It will come as a surprise to many who live in or are associated with group housing schemes in South Africa today that there are many such schemes in which the members themselves do not realise that they are – or should be – bound by a homeowners’ association which has the right and duty to manage the scheme, control the conduct of its members, charge levies and maintain the common areas.

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.”

Although disagreements over sale agreements remain part of the way of life in the property sector, trial court statistics show that these days they are fairly rare in freehold deals.  However, in the sectional title and leasing sectors, the number has risen quite significantly, says Dianne Brock, general manager of the Western Cape Institute of Estate Agents.

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.

The appointment of a managing agent holds distinct benefits for a Scheme. The task of managing and administering a scheme – whether large or small – is a complicated and time consuming one and there are few schemes with owners who have the time and knowledge to take on all of these demands for no financial compensation. Most schemes appoint a managing agent, generally a company or close corporation, who specialises in sectional title administration.

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.

Many of those people directly or indirectly involved with homeowners’ associations have not as yet come to grips with the fact that there are today two types of such associations – and that these carry different obligations and responsibilities, says Michael Bauer, general manager of the property management company, IHFM.

The first, said Bauer, are those HOAs which were previously referred to as “Section 21” companies and today are listed as “non-profit” companies.  Under the new Companies Act these HOAs have to draw up memoranda of incorporation and have to operate in accordance with the new provisions of Companies Act like any other private or listed company.

In the second category are those homeowners’ associations established to  in accordance with the Land Ordinance Act 15 of 1985.  Unlike the so-called non-profit Section 21 HOAs, which have to lodge their constitutions with the Registrar of Companies, these land ordinance HOAs lodge their constitutions with their local municipalities and these constitutions do not have to conform to a set pattern:  they suit the needs of each individual HOA and are basically a commercial contract based on the prescribed management rules and conduct rules of the Sectional Title Act.

Generally, said Bauer, this second category of HOA is easier to manage than the first category.

Members of HOAs in the first category, says Bauer, will find, if they have not already done so, not only that their directors duties and responsibilities are now exactly the same as those of company directors but also that, although they are volunteers and not paid, they can be sued by their members for mistakes or misadministration.  By way of contrast, a category one trustee cannot be held financially liable for mistakes unless gross negligence or criminal conduct can be proved.

Both categories of HOA, added Bauer, can and, indeed, must, apply for a tax exemption certificate based on their not for profit status. However, their constitution or memorandum of incorporation has to clearly state the not for profit status.

HOA may have to register for VAT, if their annual turnover exceeds R1 million per annum. In most cases, the threshold is not exceeded, but if a special levy is raised in could top the R1 million mark in a particular financial year.

Under the new Companies Act, it is also, said Bauer, essential for those HOAs that have amended and lodged their memoranda of incorporation to conform with the new provisions of the Companies Act.

In addition, every change in directorship has to be registered with the Registrar of Companies.  Until a director is registered in this way, he said, they are not legally empowered to make or change any decisions.

All too often, says Michael Bauer, general manager of the property management company, IHFM, problems arise when an owner (often a new owner) of a sectional title unit plans to renovate his newly acquired property.

This, says Bauer, is not permitted without the prior consent of the trustees of the body corporate and the local municipality especially if the improvement involves structural changes, an extension or an alteration to the external look of the building, or any major building work.

If electrical work is involved a qualified electrician’s compliance certificate has too to be obtained – and the same is necessary if plumbing work is called for: a plumber’s compliance certificate has to be issued on completion of the work.

“These requirements,” says Bauer, “are often overlooked, especially by those doing kitchen and bathroom renovations.”

Any renovation taken without the trustees’ approval, said Bauer, is likely to be a breach of the scheme’s conduct rules.  These are usually filed with the Deeds Office and should be an addendum to the Deed of Sale.  They vary from scheme to scheme, but owners should make a point of checking them out, not only before applying for permission to alter their unit but before they sign a purchase agreement.

