This article was first published in the first quarter 2017 edition of Personal Finance magazine.
Note: After the publication of this article in Personal Finance magazine, Advocate Seeng Letele was appointed Chief Ombud in April 2017.
In October 2016, a hostage drama unfolded in a residential estate in Moreleta Park, a suburb south-east of Pretoria. By the time it was over, four people were dead. News reports quoted residents as saying that the hostage-taker, Danie Small, had a history of run-ins with his neighbours. It was suggested that Small’s shooting of three residents, including the estate’s caretaker, was triggered by a dispute over a wall he had built without the permission of the body corporate. Small took two members of the police service and three security guards hostage. After a police task force freed them, Small apparently shot himself.
A residential complex can be a breeding ground for disputes: people with different temperaments and values share the same living space, while rules and trustees restrict what residents can and can’t do. If not dealt with properly, disagreements can lead to a breakdown in relationships between neighbours, mismanagement of the scheme and even, as the Moreleta Park incident shows, they can boil over into violence. This, Themba Mthethwa says, is one of the reasons South Africa needs a statutory body that will enable disputes in community schemes to be resolved easily and cheaply. Mthethwa is the chief ombud of the Community Schemes Ombud Service (CSOS), which officially opened for business on October 7, 2016, when the final regulations issued under the CSOS Act of 2011 were promulgated.
In the absence of an ombud service, the only recourse has been a professional arbitrator or the courts – even for minor disputes. (In September 2016, a judge lamented the fact that a High Court was burdened by a dispute between a homeowners’ association and an owner over a barking Chihuahua.) Most individual owners cannot afford litigation or arbitration, while the adversarial nature of the court process also acts as a deterrent against taking on people they have to live with.
The regulations, and the Act itself, are set to be a game-changer for “community schemes”, which include a variety of arrangements (residential and commercial) involving the shared use and ownership of property, the most well known being sectional title and homeowners’ associations. All community schemes are now directly accountable to a body tasked with ensuring that they are properly managed. Schemes must register with the CSOS and each year submit a return to the CSOS listing their executives, the levies paid by each unit and their annual financial statements. They must lodge their governance documents, such as their management and conduct rules, with the CSOS, and the service must approve any changes to these documents before they can become effective. The CSOS is specifically mandated to ensure that sectional title schemes comply with the new Sectional Titles Schemes Management (STSM) Act, which also came into operation on October 7.
Swing to cluster living
“Horror stories” about community schemes abound – authoritarian trustees, inconsiderate neighbours, unreasonable rules, incompetent managing agents – yet statistics indicate that more and more South Africans are living in communal property, pushed by urban densification policies and the unaffordability of freehold property, and pulled by the need for security and the desire to shed the responsibilities of property maintenance.
South Africa has the fourth-highest concentration of community schemes in the world. According to Mthethwa, community schemes had an asset value of more than R800 billion in 2015 and managers of these schemes collect R11 billion in levies annually.
The launch of the CSOS was the culmination of a process that started in 2004, when the cabinet mandated a committee, consisting of representatives from various government departments, to investigate how disputes in sectional title schemes should be dealt with. The mandate was soon broadened to include all types of community schemes. Consultations with local roleplayers were complemented by extensive overseas research, resulting in CSOS legislation that is strongly influenced by similar entities in Australia.
Although many people are only now starting to come to terms with the reality of the CSOS, it has been in existence since 2013, when the Minister of Human Settlements appointed the seven non-executive members of the CSOS’s board, who serve for a three-year term. The board appoints the chief ombud and the chief financial officer, who are also executive members of the board.
Mthethwa’s five-year term as chief ombud started on October 1, 2014. His priorities were to establish the CSOS’s head office, which is in Sandton, and to appoint and train staff, anticipating that the CSOS legislation would take effect the following year. As it turned out, the draft regulations were only published for public comment a year later, in October 2015.
Conciliation or arbitration
Although the CSOS is an “ombud” service, neither the chief ombud nor any of the regional ombuds are involved in resolving disputes. They are essentially chief executives and administrators. Disputes are settled by conciliators or adjudicators.
The CSOS hopes that most disputes will be settled via conciliation (similar to mediation), where a trained conciliator works with both parties to facilitate a mutually acceptable agreement. Conciliation is a “no-fault”, informal process, and a settlement can be reached in face-to-face meetings or by the parties exchanging submissions.
If the dispute cannot be resolved by conciliation, or if conciliation is not appropriate, the case will be referred to an adjudicator drawn from a panel made up of retired magistrates and judges, and professional adjudicators. Adjudication is more formal than conciliation, and the adjudicator will rule in favour of the parties (or dismiss the application) and issue an order that has the same status as a judgment of a magistrate’s court or the High Court.
