Sectional Title Living

Before falling in love ...

One does not buy only the section of a scheme, a unit includes an undivided share of the common property. All the owners collectively own everything that is not part of a specific section.

Take a step back and assess what the rest of the property looks like, is it well maintained or in need of maintenance? Ask the estate agent what the monthly levy is and what the name of the managing agent is. (That is a firm that collects the levies and manage the finances on behalf of all the owners collectively) Go to the managing agent and ask to see the last financial statements of the scheme. Look for the assets,  liabilities and funds in reserve. Look at the budget for the current financial year. Assess the general financial health of the scheme.

You may wonder why. The reason is that the moment you become the owner of the section that you fell in love with, you also become co-responsible for the entire scheme. Regardless of how good the section looks that you want to buy, if the rest of the building is in dire need of maintenance it is going to cost money. If there is not much cash in reserve all the owners collectively will be required to contribute (by special levy) to the funds needed to undertake the maintenance. If your personal budget is already streched you will be in trouble.

The Paddocks Sectional Title Survival Manual (by GJ Paddock) further recommends that before you buy you should: "Carefully consider the contract of sale, the management and conduct rules, the sectional plan, the scheme as a whole, the section and any exclusive use areas before a deal is done" (p. 3-1).

Of particular importance are the scheme's management and conduct rules. Make sure you would comfortably fit in. If, for example, no pets are allowed and you love/have pets, you might be quite misrable.

Revised 17 May 2010

'Why must I pay a levy?' or 'why is the levy so high?'

In order to finance all aspects of common property all schemes have levies. Refer to Section 37(1)(a-d) of the Sectional Title Act. The levies payable is derived from the approved budget for the financial year and devided based on the participation quota.

The floor areas of all the sections of a scheme are added together to derive the total floor areas. The participation quota (Section 32 of the STA) of a section is then calculated and expressed as decimal fraction or percentage of the total floor areas. Normally the participation quota of a section determines the share payable by the owner with regard to the common expenses.

One of the prescribed agenda items (Prescribed Management Rule 56[b][ii]) of a scheme's annual general meeting is the budget of the ensuing financial year. Once approved by the owners, the budget then determines the levies payable by owners based on the participation quota of their sections.

Should there be an unforeseen (or unplanned) common expense, then the trustees have the right to implement a special levy payable in order to fund the non-budgeted expense.

Revised 17 May 2010

Duties? ... you must be crazy ...

Affraid not! Sectional title living is not easy come, lock up and easy go. In addition to paying levies there are a number of imperatives, such as Section 44 of the Sectional Title Act:

• permiting, usually within reasonable hours with notice, unless it is an emergency, an authorised person access to your section to inspect, maintian, repair or renew
• carry out work within own section, at own cost, that may be ordered by a local of public authority
• repair and maintain own section in state of good repair
• keep exclusive use area clean and tidy
• use and enjoy common property in such a way that it does not interfere with others
• not use own section or exclusive use area, or permit use, in such a way that it causes a nuisance with other occupiers
• notify the body corporate about any dealings regarding own section, including change of ownership
• not use own section for any other purpose as intended or registered

Further imperatives are specified in terms of the prescribed Management Rules 68 to 70

• not use own section, exclusive use area or common property, or permit use, in such a way that it shall be injurious to the reputation of the scheme
• not contravene, or permit, any by-law, ordinance, proclamation or statutory regulation
• not make alteration to own section that are likely to impair the stability of the building or use and enjoyment of other sections, common property or exclusive use areas
• not do anything likely to prejudice the harmonious appearance of the scheme
• not use exclusive use area for any other purpose as intended, unless consent of all owners has been obtained
• not construct or place any structure on exclusive use area without prior written consent of the trustees
• maintain own hot water, irrespective of the insurance of the scheme
• the management and conduct rules are binding and the owner, and/or a lessee or occupant of the section, and it is the duty of the owner to ensure compliance of any occupant, guest, employee or any member of the family
• if an owner fails to maintain (as per Section 44 of the Act) and it persists for longer than 30 days then the trustees (or managing agent on their behalf) is entitled to remedy the the owner's failure and recover the cost from the owner

Liability in terms of Sections 37(1) and 47 of the Sectional Title Act further include:

• To make contribution (Management Rule 31[1]).
• Pay all legal costs, including costs as between attorney and client, collection commission, expenses and charges incurred to recover arrear levies or any arrear amounts, or in enforcing compliance with the Rules or Act (Management Rule 31[5]).
• Interest on arrears (Managment Rule 31[6]).

