Fraud bigger risk than fire for sectional title properties

If you own a sectional title property, you are more likely to lose money as a result of fraud than fire.

This is the view of Mike Addison, an expert in sectional title insurance, who says you are 10 times more likely to lose money through fraud and dishonesty at the hands of your managing agents than due to fire damage.

Most homeowners wouldn't dream of going without insurance against fire, but few have fidelity insurance that covers losses arising from a dodgy managing agent, Addison says.

"The shocking reality is that probably less than one percent of bodies corporate have this type of fidelity cover.

"Most policies have very limited cover if your trustees defraud you, and exclude managing agents under the fidelity section of the policy. I know of only one which would provide such cover, albeit for a very limited sum," he says.

Addison was commenting in light of news this week that Johannesburg-based Adprop Property Management has been placed under curatorship amid allegations of financial irregularities.
Property owners at one body corporate administered by Adprop learned this week that they owe the City of Johannesburg more than R200 000 for electricity, which Adprop was supposed to have paid to the council.

Adprop was administering about 70 bodies corporate when it went under curatorship, curator Bashier Adam says.

The curatorship follows the granting of an interdict by the North Gauteng High Court last month. The Estate Agency Affairs Board (EAAB), which regulates managing agents, applied for the interdict to stop Adprop from trading after it was found to be operating without a fidelity fund certificate. (A fidelity fund certificate offers limited cover to an agent's clients against fraud by the agent.)

In terms of the Estate Agency Affairs Act, managing agents - like estate agents - may not operate unless they have a fidelity fund certificate.

Jimmy Baloyi, acting executive manager of enforcement at the EAAB, says the last time the EAAB issued Adprop with a fidelity fund certificate was in 2008. "We were under the impression they had stopped operating. Someone brought it to our attention late last year that they were in business, and we acted on that information," he says.

Regulatory failure

Addison says the Adprop situation "once again" shows a failure on the part of the regulator and the system at large.

"There are lots of managing agents operating without fidelity fund certificates because the law is an ass here. A managing agent isn't an estate agent. And the fact that they are lumped together under one regulator is a problem. Managing agents manage finance and perform a very different role to estate agents. There has been this weakness by the EAAB ensuring compliance with the law."

Marina Constas, director at BBM Law and an attorney specialising in sectional title law, agrees. "The EAAB is completely negligent in policing who has a fidelity fund certificate and who does not. It's been known for over five years that Adprop has been operating without a certificate. The board needs to get its act together," she says.

Constas says South Africa has about 55 000 sectional title schemes, which incorporate a total of about 800 000 sectional title units. In other words, hundreds of thousands of people own sectional title properties and have need of a strong regulator to help them protect their assets.
But Baloyi says the EAAB is "limited by the law" - the Estate Agency Affairs Act. "Our jurisdiction over managing agents is limited to their trust accounts, but we don't have authority over their conduct," he says.

"The Act is under review by the Department of Human Settlements, with the intention of bringing managing agents fully under our jurisdiction, to give us wider powers," Baloyi says.

On the question of the EAAB's failure to ensure compliance and the policing of managing agents, Baloyi says policing should be a joint effort between the community and the regulator. "If you suspect your neighbour is dealing in drugs and you don't report it to the police, how can you expect the police to deal with it? In the same way, had no one complained about Adprop, we would have had no way of knowing that they were in business."

Trustee failure

Addison says that trustees are ultimately responsible because they have a fiduciary responsibility - a duty of skill and care - to the members of the body corporate. The trustees appoint the managing agent to provide a service to the body corporate, and as such must check that the agent has a fidelity fund certificate.

"Trustees are ultimately responsible, full stop. They can delegate the task, but not the responsibility," Addison says.

Baloyi says it is grossly negligent on the part of the body corporate [trustees] not to first check with the EAAB whether or not a managing agent is registered. "It has only itself to blame if it fails to carry out a very basic due diligence investigation into an agency that will ultimately be holding and dealing with substantial amounts of body corporate funds."

Trustees need to understand their role better, Constas says. It is their duty to check that the managing agent is paying the bills - so they need to check bank statements monthly, as well as municipal accounts, she says.

Trustees are also legally obliged to ensure that the body corporate has insurance against fraud, so that property owners are covered in the event of fraud by the trustees or managing agents.
Blame game

It's all very well to blame the regulator and/or the trustees for failing in their respective duties, but what about the responsibility of individual owners who are often only too happy to let trustees carry the can?

"Everyone loves to point fingers when things go wrong," Addison says. "But every owner should have a copy of the rules of the body corporate and should understand them. Surely an owner should ask the question: do we have cover for this or that?"

Minimising your risk

Addison says few people realise the full implications of owning property in sectional title. When you buy into a sectional title scheme, you are buying into the finances of the scheme, as well as the bricks and mortar, he says.

