Sectional Title Living

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.

Oops, nobody paid the electricity

Apathetic owners within sectional title schemes often do not have a clue about the scheme’s finances. Boldly on the front page of the Roodepoort Record of 24 June 2011 appears the question: “Were trustees grossly remiss?" Some 450 schemes are in a pickle as result of the South Gauteng High Court’s interdict preventing Constantia Sectional Title Management from operating any further. Download Roodepoort Record 24 June 2011 Page 3

Owners annually appoint trustees and entrust the management, administration and control to an elected few. Many owners just don’t bother to attend annual general meeting and appear not to pay much attention to the annual financial audit. Having paid the monthly levy and for all services (e.g. electricity) individually consumed, does not absolve an owner.

 

The Sectional Titles Act, [Act No. 95 of 1986], has been amended 14 June 2011 by the enactment of the Sectional Titles Schemes Management Act, [No. 8 of 2011], Government Gazette Vol 552 No 34367. Perhaps the owners of the 450 schemes mentioned above would show some interest in how this is impacting on their ownership.

 

The long expected Community Schemes Ombud Service Act, [No. 9 of 2011], Government Gazette Vol 552 No 34368, further became a reality on 14 June 2011.

 



Myburgh Brink pointed out on Sun, 26 Jun 2011 at 09:44 that both acts have been signed into law and are on the statute book BUT are not yet in force. The last section of each reads as follows:

STSM Act: §22. (1) This Act is called the Sectional Titles Schemes Management Act, 2011, and comes into operation on a date fixed by the President by proclamation in the Gazette.
(2) Different dates may be fixed in respect of different provisions of this Act.

CSOS Act: §60. This Act is called the Community Schemes Ombud Service Act, 2011, and comes into operation on a date to be determined by the President by proclamation in the Gazette.

Sectional Title Scheme owners responsible to resolve sewage spill

An interesting example of ignorance appeared in the Roodepoort Record of 24 June: Download Roodepoort Record 24 June 2011 p3 Sewerage spill

The resolve a problem one first need to gather facts:

1. Is this sewage spill a council or an owner responsibility?
2. What does the relevant local authority by law specify?
3. Who is indeed the owner?
4. Where exactly is the problem located?

According to the City of Johannesburg Water-Services By-laws this specific problem appears to be the owner's responsibility:

• "sewer" means any conduit used for the conveyance of sewage from and of which the property is vested in the Council (definition from the by-law paraphrased)
• "drain" means that portion of the drainage installation that conveys sewage within any premises
• "owner" includes – (a) the person in whom from time to time is vested the legal title to premises, including, but not limited to, the registered owner according to the title deed; (e) in relation to - (i) a piece of land delineated on a sectional plan registered in terms of the Sectional Titles Act, 1986 (Act 95 of 1986), the developer or the body corporate in respect of the common property; and (ii) a section as defined in such Act, the person in whose name the relevant unit is registered under a sectional title deed, and includes the lawfully appointed representative of such a person; (relevant parts extrated from the definition of an owner)

The Roodepoort Record states that the Council inspected the sewer and found no blockages. The problem therefore appear to be within the drainage works of the premises. Now, who is the owner of the premises? Most certainly not the "infamous CSTM", who at most had been the managing agent of the body corporate. The owners of sections within a scheme personally own the sections and collectively own all the rest on the premises -- together all the owners form the body corporate. The body corporate are obliged by law to annually hold an AGM at which trustees for the new fianancial year are elected by the members of the body corporate (the owners of the sections comprising the scheme).

Had the Councillor known the relevant laws and regulations, he would in the first instance have asked CSTM for contact details of the current trustees. The trustees are responsible to manage, control and administer the affairs of the body corporate (the owners collectively). The sewer running into the lake is a violation by the owners collectively as a legal entity.

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.

Who is liable to pay CoJ with CSTM being liquidated?

Do you as owner know for sure that all services rendered are paid up to date or do you pay your levies and don’t bother? Some 22 000 owners of some 450 sectional title schemes, most of which probably within the City of Johannesburg, relied on third and fourth parties with regard to their personal financial obligations.