Revised 17 May 2010

Reciprocial principle

All owners can use and enjoy all parts of the common property at all times, provided any one owner do not do anything that prevent another owner form using or enjoying the same.

Tricky! For example, if there is one piece of common property that can be used to park a single car; then all owners are entitled to use it. However, in reality only car can be parked on this piece of property at a time.

A more obvious example: An owner experience a car breakdown and need to get his vehicle fixed for the next day of work. He proceeds to dismantle the problematic part and discovers the problem is bigger than he thinks. He works until late into the night, in the basement parking area. The sleep of a number of occupants is disturbed. This is clearly an example of  an owner using common property in an unacceptable way.

Another problematic area is the contrasting needs and preferances of children (of various ages) versus adults (in various degrees of maturing). Kids wants to play, run and shout, whereas aging adults want peace and quiet.

Revised 29 July 2010

If all bond providers would alert 'would be' sectional title owners

the way ABSA does with their page on sectional title ownership, there would be less ignorance:

http://www.absa.co.za/absacoza/content.jsp?/Home/Personal/How-Do-I/Buy-or-Sell-a-home/Buying-a-Home/Sectional-Title-Ownership

ABSA should, however, also encourage their customers to view the Management and Conduct Rules of the sectional title scheme they are interested in, to assertain if they are comfortable with the rules.

All banks should follow ABSA's example.

Revised 17 May 2010

Ownership apathy—a sectional title mental disorder

Or is sectional title ownership fraud by the bystander syndrome? The purpose of this post is to indicate that there is really no grounds for apathy of sectional title owners, but rather a demonstration of real interest is most needed.

"Apathy is a mental state in which the sufferer lacks the desire, will or energy to engage in any activity, whether intellectual or physical. It is variously called indifference, boredom, lassitude, languor, listlessness, laziness, lethargy or inertia. It may be a symptom of mental disorder. It is first alienation of the self from the world and then self-alienation. Finally it is withdrawal from all participation in the care of others and care of oneself. Collectively, apathy may be expressed in social, economic, political or ideological paralysis, with all the available energy for change locked up in the institutions, systems and structures of society."

What is it about sectional title ownership that owners are often characterised by apathy? Could it be that people attracted to sectional title ownership have a pre-disposition towards alienation mental disorder?—I am not serious. However, Political Apathy Disorder (PAD) is proposed as a new DSM diagnostic category for the failure to develop a social conscience.

Apathy is a common reaction to stress where it manifests as "learned helplessness"; it really is a veiled form of anger. Apathy is often the end-result of prolonged deprivation—if earlier reaction of rebellion led to defeat and humiliation, until finally all response seemed to disappear—there is loss of hope with an impoverishment of thinking processes. In contrast, sectional title ownership offers the opposite to helplessness, defeat and loss of hope:

• Before buying into sectional title ownership you have the right to inspect the scheme's finances, management and conduct rules, etc.—This is important because you need to make sure if the environment agrees with you and if there are no financial surprises looming.
• As an owner you are a member of the collective ownership, the body corporate—your voting power directly related to your percentage of ownership.
• You have the right (rather obligation) to attend, speak, make proposals and vote at the general meetings of owners.
• You have the right to nominate persons (not necessary only owners—but the majority must be) to look after your interests by serving as trustees. You have the right to elect from those persons nominated who you believe would best serving your interests.
• You have the right to question trustees; to engage with trustees at their meetings and state your views.
• You have the right to lobby support and if 25% ownership (in value) request a general meeting the trustees are obliged to arrange one. Should they fail, the 25% may proceed to call the meeting.
• Meetings are subject to quorums, meaning that al small group may not just do as they please.
• The trustees need to decide on matters collectively and majority vote or through circulation—no one trustee may decide on her/his own.
• Certain aspects are subjected to special or unanimous resolution, to which stringent criteria of notice and percentage voting apply.
• Should you not be in the position to attend a general meeting, then you have the right to send a proxy instead.

Deprivation, helpless, defeat, reason for loss of hope—I think not. Ignorance, yes most probably.

The bystander syndrome: Kitty Genovese, an American woman who became famous for her murder, was stabbed to death in New York on 13 March 1964. Kitty was driving home around 3.15am. She parked about 30 metres from her front door. As she walked to her door, she was approached by Winston Moseley. Moseley overtook her and stabbed her twice in the back. Kitty screamed. Her screams were heard by several neighbours. But it was a cold night, many had their windows shut and few recognized it as a cry for help. One of the neighbours did shout at Moseley, "Let that girl alone". Moseley ran away and Kitty made her way to her apartment. Kitty was seriously injured, in full sight of her neighbours, but no one helped her.

