Sectional title levies: Where do owners stand?
This article first appeared in the 4th quarter 2018 edition of Personal Finance magazine.
Whenever a body corporate’s annual general meeting comes round, there’s usually only one question on owners’ minds: by how much will the levies increase? Over the past few years, I’ve heard of schemes imposing hefty increases, of 20% or even more. I recently received a letter from an owner who was upset – to say the least – because she had been notified of a 116% levy increase!
Big levy increases are, in part, a result of the above-inflation increases, year after year, in municipal tariffs – and Capetonians have had to contend with punitive water tariffs as a result of the recent drought.
It’s also the case that the Sectional Titles Schemes Management Act, which came into effect at the end of 2016, has imposed new financial obligations on schemes. Schemes are required to build up minimum reserve funds, which must be used for the 10-year maintenance plan. In some cases, trustees have had to pay specialists to draw up these plans, which must be updated annually, which incurs another, ongoing cost. Schemes must pay premiums for fidelity insurance – in addition to building insurance.
Then there is the requirement to obtain a replacement valuation of the buildings and improvements at least every three years, which requires the services of a qualified valuator. And schemes must collect levies for the Community Schemes Ombud Service (CSOS), which are based on a unit’s municipal valuation. Some of these expenses can seem relatively small, but they add up over time.
Some owners have asked whether there is a legislated cap on levy increases. They also ask how many times levies can be increased in a financial year, and how much notice must be given of a levy increase.
A misreading of Management Rule 21(3)(b) has resulted in some owners misunderstanding by how much levies can be increased. This rule grants trustees the discretion to increase levies by no more than 10% at the end of a scheme’s financial year, to take account of an anticipated increase in the body corporate’s liabilities for the next financial year.
If such an increase is implemented, it remains in effect until the budget is passed at the annual general meeting, after which the levies will be determined for the rest of the financial year. The reason for this “interim” levy increase is to take into account the time between the end of a financial year and the AGM. In terms of MR 17(1), the AGM must be held within four months of the end of the financial year.
It is not unusual for four months to pass before the AGM is held, because the financial statements have to be audited, the other documents that must presented at the AGM have to be compiled, and all these documents must be sent to owners, who must be given at least 14 days’ notice of the meeting.
What if the trustees impose a 10% interim increase and, once the budget has been passed at the AGM, the contributions are increased by, say, 5%? Can the owners have their “overpaid” levies refunded? No. MR 21(2)(b) prohibits a body corporate from refunding any contributions that have been “lawfully levied and paid”. (Although the sectional title community uses the word “levies”, the Act and regulations refer to them as “contributions”.)
It is possible, then, for owners to face two levy increases in a year: an “interim” increase and an increase once the budget has been adopted at the AGM. But once the levies have been decided on after the AGM, neither the body corporate nor the trustees can implement a further levy increase in the same financial year.
If the body corporate urgently need more money, the trustees can raise a special levy, which, as MR21(3)(a) explains, is additional income required to meet “a necessary expense that cannot reasonably be delayed until provided for the budget for the next financial year”. In other words, a special levy may be raised only to meet a pressing expense that was not foreseen in the budget for the current year and which cannot wait until next year’s budget. It is not a mechanism for implementing a further increase in the (ordinary) levies.
In the above explanation, I have been at pains not to state that the levies are determined by the owners at the AGM. Contrary to conventional wisdom, the body corporate does not have the authority to pass a resolution to set the levies. MR 17(6)(j), which stipulates the business that must be transacted at an AGM, does not include “determination of levies”; it requires the body corporate to approve the proposed budgets for the administrative and reserve funds.
However, I know this is not the case in practice. The proposed budgets drawn up by the trustees, or the managing agent, will include the levy increase required to meet the itemised expenses, and this percentage is really what owners want to discuss. So one finds there are calls to cut back on certain expenses, to reduce the levy increase, if the majority of owners think the increase is too high. Alternatively, there may be owners who feel that the increase is too low, because they believe the scheme should be collecting more money to cover major expenses in future.
However, sub-sections 3(2) and (3) of the Act clearly state that levies, whether “ordinary” or special, become payable only on the passing of a resolution by the trustees. In 2012, the Western Cape High Court ruled that a scheme had raised a levy unlawfully, because the trustees had not passed a resolution to this effect after the AGM.