The problems caused most commonly by alterations and renovations in sectional title schemes, said Bauer, relate to material deliveries and the associated increased risk of theft, noise, dirt and rubble piles.  Combined these can cause severe disruption to body corporate members’ lives.

“Typically in the worst cases,” said Bauer, “a go-getting, often young, new owner will take transfer of a unit and two or three days later start a major makeover – without the trustees’ consent.  This can mean bringing in noisy jackhammers, grinders and floor sanders.  It can also mean having to cart tons of rubble from the unit to the ground floor – in all probability using the lifts.  If the plumbing is to be revamped cutting off the entire scheme’s water supply for a few hours may be necessary.

“On top of all this, the members will find that they have been “invaded” by a group of strangers (the contractor’s staff) who are completely anonymous and may, for all they know, be light-fingered when it comes to other people’s possessions.

“Matters can get even more serious if and when the changes cause damage to the structure, common property, and to neighbouring units e.g. by a support wall being removed.  If the owner has gone ahead without the trustees’ consent and possibly without his contractor having the obligatory contractors risk insurance, he will be in very serious trouble.”

The correct procedure, said Bauer, is first to apply for the body corporate’s permission (submitting plans of the work to be done) then to get their approval of the contractor (and his insurance policy), then to register every one of his employees, preferably with a photograph, and finally to insist that a substantial deposit is paid to cover any damages.  (This can be a fixed amount or 5 to 15% of the contract value.)  It has to be remembered, too, that delivery vehicles are themselves a hazard and can cause damage to common property – and should be covered by the insurance policy.

It is also important, said Bauer, to get photographs of all areas to be worked on before work begins and on completion.  These will be excellent evidence if and when and insurance claim arises or the contractor over-claims.

The trustees, said Bauer, have the right to stipulate what hours the contractors will work – and to ban any evening, early morning or weekend work.  They can also ban the use of the scheme’s common property for vehicle parking or rubble collection.

“Sectional title members have to be aware at all times that what might suit them does not always suit other members – and these matters are governed by the conduct rules, which no member can ignore.”

If those conduct rules do not provide for a strict process, then the trustees should amend the conduct rules as soon as possible to cover the body corporate and the owners responsibilities during this process.

Sectional title property ownership is increasingly popular and today there are over 50 000 schemes, totalling more than 800 000 individual units in South Africa. The concept is tightly regulated under the recently amended Sectional Titles Act – legislation covering every aspect of sectional title ownership – and all owners and tenants must be aware they have very specific obligations and responsibilities that are governed by law.

When you buy a unit in a sectional title scheme you will, upon transfer, become the exclusive owner of your section and a joint owner of the common property. Depending on what section you bought, you may also be entitled to the exclusive use of an area such as a parking bay, garden, or yard.

At the same time you will automatically become a member of an association comprising all the owners collectively called the Body Corporate. As a member of the Body Corporate, you have a say in all important decisions surrounding the management of your scheme and the maintenance of the common property. Every year you and the other owners elect trustees who are responsible for the day-to-day affairs of the Body Corporate and generally protect your interests – their duties are clearly described in the Act and rules.

The trustees, among other duties, have to ensure all owners and occupiers of sections comply with the two sets of rules set out in the Sectional Titles Act.

• Management rules - these rules deal with matters concerning administration, accounting, and insurance, election of trustees, meetings and the setting and collection of levies. These rules may only be amended by unanimous resolution of owners at a general meeting and are mainly concerned with the efficient operation of the scheme. These are generally fairly standard across schemes.
• Conduct rules - these relate to the day-to-day conduct of owners and occupiers, such as the keeping of pets, parking, waste disposal, washing lines, appearance of buildings, etc. These may only be amended by special resolution at a general meeting and will differ from scheme to scheme depending on local circumstances.

The most important matter you and other members will have to decide on at the annual general meeting each year is the approval of a budget for your Body Corporate.

The budget will directly affect the monthly levy you – and all the other owners – have to pay to the Body Corporate during the coming year so that the scheme can meet all its financial obligations.