Some called to the police, but it was not given a high priority, as it was thought she was "only" beaten up. Witnesses observed Moseley get into his car and drive away. He then returned ten minutes later and found Kitty barely conscious at the back of the building. Out of sight, he attached her again, stabbing her several more times. She tried to defend herself, as was shown by knife wounds on her hands. He sexually assaulted her as she lay dying. He also stole money from her and left her to die. The attacks spanned over half an hour. Eventually, a witness did call the police. The police and ambulance arrived, but she died on the way to the hospital.

The media then reported that 38 people had witnessed or heard her attack. The New York Times printed an article - "Thirty Eight who Saw Murder Didn't Call the Police." This led to a media frenzy and much psychological research. What had possessed these witnesses to do NOTHING whilst Kitty was being stabbed and murdered? This psychological phenomenon became known as bystander apathy, the bystander effect or 'Genovese syndrome'. It is basically a phenomenon where someone is less likely to intervene in an emergency situation when other people are present and able to help, than they would if they were alone.

Revised 15 June 2010 with regard to 25% ownership in value: based on the participation quotas.

Insufficient funds for leaking roof—rights and realities

The facts or circumstances may differ, but many sectional title schemes are faced with realities such as:

• Owners voted for minimum levy increases for several years
• Cash reserves dwindled as result of usage
• Maintenance had been kept to essentials
• At least 10% of owners are in arrears with levy payments; and the arrears and legal fees to collect such have accumulated to a substantial amount
• The lift equipment is 30 years old, maintained in accordance with the law, but wear-and-tear nevertheless—the lift get stuck from time-to-time; is often out of level; and looks aesthetically neglected
• The company that waterproofed the roof for the past twenty years had been liquidated—the warrantee is therefore of no value
• When the previous trustees increased the levies by 10% in accordance to the new Management Rule 31(4A), gazetted 28 November 2008—Department of Land Affairs, No. R. 1264; Government Gazetted, No. 31626—the owners petitioned against the increase
• During the rainy season the roof started leaking at a few places

Options to consider:

1. The owner/s affected by the roof-leakage/s may submit a claim to insurance, but need to pay the excess—new Management Rule 29(4) applies—unless the owners collectively (the body corporate) by means of a special resolution decide that the body corporate will pay the excess (however, 75% of members are perhaps unlikely to assume proportional responsibility for payment of an excess relating to a single section).
2. The owner/s affected by the roof-leakage/s may enter into a dispute with fellow owners (the body corporate) about the excess payable, in which case the arbitration route might be followed (Management Rule 71).
3. The trustees have the right to raise a special levy to have the roof re-waterproofed and guaranteed, but effectively need to raise 110% of the amount required, because the 10% owners in arrears are unlikely to make the special levy payment—the full amount required therefore need to be contributed by 90% owners and the arrears of the 10% escalated.
4. It could be argued that the modernisation of the lift is a non-luxurious improvement; or that the refurbishment is necessary maintenance—if deemed a non-luxurious improvement the trustees need to give notice to the owners and convene a special general meeting where a special resolution need to be passed.

It is important to look into a scheme's situation before buying, because of common property responsibilities. It is further essential to get to know your rights (and obligations as member of the body corporate) as owner within a scheme. Attendance of annual and special general meetings of the scheme (body corporate) is important, because decisions may impact on you materially—a medium term look at maintenance and cash flow (finances) is crucial.

Collective-tolerance in title

Title is a legal term that, among others refers to a formal document (a title deed) that serves as evidence of ownership.

Sectional title involves personal ownership as well as collective ownership of property—it is a bundle of rights and responsibilities. The sectional title deed stipulates which part of a joint property is personally owned and which parts are collectively owned. As sectional title owner, one has accountability towards others to share in the costs with regard to common property and also to maintain your personal property.

Sectional title further involves tolerance, a permissive attitude toward fellow owners whose opinions, practices, race, religion, nationality, etc., may differ from one's own. Tolerance entails a capacity to recognise, to respect the beliefs and the patience to tolerate the practices of others.

If you are not agreeable to collective-tolerance in title you should not buy sectional title property. If you are only interested in investment, rather consider the stock exchange. If you want freedom of responsibility, do not consider sectional title ownership.

Purchasing life rights

Entering into a life rights agreement is entirely different from buying in a sectional title scheme.

