This article was first published in the fourth-quarter 2014 edition of Personal Finance magazine.
The Sectional Titles Act (STA) imposes obligations on developers that give buyers of units off-plan more protection than they would have with freehold property. At the same time, before a sectional title scheme is registered, developers can set conditions of title, create body corporate rules and reserve rights that may have significant implications for what owners can do with their sections and how the scheme will function.
1. Know what you are buying
By law, a contract of sale is not valid and binding unless the property offered for purchase has been adequately defined. In the context of sectional title, this requirement means that the purchaser must be provided with a description of the unit that he or she will buy, and this description should refer to a draft sectional plan or, if a sectional plan has not been drafted, the building plans – preferably, ones that have already been approved by the local authority. A unit always consists of a section (such as the flat, garage or storeroom owned by an individual) and an undivided share in the common property (all the land and structures that are not sections).
If the purchaser is buying registered rights to an exclusive-use area, this area must also be described with reference to the draft sectional plan or the building plans.
An exclusive-use area is shown on a sectional plan by broken, or dashed, lines.
Take-home message: Make sure you know exactly what you will own outright and what you will own collectively with the other purchasers. It is not unusual for areas that are linked to the ownership of a section (such as a garage or parking bay) and/or that are physically attached to an owner’s section (a balcony or a garden) to be exclusive-use areas or common property.
An exclusive-use area is just that – an exclusive-use area; it remains part of the collectively owned common property, and therefore what you can do with and on that exclusive-use area will be circumscribed by the STA and any conditions imposed by the developer and, once it comes into being, the body corporate. If you have an exclusive-use right, the body corporate is entitled to recover from you the costs associated with maintaining and repairing that exclusive-use area.
You should understand the financial implications of the type of facilities (lifts, swimming pool, laundry, clubhouse, gym) that will be created on the common property and that will not be subject to exclusive-use rights. You, along with the other owners, will be responsible for the cost of repairing and maintaining all the facilities that form part of the common property, whether or not you use them.
2. Drafting of the sectional plan
A sectional plan must be drafted by an architect or land surveyor who is qualified to perform this task. The plan must be based on the actual measurements of the physical buildings.
The draft plan must be approved by the surveyor-general. The surveyor-general does not check the draft plan against the physical property, nor can the surveyor-general be held liable if the plans are defective. However, a land surveyor or architect who fails to submit plans based on actual measurements, or who signs a draft plan knowing that it is defective, will be reported to his/her professional body for misconduct.
The land surveyor or architect must also establish that the development complies with the local authority’s town-planning and building regulations. If the development does not comply, the surveyor or architect must apply to the local authority for a certificate of condonation. (Condonation cannot be granted for non-compliance with national building regulations regarding the strength and stability of a building.) Note, however, that, in terms of an amendment to the STA in 1997, it is no longer necessary to obtain the approval of a local authority before a sectional title scheme can be registered.
Take-home messages: The architect or land surveyor plays a pivotal role in defining what you will actually own. Therefore, check that they are registered with their respective bodies and, to minimise the possibility of collusion to misrepresent the nature of the property offered for purchase, are independent of the developer.
If you are buying before a suitably qualified land surveyor or architect has drawn up the draft sectional plan that will be submitted to the surveyor-general, does the sale agreement state the extent to which the floor area on the plans you have seen (or the description of the unit) may deviate from the approved plans?
3. No payment before registration
In terms of the Alienation of Land Act, a developer cannot receive payment for the sale of a proposed unit before the sectional title register has been opened at the Deeds Office, at which time the unit itself can be registered. The register can be opened only once the surveyor-general has approved the draft sectional plan. You can buy a proposed unit before the sectional plan has been approved – or even before the developer has taken transfer of the land or before the building plans have been approved – but you cannot take transfer of that unit until the scheme has been registered.
The prohibition on the developer receiving payment until the scheme has been registered does not apply to occupational rent or occupational interest. It also does not apply to commission paid directly to an estate agent, although clearly it is not in your interests for commission to be paid to the agent until you have taken transfer.
