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Bodies corporate must have separate fund for big expenses

Personal Finance

Some owners of sectional title properties could see their levies increase significantly in the near future, because the Sectional Titles Schemes Management Act (STSMA), which came into effect yesterday, requires bodies corporate to contribute a certain amount of money to a reserve fund each year.

Making it compulsory for bodies corporate to establish and maintain a reserve fund specifically for future repairs and maintenance is one of the innovations introduced by the STSMA and the new regulations issued in terms of the Act.

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The STSMA repeals and replaces the sections (mainly sections 36 to 48) of the Sectional Titles Act (STA) of 1986 that governed the administration and management of schemes. However, the STA has not been abolished; its sections on how sectional titles schemes must be established will remain in force.

The STA required a body corporate to “establish a fund” (open a bank account) sufficient to pay for all the expenses incurred to administer and manage the common property (for example, municipal services, maintenance, insurance premiums and wages).

Now, under the STSMA, a body corporate must establish two separate accounts: an “administrative fund”, to cover its estimated annual operating costs (including maintenance and repairs), and a “reserve fund”, to cover the cost of future maintenance and repairs.

The aim of the reserve fund is to force bodies corporate to budget for ongoing maintenance and repairs. Many schemes draw up budgets and determine levies without making long-term provision for major maintenance and repairs; instead, they impose special levies whenever expensive repairs to the common property cannot be delayed any longer.

In terms of the new prescribed management rules (one of the annexures to the regulations), bodies corporate will still be allowed to impose special levies if they need income to meet a necessary expense that cannot reasonably be delayed until provided for in the following year’s budget.

The regulations prescribe the formula a body corporate must use to determine the minimum allocation to the reserve fund when it draws up its annual budget. This is based on the amount in the reserve fund at the end of a financial year and the total contributions collected in that year.

The calculation is as follows:

• If, at the end of the financial year, the money in the reserve fund is less than 25 percent of the total contributions to the administrative fund for that year, then, in the next financial year the minimum allocation to the reserve must be 15 percent of the contributions to the administrative fund.

• If, at the end of the financial year, the money in the reserve fund is equal to or more than 100 percent of the total contributions to the administrative fund for that year, the body corporate does not have to top up its reserve fund.

• If, at the end of the financial year, the money in the reserve fund is more than 25 percent, but less than 100 percent, of the total contributions to the administrative fund for that year, the contribution to the reserve fund must at least equal the amount the body corporate budgets to spend from the administrative fund on repairs and maintenance in the coming year.

But the regulations do not explain how bodies corporate must determine the contributions to the reserve fund for the next financial year when, until now, they have not been not required to have a reserve fund.

The trustees are authorised to use the money in the reserve fund to pay for work carried out in terms of the body corporate’s maintenance and repair plan – another innovation introduced by the new prescribed management rules. Bodies corporate must now draw up a plan for the maintenance, repair and replacement of “major capital items” on the common property “within the next 10 years”.

The definition of “major capital items” includes electrical systems, plumbing, drainage, heating and cooling systems, lifts, carpeting and furnishings, roofing, painting, waterproofing, communication systems, paving and parking areas, security systems and any recreational facilities.

The plan must set out the current condition or state of repair of each capital item; when each item, or component of that item, will have to be maintained, repaired or replaced; what this will cost; and the expected life-span of these items, or components, once they have been maintained, repaired or replaced.

The management rules prescribe a formula that a body corporate must use to determine the annual contribution to the reserve fund to maintain, repair or replace a capital item. This is based on the estimated cost of maintaining, repairing or replacing the item, less any pre-vious contributions made for this purpose, divided by the item’s expected life-span.

Other changes introduced by the STSMA and the regulations include:

• Pro rata share of special levy on transfer. Under the STA, the person who owned a unit on the date on which the trustees passed a resolution to impose a special levy was liable for the special levy, unless the offer to purchase stated otherwise. In other words, the seller, not the buyer, had to pay the special levy in full before the property transfer could go through. So, if the trustees voted to impose a special levy, say, two days before the date of transfer, the seller would be liable for it, even though the buyer, not the seller, would benefit from the money spent.