The Housing Development Schemes for Retired Persons Act 65 of 1988 serves to protect elderly people when investing in a retirement village that is not a sectional title scheme. The Act specifies what the offer to purchase life rights must contain. By signing a life right agreement one commits to pay the purchase price and consent to having the right to live in the property for the remainder of life, or until you leaving the village. In the case of death or leaving the retirement village a percentage of the original contribution is retained. [Biccari Bollo Mariano Attorneys, October 2010 SS 7/10] In contrast to ownership of part of a sectional title retirement village, there is no purchase of actual real estate — life right entails only the right to live in a specific unit, the ownership is retained by the management company — the basic concept is that an individual pays a sum of money in respect of a specific unit and receives the right to live in that unit for the remainder of their life [Sifiso Msomi of Shepstone & Wylie's property department]. Life Rights assume the form of a lease, not a form of property ownership — the occupant (the agreement holder) has no rights to the title in land, only the right of use. The right to life is the fundamental right and property rights are an extension thereof.

Investors and sectional title ownership

One way to view the investment in sectional title property is to compare it to the buying of unit trusts, in contrast to investing directly in shares or substantial freehold property, the investor buys a unit and owns property together with other investors and residential owners.

Since 2004 there has been a significant growth in demand for sectional-title office and industrial schemes. Similarly, an insatiable demand for quality inner city residential rentals has been experienced. It is believed that there will for decades be a demand for entry-level property, because of employment equity and Black Economic Empowerment drives (which includes foreigners from African countries needing to rent) in South Africa. The popularity of rental-market investment-opportunities appear to be very attractive, based on how rapidly new stock is snapped up, often pre-launch.

However, investors are recommended to tread with caution in dealing with sectional title residential, office and industrial schemes. There are a number of things to consider before making an investment, for example:

• How is the sectional title scheme managed? — The better managed, the more its value will appreciate. Conversely, a poorly managed scheme may result in losing value rapidly if not appropriately intervened.
• Property is not for quick in-and-out investment gains and it is not for the feint hearted either.
• A good managing agent (preferably a member of the National Association of Managing Agents) with a good track record is an invaluable ally to an investor, protecting the interests of investors.
• Make a careful study the financial state of the body corporate of the scheme if buying into an existing scheme:
  • Look for signs of wide scale non- payment or accumulated arrears of levies, because owners of units in such schemes can become liable for the unpaid debts of other owners even if regularly paying and levies up to date
  • Review the audited financial statements for the last three years of the scheme
  • Consider the funds in reserve for maintenance, as well as the historical expenditure and the physical appearance of the buildings and infrastructure
  • Sectional title owners jointly own the land on which the scheme exists but are individually responsible for rates payable to the local authority 
• If investing in a new scheme, make sure the developer driving it is reputable — consider obtaining either legal and/or accounting advice from a knowledgeable professional
• Peruse the scheme's management and conduct rules to make sure there is nothing therein that presents an obstacle or problem
• All investors become owners in the scheme and automatically part of the body corporate, with statutory duties (e.g. Section 44 of the Sectional Title Act) and responsibilities
• As member of the body corporate it might not be viable to attend annual and special general meetings, resulting in being reliant on a proxy to take decisions or not being part of the decision-making
• An experienced social-media-friend and regular commentator on Sectional Titles Online (Anne Greening) added that "investing in ST [sectional title] requires an ongoing involvement and financial commitment from the buyer to ensure that his property is internally maintained; that the rates are paid; the levies are paid; that he receives a rental; and that the complex is properly managed. He will not necessarily have a regular income from his investment, as tenants come and go, and he may be without one for some time. Tenants, no matter how carefully screened, can default on payments, or leave the inside of the house [unit] in need of repairs.  Another aspect is the volatility of the housing market (although this could be said of Unit Trusts, too)."  

Often investors smooth the cash flow of existing schemes in that when owners that are severely in arrears sell, the arrears are recuperated from the value of the sale.

An article by Jennifer Paddock conveniently summarises what investors need to know concerning sectional title scheme ownership. Property Investor Network neatly sums up the role for a Body Corporate by these seven bullet points:

