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Financial management obligations of sectional title trustees

The day-to-day management of a sectional title scheme can be complex, and many trustees are still trying to come to grips with the recently implemented Sectional Titles Schemes Management Act.

A spokesperson for PayProp, national processor of residential letting transactions, says trustees can spend days trying to understand scheme rules, insurance, common use areas, fines and all the rest of a very long list of issues that come into play when people share a space.

“In the process of figuring out what is mine, yours, ours and who broke what rule, it is easy to lose focus on perhaps the most important aspect of managing a sectional title – its finances. Very often, trustees appointed by a scheme are not finance professionals. They rely on reports and advice from managing agents appointed to manage the scheme on behalf of the body corporate.”

So as a trustee, how do you know if you’re always doing the right thing, if funds are managed properly, or if you’re acting within the law? Here are five quick tips:

Is there a budget?

It sounds obvious, but many schemes get tripped up on this one. Every sectional title scheme must have a budget that is approved at an annual general meeting (AGM). If there isn’t one, or you haven’t seen one, make sure you get one as soon as possible. The budget is essentially a projection of the expenses needed to run and maintain the operation of the scheme, and must include plans to pay for the replacement of assets.

Is the budget being monitored?

A budget on its own does nothing but express in financial terms the intent with managing the body corporate. What really counts is compliance with it. One of the best ways to determine this is to see if actual expenditure matches what was planned. In this regard, it’s important to be wary of both positive (underspend) and negative (overspend) variances. Underspending might feel good because it feels like you’re saving money – but it also means there are parts of the plan that are not being executed as planned.

Permissions

Each scheme has its own rules governing who may approve what. In some instances, managing agents are given authority to spend funds on behalf of the body corporate, and in others the trustees insist on co-approval of expenses. Make sure you understand who is authorised to approve what, and ensure that all decisions are made in accordance with the approval framework. Rules are meaningless if they’re not being enforced.

Show me the reserve.

Every sectional title scheme is obligated by law to establish and maintain a reserve – defined as a pool of funds that are invested separately and are not required for immediate use. The purpose of the reserve is to pay for contingencies and long-term maintenance and upgrade projects. A minimum balance equal to 15% of total levy contributions for the year is required. If your reserve exceeds that, you don’t need to budget for more, but must be able to pay for budgeted repairs and maintenance from the levy contributions you will receive for the year. If your reserve is more than 100% of projected levy collections, you don’t need to make provision for any further contributions to the reserve pool.

Arrears hurt everyone

On paper, a sectional title scheme can be solvent and well maintained, but if the levies are not actually collected, there is no way that it will function properly. It is therefore crucial to understand who owes what, and what is being done to collect any outstanding levies.

“As noted above, the skill set and effort required to manage the financial and administrative components of a sectional title scheme forces many trustees to appoint a managing agent. However, this does not release trustees from their duty of care. It’s important to know if your managing agent has the correct financial management and reporting tools to give you all the information you need.”

PayProp has recently launched PayProp Unit Management, a trust accounting platform built specifically for managing agents, based on the same platform that processes more than R8 billion in rentals each year.


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