Property MD gives advice on maintaining financial stability in sectional title schemes

29 October 2014

It is important, when considering purchasing a unit in a sectional title scheme, that the buyers ensure the financials of the scheme are healthy, particularly in today’s tough economic climate, says Lanice Steward, managing director of Knight Frank Residential SA.

What many do not realise is how fast a sectional title’s financial situation can deteriorate in a short space of time if there is a shortfall in levy collections each month or there is a problem with the financial management, she said.

As a member (an owner of a unit) of a body corporate, it is in that owner’s interests to be actively involved in the management of the scheme, and this could either be by attending at least the annual general meeting, and if other meetings are held during the year to discuss other matters, he should attend those too.

The AGM is the meeting where the trustees are elected and it is important that the right people are chosen for the various jobs that need to be done. There is no point in someone who does not have the skills required for the job being elected to do it, she said.

At the AGM, the budget for the following year will also be accepted or approved, for which a resolution must be passed and it must be remembered that a special resolution must also be in place for the interim budget, said Steward.

If there are outstanding levies, trustees should have a plan in place for the recovery of these as soon as possible, and this sort of problem should never be left for too long, she advised. Usually, if levies are outstanding the body corporate can either go to arbitration to resolve the matter or apply to the courts, either for repossession of assets or sequestration of the owner.

Trustees should be warned, however, that in some cases, when it comes to claiming outstanding levies, any of the above might still not remedy the situation, said Steward.

A case mentioned in Smith Tabata Buchanan Boyes’ newsletter, Body Corporate of Costando v Kiggundu and Another, the body corporate applied first for repossession of goods but the sheriff could not find adequate assets to settle the amount owing. They then tried sequestration of the owners but it was found that they were up to date on their bond payments on another property, so this could not go ahead either. Insolvency law principles state that this process cannot be used unless it will be to the benefit of all the creditors and in this case it was not.  

Where there are protracted court cases to try recoup money outstanding, said Steward, the body corporate may in the meantime have to raise a special levy, firstly to cover the costs of the court case and secondly, to cover the outstanding amounts, which other owners might be reluctant to do. In extreme cases, if the situation is not resolved quickly, other owners might too stop paying their levies, begrudging the payment while others get away with non-payment.

In future, it will be necessary for every sectional title scheme to have a reserve fund set aside from 1 to 2% of its market value, to protect it against financial distress and mismanagement.  

“How or when this will be signed into law is not known but it would be wise for bodies corporate to reassess their levies for next year and add the amount into the budget as soon as possible, and not wait until they absolutely have to do it. This could end up a hefty amount. If you take a scheme of 60 units, worth R1,5 million for each unit, this adds up to R90 million, so the scheme would have to have at least R900 000 in the bank. If it becomes law to have 2% in reserve, I think most in that scheme would struggle to come up with the R1,8 million needed,” said Steward.

Most would see this as a negative, but it is necessary for schemes to have a decent amount in reserve for emergencies and as contingency funds for maintenance and assistance where there are shortfalls, she said.

“It is better to have planned for something to have gone wrong and not have the whole scheme put at risk financially.”