In sectional title schemes everything that is not part of the individual sections is owned by the collective of owners, known as the body corporate. This collective, as legal persona, has obligations. The liquidation of Constantia Sectional Title Management (CSTM) should serve as a wake-up call for all sectional title owners. Download CSTM - Trustee Letter - Lexstar

• On 24 May 2011 the North Gauteng High Court in Pretoria ordered the liquidation of CSTM
• All trading halted and accounts frozen pending investigation
• It will take quite a while before any funds available will be released
• Owners are not able to sell their properties and buyers may find it hard to obtain loans

This means that 450 schemes were without the funds, held in trust at CSTM, since 24 May 2011 and that 22 000 owners are facing financial liabilities if the body corporate concerned does not have a separate bank account in its own name to keep the reserves for maintenance.

Hard as it may seem, it is none of the concern of the local authority if funds entrusted to a third party disappears. The local authority renders services and has the right to payment. The same apply to all the other service providers of the bodies corporate affected.

Many bodies corporate rely on managing agents to take care of everything. Some bodies corporate even experience difficulty at annual general meetings (AGMs) to get trustees elected. Many owners never attend AGMs and abdicate all responsibility.

The nomination and election of trustees for each financial year is a very important matter. Owners are entrusting the financial well being of the collective property and responsibility to such individuals elected as trustees. The trustees in turn may self manage the affairs of the scheme or employ an agent to handle certain affairs entrusted to such a service provider. However, the trustees remain responsible to manage, maintain and control and in turn are accountable to the collective of owners. Michael Bauer advocates the four eyes principle contained in prescribed management rule 27.

The collective of owners annually approve the budget for the financial year ahead. This budget determines the levies payable by owners of individual sections in accordance to the participation quota (prorate portion in the scheme). The collective of owners makes the rules in according to which the trustees manage the affairs of the collective. The trustees get the annual financial statements produced and audited for tabling at the AGM.

Chairperson likened to a captain of a sports team

The chairperson of the trustees of a sectional title scheme is not a 'boss' person, more like the captain of a sport team.

In team sports, a captain is a title given to a member of the team, similar as in the case of the committee of trustees, where an individual is elected as chairperson. Similar to a captain—a chairman is an honorary title— given to an individual because s/he serves as role model; motivates the other trustees (keep them upbeat); guide the ‘game strategy’ (e.g. maintenance); liaise with the managing agent (trustees could also give this responsibility to a specific trustee); deal with all issues arising with the team of trustees, as if a family.

Trustees are elected at the annual general meeting of the collective of owners—called the body corporate of the sectional title scheme—according to prescribed management rules (PMRs). At the first meeting of the newly elected trustees; they elect from among their number a chairperson.

Note, however, that all matters at any meeting of the trustees shall be determined by a majority of the votes of the trustees present and voting (PMR 22). There are prescribed procedures with regard to the calling of a meeting of the trustees, how notice should be given and the quorum necessary to meet. Owners are naïve in thinking that the chairman must take decisions. The trustees may through round robin take decisions, but then all must be in agreement (PMR 24).

Apart from chairing all meetings of the trustees the chairperson also has a casting as well as a deliberative vote (PMR 18). If for some reason the chairperson cannot be in attendance, then the trustees present would elect a chairperson for the particular meeting (PMR 21).

The chairperson further chairs all meetings of the collective of owners—the body corporate, unless the members decide otherwise (PMR 59[1]). Again, if for some reason the chairperson cannot or is not willing, then the members present at a properly constituted meeting would elect a chairperson from among their number (PMR 59[2]).

 

Without active ownership, accountability doesn’t exist

Accountability of the trustees (and the managign agent) of a sectional title scheme is determined, first of all, by how committed and involved owners are. If only a few owners attend annual general meetings (barely making a quorum); and if from those in attendance the few willing are 'elected' by default as trustees; and if the majority of owners do not play an active role; then accountability doesn’t exist. So the onus, in essense, does not rest with the managing agents (as many owners appear to think). Accountability can only be enforced if the majority of owners show a tangible interest in the matters pertaining to the collectively owned property. Trustees are then not only held accoutable, but also empowered to fulfil their statutory role. Apathy, on the other hand, is demoralising.