Once the sectional title register has been opened, the developer becomes the owner of all the units in the scheme.
Take-home messages: The contract of sale should state that the deposit (and any additional payments) will be held in the trust account of the developer’s attorney or estate agency until the unit is registered in your name.
Check that the interest on your deposit will be paid into the trust account of the developer’s attorney or estate agent, and if your deposit has to be refunded, the interest will also be paid to you, not to the developer’s attorney or estate agent.
Check what the contract states about the developer’s obligations to complete the scheme and to register the units. Clearly, it is not in your interests to tie up your money in a project that may take years to complete, or where you have an open-ended financial liability towards the developer.
4. Future development rights
It is common for developers to take out a right to extend the scheme in future – even in 10 or 20 years’ time – by adding sections. The developer will usually reserve this right when the sectional title register is opened. However, the developer can apply for this right at any time until the body corporate has been established (that is, when the first unit is transferred into the name of an ordinary purchaser).
A developer who wants to reserve a right to extend a scheme must disclose this in every contract of sale (not just before the scheme has been registered). If this disclosure is not made, the purchaser has the option to cancel the sale. However, the Sectional Titles Act requires only the existence of the right to be disclosed, not the nature of the proposed extension.
Take-home messages: You should find out how long the developer will have the right to extend the scheme and how the scheme will change if that right is exercised. Additional facilities on the common property may well mean higher levies, while that wonderful view or extensive garden you enjoyed may disappear. If the scheme will eventually consist of a number of separate buildings, you should find out whether the developer intends to create management rules so that each phase can operate as a separate cost centre. If not, all owners will remain liable, in proportion to their participation quotas (PQs), for the expenses of the entire scheme, not only their phase or building. Think of the financial implications if, for example, the scheme consists of a three-storey building when you buy and then, in five years, the second phase includes two taller building with lifts and swimming-pools.
5. Levy and vote
The PQ of each section is normally expressed as a percentage of the floor area of all the sections. Normally, the quota will determine an owner’s liability for levies and the value of his or her vote at a general meeting of the body corporate. Before the sectional title register is opened, the developer can amend the scheme’s management rules so that an owner’s levy liability or the value of his or her vote will be determined in another way. If the sales agreement does not disclose that the developer intends to make these amendments, the developer cannot make them. Variations in how levies and votes are valued are more common in mixed schemes (those where there are sections for commercial and residential use).
Three more things
In addition to the above five points, prospective buyers should also check the following:
1. Will the developer retain (not put on the market and sell) a certain number of units after the scheme has been registered? If this is the case, find out the total PQ of the retained sections in relation to the total PQ of the sections that will be sold. If the developer retains a number of units, it will mean that one owner will be able to exercise substantial or even majority control over body corporate decisions, including awarding contracts and making rules.
2. Will the developer make “non-standard” management and conduct rules for the scheme, or will the prescribed management and conduct rules apply without amendment? The contract should draw your attention to any “non-standard” rules that may affect your rights.
3. Will the developer bind the purchasers to any third-party agreements? The Sectional Titles Act states that no debt or obligation arising from an agreement between the developer and any other person shall be enforceable against the body corporate. However, a developer can bind the body corporate at its inaugural meeting to appoint a managing agent of the developer’s choosing, by including a clause in the sales agreement whereby purchasers automatically grant the developer the authority (a proxy) to vote on their behalf when the meeting considers which managing agent to appoint. If this is the case, you should obtain a copy of the proposed contract and study its terms and conditions. The contract will have an initial term of one year.
You should also find out if the managing agent is in any way linked to the developer. Remember that if the developer retains enough units in the scheme to control the body corporate, the developer will be able to renew the contract year after year, even if the other owners are unhappy with the costs and the standard of service.
Note: This article addresses the purchase of sectional title units in residential-only (not a mix of residential and commercial) schemes. There are specific laws that apply to the purchase of units in time-share schemes, in retirement developments and in shareblock properties that are converted to sectional title.
* This article was compiled with assistance from Bobby Bertrand, a director of law firm Bowman Gilfillan.