• Budgeting – The Body Corporate must establish funds for administrative expense for the sectional title scheme. That, of course, includes everything from repairs [as well as planned maintenance and occational major maintenance projects] to local authority charges, electrical supply, fuel, sanitary and other services. Basically, everything that is necessary to manage and administrate the complex.
• Set Levies – The Body Corporate must determine levies for owners so that they have enough money to manage and administrate the complex.
• Banking – Yes, the Body Corporate is also obligated to open an account with a financial institution.
• Insurance – The Body Corporate also have the responsibility to take care of insurance and also to make sure it is up to date, all insurances needed of course. It was once found that sectional titles in a scheme did not update their insurance. Each unit was insured at a value less than 30% of the replacement cost. In this case, if the worst happens, for example a fire broke out, the owners would have to pay out some 70% of the total cost of rebuilding their properties. Keeping up with adequate insurance is a very important role that the Body Corporate is obligated to do.
• Maintains Common Property – The Body Corporate must make sure that the common property is maintained, that includes elevators and generally keep the complex or building in good state of service and repair.
• Comply with Authorities – If the authorities ask a body corporate to fix something under any regulations they are responsible to comply.
• Comply with Law – Another interesting point is that body corporate must be in compliance with any law that relates to common property or any improvement of land comprised in the common property [and a whole host of other laws: e.g. Basic Conditions of Employment Act,  Health and Safety laws, Income Tax, UIF, Workmen’s compensation laws, the Older Persons Act and its regulations, and in anticipation the Ombud Act]. This is an interesting one as the members of the Body Corporate, in this function, must by definition understand such laws. If they don't then they should hire someone that does, otherwise they can't really comply with something they don't understand.

There SHALL be reasonable provision for maintenance

Owners of a sectional title scheme have a collective duty to maintain the common property. It is not a matter of owners could if they have the financial means. Unlike freehold property, the maintenance of the collectively owned property is a collective obligation.

Section 37(1)(a) of the Sectional Titles Act (95 of 1986) is quite clear in this regard. The prescribed management rules appended to this act, Rule 36 on the annual financial estimate, states “(1) Before every annual general meeting, the trustees shall cause to be prepared an itemised estimate of the anticipated income and expenses of the body corporate during the ensuing financial year, which estimate shall be laid before the annual general meeting for consideration in terms of rule 56 hereof. (2) The estimate of expenses referred to in sub‐rule (1) shall include a reasonable provision for contingencies and the maintenance of the common property.” (emphasis added).

The Sectional Titles Schemes Management Act, No. 8 of 2011, repeals section 37 of the Sectional Titles Act, and replaces (section 3) it with, the functions of bodies corporate, which include interalia:

• (1) A body corporate must …

• (a) to establish and maintain an administrative fund which is reasonably sufficient to cover the estimated annual operating costs—
• (i) for the repair, maintenance, management and administration of the common property (including reasonable provision for future maintenance and repairs);
• (b) to establish and maintain a reserve fund in such amounts as are reasonably sufficient to cover the cost of future maintenance and repair of common property but not less than such amounts as may be prescribed by the Minister;

The exisitng prescribed management rules are retained as per Section 10(12) of the Sectional Titles Scheme Management Act, No 8 of 2011: http://www.info.gov.za/view/DownloadFileAction?id=147401

Sharing costs through sectional title ownership

A substantial advantage of owning property in a sectional title scheme, in contrast to free-hold property where everything belongs to the owner, is that ownership of everything other than the your personal section is shared ownership. The title deeds usually reads something to the effect of:

A unit consists of: (a) ...; and (b) an undivided share in the common property apportioned to the said section in accordance with the participation quota as endorsed on the said section plan.

This reality is possibly the biggest problem of sectional title ownership, in that owners appear to perceive that some entity other than themselves are responsible. This 'b' part of the title deed encompass membership of the body corporate of the scheme. The Sectional Titles Act (STA), No 95 of 1986, §36(1), as well as the Sectional Titles Schemes Management Act, No 8 of 2011—that would amend section 36 of the STA—§2(1) reads:

With effect from the date on which any person other than the developer becomes an owner of a unit in a scheme, there shall be deemed to be established for that scheme a body corporate of which the developer and such person are members, and any person who thereafter becomes an owner of a unit in that scheme is a member of that body corporate.

This is an important issue that Andrew Buttress fails to address in his message to the Roodepoort Record (Download Is_threre_a_loophole_in_the_law-loss_of_financial_control_Rdp_Record_22July2011). The abovementioned acts outline the responsibilities of the body corporate, which is elaborated upon in the prescribed management rules (PMRs). It is important to note that a body corporate may make use of the services of a managing agent, but is not obliged to, they owners may self administer. PMR 46 outlines what the appointment, powers and duties of a managing agent (MA) should entail. In my opinion MA is a misnomer, it should be administrative agent.

The biggest 'loophole' in sectional title is owner apathy. There are many checks and balances in place to preserve the rights of owners, but few owners show any real interest. What Constantia Sectional Title Management did is criminal, but it does not absolve the trustees and owners of schemes affected from their responsibility.

Sectional Title segment price index marginal growth

While in Ballito, I read in The Bugle, one of the local papers, the following snippet on page 6 of the 2 December 2011 edition. The FNB 3rd quarter 2011 housing segment review is readily available.

Download FNB_Property_Barometer_Segment_Price_Review_Q3_2011