Doing so carries some risk. Apart from becoming a fully informed and actively involved trustee, there may be other ways for you to mitigate the risk.

Some municipalities collect rates from individual sectional title owners and have installed pre-paid electricity meters in many blocks. Addison says water meters can also be installed.
But other areas, such as the overall maintenance, planning and financial management of the scheme, need to be done "as a community", and sectional title legislation is designed to allow trustees to do just that, he says.

Provided owners and trustees know and understand their responsibilities and engage the services of professional service providers, community living can be extremely successful, but if badly managed it can be disastrous, he says.

How your trustees should protect you

Mike Addison is a sectional title insurance specialist and director of sectional title insurance advisers Addsure. He says trustees can lessen the risk of fraud by:

  • Engaging the services of a managing agent who has a fidelity fund certificate issued by the Estate Agency Affairs Board (EAAB).
  • Engaging the services of a managing agent who is a member of the National Association of Managing Agents (Nama). Membership of Nama is voluntary, but managing agents who are members subscribe to a code of conduct and are obliged to be fit and proper.
  • Ensuring that your managing agent holds additional fidelity insurance covering itself against fraud or dishonesty by its staff. The EAAB fidelity fund covers only the agent concerned, not necessarily the staff of the agent. Furthermore, the EAAB fidelity fund covers only monies held in the agent's trust account. Funds in individual bank accounts or investments outside the agent's trust accounts are thus exposed. Addison says wider cover is definitely needed.
  • Ensuring your managing agent holds professional indemnity and extended fidelity cover, which is underwritten according to strict criteria.
  • Establishing how much fidelity cover would be prudent by obtaining written advice and a quotation for such cover from a specialist insurance adviser and presenting the matter to a general meeting of the body corporate. This is one of the obligations of the trustees in terms of prescribed management rule 29.2(b) under the Sectional Titles Act.

What to do if your scheme is in trouble

Marco de Oliveira is a managing member of Solver Property Services. He is also the chairman of the National Association of Managing Agents (Nama) in Gauteng. De Oliveira has the following advice for owners whose body corporate is in financial trouble due to fraud or mismanagement by managing agents:

Find a capable managing agent as soon as possible to ensure operational continuity. He says owners in such circumstances as those who live in buildings administered by Adprop need to realise that they have a hard road ahead and need to stay afloat financially.

Consider raising a special levy to pay the bills. Not all owners will like or support this suggestion, but right now operational continuity is key and you can't afford to ignore bills, including those that you thought had been paid.

Once your new managing agent is in place, get fidelity cover. Sectional title schemes are compelled by law (the Sectional Titles Act) to have fidelity cover. "You can't rely purely on the cover provided by the Estate Agency Affairs Board (EAAB). And it can take years for the EAAB to pay out. So best seek alternate products that suit the needs of your scheme," De Oliveira says.

Ideally open a separate bank account in the name of your body corporate. "In my opinion," De Oliveira says, "each scheme should have its own account or a trust account in its name for its sole use. And each scheme should have sufficient fidelity cover for such an account."

De Oliveira says some of the larger managing agents run a bucket account (an account that pools money from bodies corporate to pay service providers), which can work "provided that accredited criteria and processes have been implemented in such managing agencies".

However, stricter quality controls should be imposed by the regulator in this regard, he says.
Marina Constas, a lawyer who specialises in sectional title, says schemes should not allow massive surpluses to accumulate in the trust account. Surplus funds should be held in an investment account instead, she says.

Take responsibility and hold others to account. "The onus lies on three parties in sectional title schemes, namely owners, trustees and managing agents," De Oliveira says.

Everyone must take responsibility

De Oliveira says he finds it amazing that South Africans will research everything to do with a TV before buying one, but when it comes to a home they don't do proper homework before they buy.
"People buy into sectional title without first requesting a copy of the latest financials to see if the scheme is in a good financial state, without getting a copy of the rules to see if they accommodate their personal requirements, and without generally investigating what scheme living is all about. Ignorance is not an excuse," De Oliveira says.

Turning to the responsibilities of trustees, he says trustees have a difficult task. "We often struggle to find owners who are willing to stand as trustees due to the extra commitment required or the liability that now falls on their shoulders. Often, when they do stand, they lack sufficient expertise to understand what is required of them, so inevitably the weight lands on the managing agent's shoulders.

"There are many avenues for trustees to prepare themselves for their duties. Nama, for example, holds trustee training workshops and seminars throughout the year where trustees get a good overview of the various facets of scheme management. Schemes ought to pay for such training to ensure they have better trustees."

To managing agents, De Oliveira says it is their duty to comply with the law by having a fidelity fund certificate issued by the regulator. They should also join Nama and work with qualified and professional service providers for the benefit of their clients.

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