Without proper budgeting –

• Your Body Corporate will not be able to meet its financial commitments and this will affect the viability of the entire scheme and will also undermine the market value of your unit. Not being able to pay Body Corporate debts may result in your becoming liable for a further portion of the unpaid body corporate debts.
• Your Body Corporate will not be able to keep the buildings and facilities in good repair. If this is not done, the value of your property can decline.
• You and other owners may suddenly find that you are confronted with a very unwelcome, but inevitable, special levy to make up for the budget deficit.
• Once the budget is approved at the AGM, the total expenses for the year are divided among all the owners according to the participation quota. The participation quota is set at inception of the scheme and basically calculates each owner’s stake in the common property. This is purely a mathematical calculation with owners responsible for their share of the total amount.

This is commonly known as the general levy. Once the trustees have established the amount of each unit’s levy they must notify each owner.

If you are fortunate enough to have an exclusive use area, you will have to pay an additional levy for that. These levies are not calculated according to your PQ but according to the actual estimated expenses applicable to your exclusive use area.

A third, often unpopular, kind of levy is called a special levy. If essential emergency repairs are required within a scheme for which there are no reserve funds, the trustees are able to institute a special levy to raise the money needed.

This form of levy is often seen negatively by the owners and mainly comes about from a lack of proper financial planning, inadequate budgeting or poor general levy collection. Clearly, this extra lump sum levy places all owners under additional financial pressure and may deter potential buyers from purchasing within the scheme.

It’s important to remember that trustees are empowered to declare a special levy, without any authorisation by the members as it is their responsibility to maintain the scheme.

Even if you are unhappy with a certain situation or the conduct of the trustees, you are not entitled to withhold your levy payments for any reason.

In terms of the Standard Conduct rules, which are applicable in most schemes, the following matters may be strictly regulated:

Pets 

Do not assume that you are automatically entitled to keep a pet and do not simply accept what may have been said to you by any person who is not a trustee or managing agent of the Body Corporate. To keep a pet you will need the written consent of the trustees and will have to comply with conditions set by them.

Refuse disposal 

Find out from your trustees what the arrangements are.

Vehicles and parking 

You cannot simply park wherever you want and must stick to the relevant parking arrangements.

Alterations to common property 

You have no right to make any alterations to your section which affects the common property, or to alter the common property in any way. Although the conduct rules may make provision for the installation of exterior burglar-proofing, security doors and similar items, you may not proceed without obtaining the trustees’ written consent.

Signs and notices 

You may not place any sign, notice, billboard or advertisement of any kind on any part of the common property, or even in your unit, if it is visible from outside your section, without the prior written consent of the trustees. This includes a notice board on the common property.

Laundry 

You may not, without the written consent of the trustees, erect your own washing line or hang any washing, laundry or other items on any part of the building or the common property, so as to be visible from outside the buildings or from any other sections. This includes hanging washing on balconies.

Article by Johann le Roux, Executive Director of Propell.

In July 2007 the Cape Town City Council ruled that the rates on sectional title schemes payable to them would henceforth be the responsibility of the owners of the units and should no longer be included in the levy.

Furthermore, the City Council laid the onus on the owner to inform them of his address – or change of address.

This ruling, said Lanice Steward, MD of Anne Porter Knight Frank, was quite often either not communicated by bodies corporate to their owners or communicated but not followed up, with the result that some owners continued to believe that their rates were covered by their levies.  This was especially true where units were rented out and, as is so often the case, the owner did not attend the body corporate meetings.

Apart from sending out monthly statements the City Council, for its part, does not take action when rates are not paid but it will impose penalties and will allow the sums to mount up.

Then, if and when the owner comes to sell his unit he will discover that transfer is blocked because of the unpaid amounts – which over the years can reach astronomical heights and which will have been added to by the penalties.  The seller, says Steward, may well find it very difficult to pay these sums.

“The lesson to be learned from these unfortunate cases of unpaid levies,” she said, “is that owners must ensure that they receive not only their monthly rates accounts but also water, garbage and electricity accounts (where these are not prepaid by the tenant).”

