The interests of sectional title owners could be jeopardised by two recent amendments to the Regulations issued under the Sectional Titles Act (STA). One of the amendments means that owners can now attend and speak at trustees’ meeting only by invitation, while the ambiguous wording of the other has opened the door to disputes over levy increases (see below).
Two other amendments affect owners with exclusive-use areas and the nomination of trustees (see below).
The amendments, which became effective on August 1, were promulgated in the Government Gazette of June 30 by the Minister of Rural Development and Land Reform, Gugile Nkwinti.
When the STA came into effect in 1986, the government also promulgated Regulations, issued in terms of the Act. These Regulations included a number of annexures, including Annexure 8, better known as the Prescribed Management Rules (PMRs).
Sectional title experts are scratching their heads over the correct interpretation of a new management rule that, once again, authorises trustees to increase levies at the end of a body corporate’s financial year. One interpretation could enable trustees to impose huge increases on owners.
A sectional title scheme is required to hold its annual general meeting (AGM) within four months of the end of its financial year. The body corporate should approve a budget (schedule of income and expenditure) at the AGM, and the trustees must set the levies (contributions) so that there will be sufficient income to meet the budgeted expenditure in the financial year, plus make reasonable provision for future maintenance and repairs.
One of the PMRs made provision for a body corporate to raise revenue in the period between the end of the financial year and the date of the AGM. PMR 31(4A) required owners to continue paying their contributions in the same amounts as they were paid during the expired financial year. The rule also gave trustees the authority, at the end of the financial year, to increase contributions by up to 10 percent to take account of expected higher liabilities.
In amendments to the PMRs in March 2013, the Minister of Rural Development and Land Reform deleted PMR 31(4A). Some commentators believe that the rule was deleted by mistake.
The deletion of PMR 31(4A) not only removed the basis in law for owners to pay levies once the financial year had ended, it also meant that trustees could not increase levies until the AGM had taken place.
Property lawyers suggested that trustees remedy the removal of PMR 31(4A) by, before the financial year expired, passing a resolution to raise a special levy that would run from the end of the financial year until the AGM. In effect, owners would continue to pay the same levies, but they would be classified as special levies. However, it was unclear whether trustees could require owners to pay more than they had paid in the expired financial year, and if they could, whether there was a cap on the increase.
The Minister of Rural Development and Land Reform, Gugile Nkwinti, has restored the rule, now called PMR 31(4Aa), but the wording has been changed to read as follows:
“After the expiry of a financial year and until they become liable for contributions in respect of the ensuing financial year, owners are liable for contributions in the same amounts and payable in the same instalments as were due and payable by them during the expired financial year: provided that the trustees may, if they consider it necessary and by written notice to the owners, increase the contributions due by the owners by a maximum of 10 percent excluding capital expenditure to take account of the anticipated increased liabilities of the body corporate. Such increase shall be ratified or changed after the AGM by the trustees once the body corporate has approved or amended the schedule of income and expenditure.”
The poor wording means that the provision in the rule that grants trustees the authority to increase the levies is open to two interpretations:
* The trustees can increase the levies by up to 10 percent in order to cover operating, or running, expenses only; or
* The cap of 10 percent applies only to operating expenses, whereas trustees can increase levies by any amount in order to cover “capital expenditure”.
To complicate matters further, neither the STA nor the regulations define or refer to “capital expenditure”, and it is unclear how this term should be interpreted in the context of a sectional title scheme. In the business world, capital expenditure is when a company borrows money or reinvests its profits to acquire new assets or improve existing assets in order to benefit over the long term. In the context of real estate, it would be the cost incurred to buy an income-producing property.
Tertius Maree, an attorney who specialises in sectional title, says he has a problem with the last sentence of the rule, because it seems to grant trustees the discretion to ratify or change the levy increase once the body corporate has approved the budget at the AGM, whereas they have no such discretion and must determine levies only according to the approved budget.
Maree says the wording of the rule will “probably give rise to uncertainties and disputes. It certainly does not simplify matters for trustees and managing agents.”
