Converting share block schemes to sectional title good for property owners

Since January, transfer duty has no longer been payable in respect of transactions contemplated in Item 8 of Schedule 1 to the Share Blocks Control Act, No 59 of 1980, whereby rights to or interest in the use of immovable property conferred by virtue of the ownership of a share in a share block company is converted to ownership of the immovable property concerned, says Hugh Jackson, director of the real estate division at Cliffe Dekker Hofmeyr.

The amendment of section 9 (19) of the Transfer Duty Act, No 40 of 1949, is contained in section 1 of the Taxation Laws Amendment Act, No 22 of 2012.

"The exemption from payment of transfer duty in such circumstances was previously restricted to a natural person and only applied if the initial acquisition of the share was subject to duty in terms of the Transfer Duty Act. The exemption now applies in respect of any such transaction concluded on or after January 1, 2013, irrespective of whether the holder of the share is a natural or a juristic person, and whether or not the transaction relating to the initial acquisition of the share was subject to payment of transfer duty at that time."

The exemption is extended to include the acquisition of a part of the immovable property of the share block company, where that person had a right of use of that part of the property conferred on him by his ownership of a share held in the share block company.

Michael Bauer, general manager of property management company IHFM, says many blocks of flats are still run as share blocks, a development system used to manage blocks in the 1970s and 1980s.

"Share blocks are particularly prevalent on the KwaZulu- Natal south coast. Since IHFM opened its offices in Durban in March, we have become more aware of and surprised at how many of these share block schemes still exist in this area and have never been converted," he says.

"Share blocks can be complicated to run as they are classed as companies, and each owner of a unit has shares in the company. The shares are usually allocated to different parts of the building, for instance parking, gardens, apartments. So in owning those shares owners have the exclusive use of the parts of the building they have shares in. The company, in this case, owns the immovable property.

"The drawback of a share block is that the directors, or management, can make decisions without consulting any other shareholders i the block. And because the owners own shares and not the property, they can't use this as leverage to get finance on other investments. This is also to the disadvantage of potential buyers, because they cannot borrow 100 percent against shares, but may be able to get 100 percent home loans against sections of the property."

Sectional title schemes are run by bodies corporate, of which all owners are members, so they all have a say in the way schemes are run. They vote the trustees in who manage the schemes, and can give directives at general meetings as to the way their schemes are run.

"Converting to sectional title is usually advisable, and this is carried out according to a schedule as outlined by the Share Blocks Control Act. If this is to be done, the company must first draft the documents to show shareholders what the sectional title plan will be and what rules will apply. To convert from a share block scheme to sectional title only requires 30 percent of shareholders to vote in favour of the motion, and after the decision to convert has been made, half the owners must support the resolution. If there is still a bond on the property, the bondholder must also agree to the changeover," says Bauer.

"Once the process has been completed, a sectional title register is opened and owners can take transfer of their units. They now become owners of immovable property, instead of owners of shares in a company. This will allow them to reap the benefits of owning their properties such as using them as collateral if they choose to invest in other properties.

"Owning your property is far preferable to owning shares in a company," says Bauer. "The first benefit is the investment is owned outright and the second is the direct participation now afforded to owners of units in their schemes."

(Weekend Argus - Saturday Edition)

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