A party who is dissatisfied with an order can appeal to the High Court, but the grounds are limited to how the adjudicator applied the relevant law. Mthethwa says this prevents litigants from resorting to the courts to delay the implementation of orders.
The CSOS could not issue adjudication orders until the final regulations were promulgated on October 7. In the 2015/16 financial year, the CSOS finalised 646 complaints, most of them (225) by conciliation, but a large number (133) were closed without being resolved, because the applicants failed to submit information requested by the CSOS. The balance of the applications were rejected, withdrawn, settled by the parties without conciliation, or referred to other tribunals.
Mthethwa says that, contrary to expectations, the vast majority of complaints were not about barking dogs or noisy neighbours, but were financial matters, including “excessive” levy increases, the imposition of special levies and the “incorrect” calculation of levies. He says a common problem underlies all these complaints: owners and trustees do not understand how to apply the legislation that governs sectional title schemes.
One of the CSOS’s responsibilities is to educate owners, residents and scheme executives about their rights and obligations, and Mthethwa says carrying out this mandate is crucial to ensuring harmony and good governance in community schemes. The service plans to roll out a number of free workshops around the country, and make educational material available.
He says it’s apparent that many owners do not understand that, when they buy into a community scheme, they automatically become liable for the expenses associated with maintaining and repairing the common areas – such as the exterior of the building, corridors, lifts, gardens and paving.
“Owners don’t attend an AGM where it’s decided, for example, that the building has to be painted. Then they become angry when their levies are increased,” Mthethwa says. “But when we investigate these complaints, we find that the body corporate did, in fact, follow the proper decision-making process before the levies were increased.”
He says owners must get involved in their schemes, attend meetings, read the governance documentation and hold their executives accountable.
Learning to get along
The CSOS has jurisdiction over a wide range of matters and sceptics wonder whether it will be able to cope with a tidal wave of complaints – many of them, no doubt, petty. Mthethwa says the CSOS Act entitles the service to reject a matter if the complainant does not provide evidence that he or she has made an attempt to resolve the dispute within the scheme.
“We are not ‘a court of first instance’. Our preference is for problems to be resolved internally. We want to encourage people in community schemes to learn to live together as a community,” he says.
In light of the requirement that residents should attempt to solve their problems themselves before turning to the CSOS, there was speculation that the regulations would spell out what dispute-resolution mechanisms should be set up. They did not.
Mthethwa says schemes should create their own structures for dealing with disputes. He is not opposed to schemes having rules that provide for offenders to be fined, as long as the fines are reasonable and fair – for example, both parties must be granted an opportunity to present their case.
A price to pay
Although few people have taken issue with the need for a statutory dispute-resolution service, the levies that community schemes must pay to fund the CSOS have not been universally welcomed. The CSOS levies are based on the levies that owners pay their schemes: under R500 a month, there is no CSOS levy; thereafter, the levy is two percent of the monthly scheme levy, capped at R40 a month (or R480 a year), which kicks in once the scheme levy reaches R2 500 a month.
In addition, a fee of R50 must be paid when you apply for the CSOS to intervene in a dispute, and if your complaint is referred to adjudication, you must pay a further fee of R100.
Individuals and schemes can apply to have their CSOS or dispute-resolution fees reduced or waived by submitting details of their income and expenditure to the CSOS. But some have asked why the CSOS charges fees in the first place: couldn’t it be funded from taxes and rates?
Mthethwa answers by pointing out that taxpayers fund the judicial system, but they still have to pay out of their own pockets when they engage a lawyer to represent them in court. He says the CSOS levies are very reasonable, particularly when one compares them to the alternative of paying an attorney who specialises in sectional title or property law. The CSOS system prevents the prospect of high legal fees acting as a disincentive to resolve disputes.
Until now, the CSOS has been funded by grants from National Treasury: it received R40 million in the 2014/15 financial year and R39.5 million in 2015/16, when it incurred a loss of R15 million, because the CSOS Act was not proclaimed as expected, so budgeted-for revenue of R20 million from levies did not materialise. Treasury has granted the CSOS R23.9 million for 2016/17.
In terms of the CSOS Act, parties to an adjudication are not entitled to legal representation unless by common agreement or if, after considering the circumstances of the matter, an adjudicator believes it would be unreasonable for a party not to be represented.
Channels for complaints
One of the features of the CSOS Act is that occupiers (effectively, tenants), not just owners, can lodge complaints. The provinces already have Rental Housing Tribunals (RHTs), established in terms of the Rental Housing Act, so won’t the jurisdiction of the CSOS and the tribunals overlap?
Mthethwa says the RHTs are designed to address disputes between landlords and tenants, usually over whether one or other party has adhered to the terms of the lease, while a tenant or a scheme would approach the CSOS if the dispute involved the tenant’s use of the common property.
