The new sectional title rules

Nov 5, 2016 | Features, Property News, Slider

“The gist of the acts is in regulation of the industry, which is a good thing: homeowners’ associations weren’t regulated, so there was no uniformity.”

Five years after amendments were first drafted, the Sectional Titles Schemes Management Act came into effect in October – with consequences for noncomplying property owners, trustees, investors and developers. This is what they need to know

Amendments to the Sectional Titles Act brought two interesting legislative developments to the property industry: the introduction of the Sectional Titles Schemes Management Act and the Community Schemes Ombud Services Act (acts 8 and 9 of 2011). The latter led to the establishment, in April 2015, of the Community Schemes Ombud Service (CSOS), headed by chief ombud Themba Mthethwa. It sounds complicated (and is) but these changes were aimed at bringing all housing-related legislation under the administration of the Human Settlements Department and at helping body corporates to manage and regulate community schemes. These include sectional title development schemes, share block companies, home- or property owners’ associations, retirement schemes and housing cooperatives or group housing.

A more cost-effective solution

Bauer continues: “Now, compliance is key; there are thousands of sectional title disputes in court and the ombudsman is at least fulfilling the main function: dispute resolution, which seeks to free up the courts and results in settling disputes more efficiently, much faster and more cost effectively. For instance, if you have a problem in a sectional title scheme, you’re looking at R200,000 in legal fees at High Court, while the ombudsman could settle it for as little as R10,000.” This is especially good news for tenants who felt that they had little recourse because of excessive litigation costs and now have rights to complain, says Mike Spencer, owner and manager of Bloemfontein property management company Platinum Global. “The new act will force property owners to look carefully at their management and how effectively property is being managed,” he says.

The benefits of stricter regulations

Publication of the Sectional Titles Schemes Management Act finally grants the ombud greater control and regulation of all community housing schemes and, more significantly, powers to advocate rule amendments to sectional title schemes. This effectively means that communal property owners and associations will immediately have to gear up on requirements. Says Spencer: “They’ll need to be conversant with the act. And if they run buildings properly, they’ll have no worries. But what’s important to remember is that trustees are now responsible – and more likely to be called out as negligent if not careful. In fact, they could be held liable for malefidi (gross negligence or bad faith) if not registered and compliant with CSOS.” On the whole, property management companies welcome these clear guidelines and stringent regulations, noting that a controlling body was long needed to regulate the industry. And with the CSOS already established, it is hoped it will be amenable to relooking at sections of the act that hamper efficiency or negatively affect the managing of communal schemes.

“The gist of the acts is in regulation of the industry, which is a good thing: homeowners’ associations weren’t regulated, so there was no uniformity”

-Michael Bauer, property manager, IHFM

What has changed

Key stipulations in the act require detailed administration, reporting and auditing procedures. They include:

Everybody corporate has to have a 10-year maintenance plan and a separate long-term maintenance reserve fund based on expected costs. This is apart from a current budget for short-term maintenance. “This could mean that schemes that have not made good provisions already will have a hard time not increasing their levies substantially. Well-run schemes that have sensible, good reserves will have to reallocate their funds to short- and long-term reserves and will be much less affected,” says Spencer.

Trustees need to appoint a managing agent to run the property. This, says Spencer, is akin to Australian regulations, with an executive managing agent reporting to trustees or owners every six months. “It’s a positive move, as it makes life a lot easier and simpler for owners and trustees, especially with the ruling that the person who handles a body corporate is not allowed to handle funds unless they are registered estate agents.”

The act is specific about scheduling meetings, establishing a quorum and voting by proxy. No person may hold more than two proxies and an owner may only vote once, irrespective of the number of units to their name. This all has property managers in a tizz. “The proxy rule has advantages as not enough people attend AGMs, so often people had a controlling vote by means of proxy. One could use it for good or abuse that power. Now, with limited proxies, chances are they won’t make a quorum and meetings will be delayed. This makes it difficult for managers, as it will necessitate many more meetings and incur additional costs for body corporates,” says Bauer.

Whether schemes have strong reserves or not, their levies will have to be revised, if only to include contributions to the CSOS. Given a seed fund of R40m, the service will only partly be funded by taxpayers; it is set to become self-funding through annual contributions from associations and schemes, and those who seek the service’s intervention, for which they will have to pay an application and, possibly, an adjudication fee. The CSOS can be approached not only to settle disputes, but also to help schemes to recover arrears levies.

All community schemes need to be registered with the CSOS and to send regular copies and reports to the new ombud’s office on the financial health of the body corporate, along with an audited annual report. They also need to register a domicile with the chief ombud, local municipality and local registrar of deeds.

Any changes that are made to levy contributions and rules must be certified in writing. This applies to levies and to all body corporate rules and regulations.

Words Lucinda Jordaan

Images iStock