by a special resolution of its members.
2. The approval of every bondholder (bank) with an interest in the sectional title scheme if they intend extending the unit by more than five percent of its current area.
3. An amended sectional plan and a new schedule of participation quotas (PQs), drawn by a land surveyor or an architect for submission to the Surveyor General and then registered in the Deeds Office.
4. The approval of the local authority for the building work proposed, which can only be obtained after the changes to the sectional plan have been approved and registered.

Berry Everitt, MD of the Chas Everitt International property group, says approval to extend a section comes from the body corporate and not the trustees, and that a special resolution requires a 75 percent vote in favour (in number and PQs) by the members of the body corporate present or represented by proxy at a meeting at which a quorum is present and of which at least 30 days’ notice has been given.

However, he says,owners who want to extend their sections must pay all the legal and administrative costs of changing the sectional plan and getting it approved and registered themselves. This is not a body corporate expense, he explains.

On the other hand, Everitt says, there is no question of an owner who wishes to extend having to buy the land on which he or she plans the addition. “All land within a sectional title scheme forms part of the common property and is owned in undivided shares by all the members of the body corporate.”

He says the benefit to the body corporate of any extension will come in the form of a higher levy paid by the owner as a result of the increase in the PQ resulting from the increase in the floor area of the section and that this will apply even if the section is extended vertically rather than horizontally.

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The first free trustee workshop held by IHFM in Cape Town, with Marina Constas from BBM Attorneys as their guest speaker, who spoke on various aspects of sectional title, case law and how to deal with problems such as enclosures of balconies and exclusive use areas, was oversubscribed and so much so, says Michael Bauer, general manager of IHFM, that they have already arranged to hold the next workshop in Durban.

“Marina Constas is known as a specialist in sectional title law,” said Bauer, “but we didn’t think the seats would fill as quickly as they did, nor did we think that people would be willing to stand for two hours, just to be able to attend.”

IHFM have decided, because of the success of the first one and because “the demand is clearly there”, said Bauer, to hold one each quarter.

The aim of these workshops is to educate the public and to teach them about their responsibilities as owners of sectional title units.

The next workshop will be in Durban with Mike Addison as guest speaker, who will talk on sectional title insurance of sectional title schemes and trustee duties and responsibilities.

Insurance of sectional title units is a very important aspect of being a trustee, said Bauer, and trustees who do not do this properly could even be accused of gross negligence.

The workshop on insurance will cover how to deal with claims and multiple claims, insuring to the correct value, how to manage claims properly and will have a question and answer session for specific problems trustees would like to discuss.

The Durban session will be held on 11 May at Paradise Valley from 8h30 am to 12h00 pm.

To be updated regularly on various sectional title matters, IHFM offer a free newsletter and anyone who is interested should go to www.ihfm.co.za and subscribe.

To book a place at any of the workshops being held telephone Rene Scholtz on 021 427 1600 or email rene@ihfm.co.za.

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Property purchasers can buy in their own name, in more than one person’s name (as a syndicate or forming a partnership) or in a company or trust.

This is according to Carol Reynolds, area principal for Pam Golding Properties (PGP) in the Durban, Durban North and La Lucia areas, who says there are a variety of options available to the property purchaser – you can buy in your own name, in more than one person’s name (as a syndicate or forming a partnership) or in a company or trust.

She says the two most common types of ownership are freehold and sectional title.

Freehold, she says, usually applies to freestanding homes in residential areas, but also applies in certain gated estates. “In freehold ownership you will own your portion of land and the buildings on it; be responsible for all municipal charges e.g. water, electricity, refuse removal and sewage (unless you have a septic tank) as well as for insuring the property.”

If it’s a freehold property in a gated estate, a levy is paid to the homeowners association (usually a non-profit company) to maintain the common property and cover security costs, says Reynolds. In addition, she says, you are obliged to become a member of the Homeowners Association and abide by its Conduct Rules.

“Sectional title property usually refers to flats and simplex/duplex developments and in this regard you own a ‘section’ – the interior of the unit, contained by walls, ceilings and floors plus a share in the common property. Furthermore, you may be entitled to an ‘exclusive use’ area – part of the common property which is usually a garden area or a carport.”

According to Reynolds, with a sectional title property you are obliged to become a member of the body corporate and abide by its conduct rules; pay a levy (this covers the cost of running the development, insurance and usually water) based on your ‘participation quota’ (determined by the area of the unit and exclusive use area); and you are responsible for paying municipal rates, electricity, refuse removal and sewage.

She says before buying into any complex, ensure that you have received a copy of the conduct rules and recent financials for your own peace of mind, and if mortgage finance is involved in acquiring the property your bank will require them. A healthy body corporate is a good indicator of a well-run complex, which is critical from an investment perspective, she says.

When purchasing property you will need to consider if you want an existing property, land on which to build, or a plot and plan option from a developer, says Reynolds.