However, he says the lines of jurisdiction won’t always be clear, which is one reason for the CSOS working closely with the provincial tribunals. The other reason is that it makes sense for the CSOS and the RHTs to share skills and resources, considering that both entities provide dispute-resolution services for people who live in community schemes.
Although most complaints are submitted electronically, Mthethwa says that, ideally, the CSOS should have a walk-in office in every province. To this end it could share office space with the RHTs or the provincial branches of the Consumer Commission.
Currently, the CSOS has offices in Sandton (to deal with complaints from people in Gauteng, Limpopo and North West), Durban (to serve KwaZulu-Natal, Mpumalanga and the Free State) and Cape Town (for the three Cape provinces).
The STSM Act, which came into effect on the same day as the CSOS Act, requires sectional title schemes to budget for a maintenance reserve fund and to draw up a 10-year maintenance and repair plan. The CSOS regulations spell out the duties of scheme executives, which include the obligation to educate themselves about their scheme and the legislation that governs community schemes.
Won’t the plethora of legislation, plus the risk of being hauled before the CSOS, deter people from serving as trustees or executives on the boards of their community schemes?
Mthethwa says the regulators do appreciate that the vast majority of trustees are volunteers who serve their schemes on top of holding down full-time jobs. At the same time, he says, scheme executives hold public office and, as such, they need to be held accountable. Those who manage schemes with the best interests of residents in mind have nothing to fear, he says, emphasising that the CSOS is not “out to get” people, but, through education, aims to help schemes manage their affairs properly.
Regulating managing agents
Many community schemes turn to managing agents to relieve them of the sometimes onerous burden of administration. Although managing agents must register with the Estate Agency Affairs Board (EAAB), the Estate Agents Affairs Act of 1976 was not drawn up with the duties and responsibilities of managing agents in mind, and Mthethwa says the absence of regulation for the “vast” managing agency industry needs to be addressed urgently.
The STSM Act requires the Minister of Human Settlements to appoint an Advisory Council that will, among other things, make recommendations about new legislation or regulations. Mthethwa believes that one of the council’s first recommendations will be that a qualifications framework for managing agents should be established.
The CSOS Act does authorise adjudicators to order a managing agent to comply with the terms of its contract of appointment, or to overturn a scheme’s decision to terminate a contract. But, apart from that, it has not brought managing agencies within the ambit of the CSOS. The CSOS regulations have addressed the problem of unscrupulous managing agents stealing scheme money by making it compulsory for all schemes to take out fidelity insurance. The cover must insure the scheme against theft or fraud perpetrated by any person who has access to, or control over, the scheme’s money. The minimum level of cover must equal the total value of a scheme’s investments and reserve funds at the end of its previous financial year, plus 25 percent of the scheme’s operational budget for its current financial year.
Under the Estate Agency Affairs Act, managing agents must have a fidelity fund certificate issued by the EAAB. However, it is alleged that the EAAB has been lax in checking whether all managing agents are operating with valid fidelity fund certificates.
Even where an agency does have a fidelity fund certificate, owners and schemes are not fully protected. The EAAB’s fidelity fund covers only the principal, or owner, of the managing agency, not his or her employees, and it covers only scheme money held in the agency’s trust account, not money held in accounts outside the trust account.
A further problem with the fidelity fund is that, before it will pay out, a claimant must first prove the validity of his or her claim and demonstrate that he or she tried to recover the missing funds. It could take years before a claimant has exhausted the available legal avenues.
The CSOS regulations state that a fidelity insurance policy must pay out within “a reasonable time”, and a payout must not be conditional on legal action being taken against the insured person.
TYPES OF ORDERS
An adjudicator can issue orders in respect of a wide range of issues that arise in the context of community schemes. These issues include:
• Financial issues – for example, ordering a body corporate to re-calculate or refund a levy, or ordering a body corporate to have its financial statements audited.
• Behavioural issues – for example, ordering that a behaviour, such as playing music loudly, constitutes a nuisance and ordering the relevant person to stop that behaviour; or ordering an animal, such as a pet dog that is being kept in violation of the scheme’s rules, be removed from the property.
• Meetings – for example, ordering that a resolution adopted at a meeting of a body corporate or a board of trustees is invalid, or ordering that a resolution passed at a general meeting is void, because it unreasonably interferes with the rights of an owner.
• Private and common areas of the property – for example, ordering a body corporate to carry out repairs to the common property, or ordering a body corporate to grant an owner or occupier exclusive-use rights over a certain part of the common property.
• Scheme governance – for example, ordering an association to amend a management or conduct rule.
• Management services – for example, ordering a managing agent to comply with the terms of his or her contract of appointment.
• Access to information – for example, ordering an association to make governance documents or records available to a resident.
CSOS HEAD OFFICE CONTACT INFORMATION
Telephone: 010 593 0533
Fax: 010 590 6154
Post: 63 Wierda Road East, Wierda Valley, Sandton, 2196