In terms of MR 25(1), the body corporate (effectively, the trustees, or the managing agent) must, “as soon as possible” but no later than 14 days after the AGM at which the budgets for the financial year were approved, notify each owner in writing of the levy he or she will have to pay. In terms of the legislation, therefore, the trustees could meet on the 14th day after the AGM, determine the levies, and notify the owners on the same day. (Note that it’s “no later than 14 days”, not “at least 14 days’ notice”.) Bearing in mind what I stated previously about how levies are decided, in many cases, when trustees meet after the AGM to pass the MR25(1) resolution they are simply “rubber-stamping” what the owners have already decided – and the notification will be news only to those who didn’t attend the AGM. However, it’s important to note that the legislation gives trustees the authority to determine levies, and without a trustee resolution, the levies are not valid, no matter what the owners decided at the AGM.
Incidentally, in the case of an “interim” increase, the notice period is no longer than 14 days from the passing of such a resolution by the trustees.
CSOS dispute resolution
The CSOS has released a practice directive setting out what you need to know if you apply for dispute resolution. The comprehensive document explains how to lodge an application for dispute resolution, and how the different forms of dispute resolution – conciliation and mediation – operate. You can download the directive by going to csos.org.za and clicking on “Practice directives” under “Documents” on the home page.
Shirley Baillie, who compiles the “Keyword Access” publication (www.sectionaltitlesact.co.za), an indispensable road-map through the sectional title legislation, has submitted four complaints to the CSOS, two to the Joburg office and two to the office in Cape Town. She’s won two cases, lost one, and one has yet to be decided. Baillie says the directive will definitely help applicants in their dealings with the CSOS, although the time-lines laid down for handling complaints do not, in her experience, match reality.
Baillie says what’s missing from the directive is what applicants who are granted an adjudication order must do if the other party to the dispute ignores it once it has been made an order of court. A person in whose favour an adjudication order has been issued can apply to a magistrate’s court or the High Court for an enforcement order. In one of her four cases, Baillie obtained an enforcement order from the clerk of the court, and the sheriff served it on the trustees. However, she says the trustees ignored the order, and neither the court nor the CSOS could agree on how she should proceed.
The legislation is silent on this issue, and the courts have not been given a directive on what to do. One of the functions of the Sectional Titles Management Advisory Council is to make recommendations to the Minister of Human Settlements on amendments to legislation. The closing date for nominations to the council was July 16, 2018. Hopefully, the council will tackle this gap in the legislation.
Nevertheless, Baillie says she is largely positive about the CSOS: “It’s slow, but it does work.” Her key advice for parties to a dispute is to be thoroughly prepared, particularly if your case goes to adjudication, where the parties are allowed to cross-examine each other. You must know your facts inside and out and have all the supporting documentation with you – the ability to put forth a convincing case will determine whether or not the complaint is decided in your favour.
Meanwhile, at the time of writing, in September, two of the CSOS’s top executives were embroiled in a dispute over a decision to invest R80 million of CSOS funds in VBS Bank. The CSOS board has suspended chief ombud Advocate Seeng Letele and chief financial officer Themba Mabuya following allegations of gross negligence, dishonesty and dereliction of duty in regard to the investment and failing to provide relevant information to the board. Letele and Mabuya were suspended on full pay and subject to pending investigations and a possible disciplinary hearing.
The CSOS’s executive for legal, compliance and enforcement, Ndivhuo Rabuli, has been appointed as acting chief ombud, while Nathi Dube, the finance manager, has been appointed as acting chief financial officer.
New sectional title management course
The University of Pretoria’s Department of Construction Economics, in collaboration with the National Association of Managing Agents, has launched a course for people who want to embark on a career as sectional title portfolio managers. The Introductory Programme in Sectional Title Management is an online course offered through the university’s Enterprises subsidiary.
The course, which runs from February to November, costs R25 000. Until now, there has been only one “benchmark qualification” for sectional management, the sectional title scheme manager course run by Paddocks and endorsed by the University of Cape Town. This three-month course, also online, plus a two-day workshop, costs R17 000. Unfortunately, neither the UP course nor the Paddocks course is credit-bearing, and neither course is recognised in terms of the National Qualifications Framework.