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Maintaining financial stability in sectional title schemes

When considering buying a sectional title unit, buyers need to check that the scheme’s financial affairs are healthy, says Lanice Steward, managing director of Knight Frank Residential SA.

“Many people don’t realise how fast a sectional title scheme’s financial situation can deteriorate in a short time if there is a shortfall in levy collections each month or if there are problems with financial management.”

Owners are automatically members of the scheme’s body corporate, and it is in their interests to be actively involved in the management of the scheme. This could either be by attending at least the annual general meeting, and if other meetings are held during the year to discuss other matters, owners should attend those too.

The AGM is the meeting where the trustees are elected and it is important that the right people are chosen for the various jobs that need to be done. There is no point in someone who does not have the skills required for the job being elected to do it, says Steward.

At the AGM, the budget for the following year will also be accepted or approved, for which a resolution must be passed and a special resolution must also be in place for the interim budget.

If there are outstanding levies, trustees should have a plan in place for the recovery of these as soon as possible, and this sort of problem should never be left for too long. Usually, if levies are outstanding the body corporate can either go to arbitration to resolve the matter or apply to the courts, either for repossession of assets or sequestration of the owner.

“Trustees should be warned, however, that in some cases, when it comes to claiming outstanding levies, any of the above might still not remedy the situation,” says Steward.

A case mentioned in a recent Smith Tabata Buchanan Boyes’ newsletter, Body Corporate of Costando v Kiggundu and Another, the body corporate applied first for repossession of goods but the sheriff could not find adequate assets to settle the amount owing.

The body corporate then tried to have the owners sequestrated, but it was found that they were up to date on their bond payments on another property, so this could not go ahead either. Insolvency law principles state that this process cannot be used unless it will be to the benefit of all the creditors and in this case it was not.

“Where there are protracted court cases to try recouping money outstanding, the body corporate may in the meantime have to raise a special levy – first, to cover the costs of the court case and second, to cover the outstanding amounts, which other owners might be reluctant to do. In extreme cases, if the situation is not resolved quickly, other owners might also stop paying their levies, begrudging the payment while others get away with non-payment.”

In future, it will be necessary for every sectional title scheme to have a reserve fund set aside from 1 to 2 percent of its market value, to protect it against financial distress and mismanagement.

“How or when this will be signed into law is not known but it would be wise for bodies corporate to reassess their levies for next year and add the amount into the budget as soon as possible, and not wait until they absolutely have to do it. This could end up a hefty amount. If you take a scheme of 60 units worth R1.5 million each, this adds up to R90m, so the scheme would have to have at least R900 000 in the bank. If it becomes law to have 2 percent in reserve, I think most owners in the scheme would struggle to come up with the R1.8m needed,” says Steward.

“Many owners would see this as a negative, but it is necessary for schemes to have a decent amount in reserve for emergencies and as contingency funds for maintenance and assistance where there are shortfalls. It is better to have planned for something to have gone wrong and not have the whole scheme put at risk financially.”



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