UNFORSEEN MAJOR EXPENSES NEED NOT PUT THE OWNERS UNDER STRAIN

The body corporate of any sectional title scheme cannot lend money to any person but what many do not know, is that it can borrow money under certain circumstances, says Johann le Roux, executive director of Propell.

The body corporate cannot mortgage the common property in the scheme to raise funds for large unforeseen projects, and they cannot approach a bank for a large loan, unless the body corporate owns one or more units in the scheme to serve as security (which is highly unlikely), said le Roux. This can put the trustees under some strain as to where and how they will manage to raise funds from the owners if a large sum of money is needed in an emergency.

However, the Sectional Titles Act does allow the body corporate, if they are in dire financial straits, to raise money through hypothecation (cession) of unpaid levies. This is usually authorised by the trustees of the scheme and they would approach companies like Propell, who specialise in this type of transaction, as banks are generally not geared for such loans and would reject an application, except if the trustees are willing to stand surety, which is unlikely.

There are many incidents that can occur that would cost far more than the body corporate has in its reserves or could hope to raise quickly such as major damage to the roof of the building due to a bad storm, cracks in the units from bad foundations or a lift needing replacement.

To give an example of situations where Propell has stepped in, said le Roux, is a 45 year old building which was badly in need of emergency maintenance and this needed to be done immediately, as the structural insurance had been cancelled by the insurers. The majority of the owners in that scheme were pensioners, who simply could not afford to pay in a large special levy. In a case like this, a loan was the best option and the whole project was funded through a project finance loan through Propell.

Term loans, which can be taken over 12 to 60 months, are the best way to deal with a number of situations such as the above and they can be used for maintenance and improvements as well as emergency repairs.

Another situation where a project loan is a good option is where the majority of the owners in a scheme wrote to the trustees asking for separate meters for water and electricity to be installed for each unit and the common property. While this wasn’t an emergency situation, something like this benefits the financial health of the scheme in the long run because it eliminates the risk of large municipal bills as each owner will be responsible for payments for their respective unit’s consumption.

“Many believe that taking out a loan is bad option but in many cases it can actually be better than trying to get the cash reserves built up or raising a special levy as it does not put huge financial strain on the owners. The loan would be paid back over a period of time and a smaller amount added to the levies each month to cover the loan is easier for most households to manage than a large sum of, say R15 000 or R20 000,” said le Roux.

Please subscribe to our sectional title newsletter here.