In terms of the STSMA, the buyer is liable for a pro rata share of the special levy from the date on which he or she takes transfer of the unit.

• Trustees can no longer make certain decisions. The STA gave trustees the power to: rent out parts of the common property to an owner for less than 10 years; take out loans to fund the upkeep and management of the scheme; and buy, sell or a mortgage a unit in the scheme. Decisions on these matters now require a special resolution of the body corporate.

• A cap on interest on arrear levies. Under the STA, penalty interest on arrear levies could be determined in one of two ways: the body corporate could set the rate of interest by adopting a resolution, or if it did not take such a resolution, the trustees could set a rate of interest up to the rate in the Prescribed Rate of Interest Act.

The STSMA stipulates that penalty interest may not exceed the maximum rate under the National Credit Act for what are known as “incidental credit agreements”. It is currently two percent a month.

• Recovery of arrear levies. A body corporate can obtain an order from the Community Schemes Ombud Service to recover arrear levies instead of having to go to court, as was the case under the STA.

• Changes to voting rules. A person may act as a proxy for a maximum of two owners. And under the new Act, when votes are counted (in number, not value), each owner has only one vote, irrespective of how many units he or she owns.

 

SECTIONAL TITLE JARGON BUSTER

Body corporate: A body corporate comes into existence when the developer of a scheme transfers the first unit to any other person. Every owner automatically becomes a member of the body corporate on taking transfer of his or her unit. The body corporate is responsible for managing and administering a sectional title scheme in accordance with legislation and the rules of the scheme. The body corporate elects trustees, who exercise the functions and powers of the body corporate. However, certain decisions can be taken only by the members of the body corporate, not the trustees.

Section: the part of a sectional title scheme that is owned by an individual owner.

Common property: any part of a sectional title scheme that is not a section. The common property is owned by all the owners in undivided shares.

Participation quota (PQ): the share in the common property allocated to each section, based on the floor area of the section. The PQ determines the value of an owner’s vote and the extent of his or her liability (recovered via the levy) for the body corporate’s expenses.

Unit: an owner is never the owner of just a section, but of a unit, which consists of a section plus the section’s share in the common property (its PQ).

 

Levels of consent

The legislation sets out the levels of consent (agreement) that are required for a decision by the body corporate to be lawful and binding. The three levels of consent, from lowest to highest, are:

An ordinary resolution is passed if 51 percent of the votes, calculated by number (one member has one vote), are in favour. Examples of when an ordinary resolution is required: to elect trustees or adopt the annual budget.

A special resolution can be adopted in one of two ways. At a general meeting, at least 75 percent of the votes, which must calculated both in value and in number, must be in favour of the resolution, or the resolution can be agreed to in writing if those in favour hold at least 75 percent of the votes, also calculated both in value and number. Examples of when a special resolution is required: to make a non-luxurious improvement to the common property or change the body corporate’s conduct rules.

Note: the quorum required for an ordinary or a special resolution depends on the number of units in the scheme. For example, if there are between 11 and 49 units, the quorum is at least 35 percent of the owners. (A quorum is the minimum number of people who must be present, or represented by proxy, for the decisions taken at a meeting to be valid.)

A unanimous resolution can also be adopted at a meeting or agreed to in writing. If a meeting is held, members who hold at least 80 percent of the votes (calculated in value and number) must be present, or represented by proxy. No votes must be against (abstentions are regarded as being in favour). If the resolution is adopted in writing, every member of the body corporate must agree to it. Example of when a unanimous resolution is required: to rent or sell part of the common property to a non-owner.

Proxy: A person who is appointed by an owner to speak and vote on his or her behalf at a general meeting of the body corporate, because the owner is unable to attend. An owner must appoint a proxy in writing, and the signed “proxy form” must be handed to the chairperson before the start of the meeting.

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