“When buying land you can design a brand new house custom-built for you. However, bear in mind that there are holding costs, in that you will need to rent while you are building, as well as pay for the build and pay for the bond instalments on the land. Building costs also need to be factored into the equation – currently building costs start from around R5 000 per square metre and can escalate as high as R20 000 per square metre for top quality finishes.”

Reynolds says it is also important to note that banks generally only lend up to 50 percent of the value on land sales, so you will need to have a 50 percent deposit to put down on the land. Other costs and time delays to keep in mind are costs linked to getting plan approval and professional fees.

“Buying a plot and plan means getting a brand new home without the above hassles and no transfer duty. In both cases, you need to ensure that the builder is reputable and registered with the National Home Builder Registration Council (NHBRC),” she says.

Reynolds explains that with the Consumer Protection Act, a heavier onus is on developers to ensure that the property is sold in good condition without any defects.

VAT or transfer duty

Reynolds advises homeowners to remember that, in regard to a property purchase, only one tax can apply – either transfer duty or VAT. VAT usually applies to new residential developments as well as commercial properties where the property is owned by a VAT vendor.

VAT is included in the purchase price and then paid by the seller as part of his/her VAT bill. Transfer duty is paid by the purchaser and is excluded from the purchase price.

She adds that it is important, when buying a property and applying for a bond to disclose your marital status to the agent and bond consultant. The agent and the attorney will need to know whether you are single, married in or out of community of property and which country’s laws govern your marriage. If you are married in community of property, both spouses will need to sign the sale agreement. If you are not a South African citizen it is also important to disclose your residency status in South Africa.

In addition, she says, buyers should be aware that some banks will require life insurance to cover the loan in the event of your death, in which case, you may be required to either cede an existing policy or to take out a separate Home Loan Protection Policy.

With regard to homeowner’s insurance, which covers the actual building, this resides with the owner and not the occupant, so on the date of transfer, the responsibility for insurance passes from the seller to the purchaser, she says.

“If the buyer takes early occupation, i.e. before transfer, then the seller is still responsible for the homeowner’s insurance.”

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Unfortunately, most Bodies Corporate are notoriously bad at budgeting for future expenses and while most do make a small provision within their annual budget for future expenses, the majority do not take into account the necessity to raise funds for big ticket items such as painting, waterproofing and roofing.

The only problem is there are not enough funds to cover even half of this required maintenance. The Board of Trustees are discussing the Body Corporate’s options: Do they raise a special levy? Do they take out a project loan? Do they wait for funds to be raised by increasing the levies and run the risk of the building falling into further disrepair and costing more in the long run?

Let’s take a step back. In terms of Section 37 (1)(a) of the Sectional Titles Act 95 of 1986, a body corporate shall establish a fund for administrative expenses; sufficient for the repair, upkeep, control, management and administrative activities of the common property, and most importantly, including reasonable provision for future maintenance and repairs.

Unfortunately, most Bodies Corporate are notoriously bad at budgeting for future expenses and while most do make a small provision within their annual budget for future expenses, the majority do not take into account the necessity to raise funds for big ticket items such as painting, waterproofing and roofing. These items of maintenance are classified as routine and should be included in both a maintenance schedule and the annual budget.

Maintenance schedules should be drawn up and updated on a regular basis. When undertaking this exercise, quotations should be sourced for inclusion in the annual estimated budget of expenditure for presentation and approval at the Annual General Meeting. Large expenditure items such as the painting can be quoted on well in advance. A Body Corporate can do this by enlisting the assistance of a reputable painting firm and requesting them to provide a budget quote with escalation for the period until the next painting is due in order to budget for this future expense accordingly. This then provides the Body Corporate with an estimate of what would need to be raised annually to ensure there are sufficient funds available when the painting becomes due and avoids the need for unnecessary special levies and/or project loans.

Bodies Corporate should also ensure that their surplus funds make provision for sudden and unforeseen circumstances. While events such as burst water mains and roofs blowing off during storms are generally covered by the Body Corporate insurance, items such as the collapse of a communal sewerage system due to a cracked ceramic or clay waste line, causing massive blockages, may not be. How was the Body Corporate to know this was going to happen? How do they pay for it if there are not sufficient funds? The answer is: making sure that there are surplus funds “just in case”.

The Body Corporate is responsible for ensuring that they budget adequately for normal day to day expenses such as municipal charges, audit fees, insurance etc; but also need to ensure that they are providing for the future. They need to make sure that they are fulfilling their obligations entrusted to them under the Sectional Titles Act in terms of Section 37 (1)(a). While the Board of Trustees are responsible for having the estimated budget of expenditure prepared for the Annual General Meeting, they should remember that their managing agent is well-versed in the Sectional Titles Act and the requirements therein and can offer valuable guidance and assistance if it is required.

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