The new PMR 31(4Aa) also does not specify how much written notice the trustees must give owners if they decide to increase the levies. However, PMR 31(3) states that, within 14 days after each AGM, the trustees must advise each owner in writing of the levies that will be payable by him or her during the ensuing financial year. Therefore, trustees could regard 14 days as the minimum notice period.
TRUSTEE MEETINGS: RIGHT TO SPEAK
Sectional title owners are dismayed by an amendment to the Prescribed Management Rules (PMRs) that means they are no longer entitled to attend and speak at trustees’ meetings.
PMR 15(5) stated that any owner in a sectional title scheme was “entitled” to attend and speak at a meeting of the trustees of the scheme, although the owner could not vote at the meeting. The rule has been amended to state that an owner may attend a trustees’ meeting “on invitation”. The amendment does not specify who must extend the invitation: any of the trustees, the majority of the trustees, or the chairman.
The amended rule also no longer includes the phrase “and speak”, which could be interpreted to mean that, even when an owner is invited to attend a trustees' meeting, he or she may only observe the proceedings and is no longer entitled to express an opinion or ask questions.
Trustees have the authority to make important decisions without seeking a mandate from the owners – for example, raising a special levy – and prudent owners often attend trustees’ meetings so they can monitor how trustees are managing the body corporate’s money and property. However, owners will no longer be able to do this unless they are invited.
Members of Paddocks Club, an online forum hosted by sectional title law firm Paddocks, voiced their anger and disappointed at the amendment. In their view, it would exacerbate the unaccountability of trustees who are making decisions without regard for the interests of the owners.
Sectional title expert Graham Paddock says the removal of an owner’s right to attend trustees meetings means that, unless special general meetings are held, owners now have only one assured right of participating in scheme administration, which is to attend the annual general meeting.
He says it is unlikely that owners can give trustees a directive to invite them to meetings, because the amended rule pre-supposes that the trustees must exercise a discretion in this regard.
The minister amends the Sectional Titles Act or the PMRs on recommendation of the Sectional Titles Regulation Board. The board does not normally provide reasons for amendments.
Personal Finance asked the Department of Rural Development and Land Reform why PMR 15(5) has been changed, but no comment was provided.
MAINTENANCE AMENDMENT
An amendment to the Prescribed Management Rules (PMRs) seeks to make owners responsible for maintaining improvements to their exclusive-use areas (EUAs), but the amended rule is in conflict with the Sectional Titles Act.
In terms of an amendment to PMR 70, owners must “adequately maintain any improvement” to their EUAs. If an owner fails to do so for 30 days after being warned to do so by the trustees or the managing agent, the body corporate can carry out the maintenance itself and recover the costs from the owner.
The Act requires owners to keep their EUAs “in a clean and neat condition”. However, it is the responsibility of the body corporate to maintain EUAs and to require owners with exclusive-use rights to make contributions necessary to defray the costs it incurs in this regard.
Tertius Maree, an attorney who specialises in sectional title, says it is not possible to amend a statutory provision by changing a PMR; the STA must be amended, too.
One of the PMRs has been changed to prevent owners who are in arrear with their levies, or who are in breach of the scheme’s conduct rules, from nominating a person to serve as a trustee.
Maree says the amendment, as well as the existing provisions of PMR 7, mean that trustees must be nominated as follows:
* Nominations for trustees, together with the nominees’ acceptances, must be made in writing and must be received at the domicilium address of the body corporate not later than 48 hours before the annual general meeting (AGM).
* If the above deadline is not met, further nominations may be submitted, and consented to, at the AGM, but only if the number of nominations received is less than the number of trustees determined by the owners at the AGM. (A body corporate must have at least two trustees.)
* A person who is in arrear with his or her levy payments, or who remains in breach of the scheme’s conduct rules despite written warning to comply, may not be nominated for election as a trustee.
* An owner who is in arrear with his or her levy payments, or who remains in breach of the conduct rules despite written warning to comply, may not nominate a person for election as a trustee.