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Are share block scheme owners stuck with their arrangement?

Published Nov 30, 2021

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Lawyers say such schemes can be converted to sectional title, provided a third of the owners vote for it

Although new share block developments are not common nowadays, there is a large number of established schemes in South Africa people can buy into, and many retirement complexes use the share block ownership system.

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Lately, there have been queries about whether share block schemes can be converted to sectional title schemes. Law firm STBB answers the question, saying “yes”, and outlines the procedure below. The company says it is not possible to know when standing in front of a block of flats, whether it is a share block scheme or a sectional title one.

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So, what is the difference? A share block scheme describes a legal structure where a piece of land is owned by a share block company on which, typically, a block of flats is built. Buyers individually purchase a grouping of shares in the company, known as a “block” of shares, which is behind the conclusion of a use agreement.

The use agreement grants the holder of the block of shares the right to occupy a certain apartment and sets out the buyer’s rights and obligations. This means the owner does not own their apartment directly but owns shares in the company.

Ownership of the land and the block of flats built on it remains with the share block company, which is the registered owner of the land. By contrast, if the block of flats were described in the deeds registry as a sectional title, people would be able to buy and own their individual apartments. Share block ownership schemes came before sectional title ownership.

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Before South Africa’s first sectional title legislation was passed in the 1970s, it was not possible to own a part of a building, without also owning the land on which it stood. Share blocking was the closest thing to ownership available to occupiers of parts of buildings at the time.

The promulgation of sectional title legislation meant, for the first time, ownership of apartments and property could be acquired in a scheme.

Share block schemes can be converted to sectional title schemes in terms of the Sectional Titles Act:

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• There is provision for such conversion when 30% of the shareholders have agreed to the conversion.

• When the directors of the share block company resolve to convert the share block scheme to a sectional title scheme. In the first case, a meeting of shareholders is called and a vote is taken. The Share Blocks Control Act lists a number of requirements to be met for the shareholders’ resolution to be valid.

There must be proper notice to all shareholders explaining the proposed conversion and furnishing details of the sectional title plan and rules that will apply to the scheme were this to happen. Once the resolution has been passed, notice must be given to all affected parties – including every shareholder of the company, every creditor who is owed more than R500 and any person entitled to a share in the company by way of pledge – within 21 days.

Registration of the conversion in the Deeds Office After dealing with possible objections and attending to certain administrative matters, proof must be provided to the Registrar of Companies that all requirements for conversion have been met. The share block company will then appoint a land surveyor to prepare sectional title plans.

Once these have been approved by the surveyor-general, an application can be made by a conveyancer for the approval of a sectional title plan by the Registrar of Deeds. Once the sectional title plan has been registered at the Deeds Office, and the sectional title scheme opened, all the apartments will be converted to sectional title units and registered in the company’s name until the units are transferred to individual shareholders.

Shareholders do not necessarily have to take the transfer of a unit in the sectional scheme. Their ownership of the property is regulated by their shares in the share block company up until such time as they elect to take transfer of a unit.

Did you know?

One of the disadvantages of buying into a share block scheme is that your purchase price will be more difficult to finance. You may not be able to get a home loan to buy a unit in a share lock scheme (unlike buying a freehold or sectional title property), because you don’t own a physical property that can be bonded as security for the money advanced by the bank.

However, you might be able to obtain a loan from a bank using your share certificate as security in the form of a pledge and cession of such shares. You will also generally be required to put down a bigger deposit compared with a freehold or sectional title sale. The period of the loan is likely to be shorter, and the rate of interest on the loan is likely to be higher.

– Personal Finance

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