The Tshwane Metro Council is looking at passing a by-law compelling households to have pre-paid meters within three years to improve its revenue collection.

Agreeing on a three-year prepayment roll-out strategy at the monthly meeting, executive mayor Kgosientso Ramokgopa said the council should pass a by-law compelling every household to be have pre-paid meters.

He said the debt for municipal services (water, electricity and rubbish removal) stood at R3.9 billion.

“At the current rate the municipality is unsustainable. The installation of pre-paid meters will alleviate this problem,” said Ramokgopa.

According to the municipality, the credit control measures are not yielding the results hoped for and the debt is increasing while projected revenue is dropping.

If the status quo remains, the projected revenue will decrease beyond the municipality’s sustainability.

The council agreed that all accounts exceeding R3 000 over 60 days be changed to pre-paid meters and that pre-paid meters be compulsory for new electricity accounts for rented premises and residential dwellings with high tenant turnover.

All accounts where a tenant’s premises cannot be accessed for more than two months or where electricity meters are installed

Tshould be placed on the pre-paid meter system.

Tenders for meter installation have been invited with five service providers, and a third-party vendor tender is in place for three years for the extended reselling of electricity at retail merchants, including petrol stations and spaza shops.

DA councillor Professor Duncan Baker said the rolling out of prepayment electricity was a welcome development.

He said: “Following problems with getting clarification as to (their) electricity accounts, many residents have indicated an interest in using such meters.

“The reasons include the avoidance of electricity account queries, as well as allowing them to monitor their usage.”

Baker said the municipality should start a programme to roll out devices that can cut the power to geysers remotely.

“The older example is the ripple relay system.

“Today, this can be done effectively using radio transmitters and receivers. Blocks of users could have the geysers turned off selectively.”

Baker urged the municipality to investigate this option, “before Eskom starts to charge exorbitant rates whenever our peak demands exceed a certain level”.

“With this in mind, we are reminded that Eskom, those ‘princes of darkness’, are again warning of power cuts this winter.

“I urge the council to take the matter of demand side management seriously.”

Source: iolproperty.co.za

Water costs, in most cases, are a Body Corporate’s single largest expense. This is mainly due to bulk water meter systems being installed in most developments pre 2004.

“In many cases we find that tenants and owners in sectional title schemes are not too concerned with water usage as this has always been an expense carried by the Body Corporate,” says Johann le Roux, Executive Director of Propell.

“They are not too concerned with leaking toilets, geysers or taps as the perception is that this amount will be covered by the Body Corporate and therefore included in their levy amounts.”

In many sectional title schemes overcrowding of units has become an issue and due to the bulk water meter systems, the smaller households end up “sponsoring” the overcrowded units.

Notwithstanding the environmental impact of water wastage that will catch up with society soon enough, there is a fear that water tariffs will go the same way as electricity costs in the very near future.

Often non-payment of levies by tenants or owners leads to the Body Corporate being placed in a difficult cash flow position where they are unable to pay municipal rates and water costs for the scheme. This in turn can lead to water being cut off for the entire building due to the non-payment of only a few tenants or owners.

Bodies Corporate need to address water issues, if not just for their own financial welfare, but also for the environmental social responsibility issues, says le Roux.

“Our suggestion to each of the sectional title schemes and Bodies Corporate that we work alongside is to install individual water meter systems for each of the units within their scheme.”

By doing so, he says the Body Corporate would no longer be responsible for the water usage costs, since each individual owner would be expected to pay the municipality directly.

The installation of water meters would form a special project and in most cases a special levy would need to be raised.

Another option would be for the Body Corporate to obtain finance for the project. “In most instances the monthly water cost saving of the Body Corporate can cover the instalments for a loan for the installation of individual water meters.”

Therefore, he says no special levy would need to be raised. “Once this loan has been repaid, the saving could help the Body Corporate’s cash-flow and reduce the need of future drastic levy increases.”

Le Roux says in short everybody wins – the owners, the scheme, the landlord and even the environment.