Sectional title versus freehold ownership

 

Several reasons have contributed to the growing popularity of sectional title homes in South Africa over the last decade, says Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa. “These homes often offer heightened security, are more affordable and provide people with a more communal way of living. However, as popular as sectional title ownership may be, it remains highly misunderstood when it comes to ownership responsibilities and legalities,” he adds.

Goslett says that to fully grasp the differences between sectional title and freehold property ownership, each needs to be defined. He explains that freehold or full title describes the transfer of full ownership rights when you own a property, which includes the building and the land on which it is built. Examples of these properties include free-standing houses, cluster houses, residential property used for business purposes, and smallholdings.

As the name suggests, sectional title describes separate ownership of units or sections within a complex or development. “When you buy into a sectional title development, you purchase a section or sections, as well as an undivided share of the common property. These are collectively known as units. Sectional title dwellings comprise of mini subtype houses, semi-detached houses, townhouses, flats or apartments, and duet houses,” says Goslett.

While a collection of freehold homes could belong to a Homeowner’s Association, sectional title complexes are governed by a Body Corporate, which is the collective name given to all the owners of units within any particular development. The Body Corporate is responsible for managing the scheme and taking care of its finances. Goslett points out that a managing agent is often appointed to take care of the duties of a Body Corporate, which includes collecting monthly levies, paying the scheme’s insurance premiums, arranging meetings, ensuring compliance with the Sectional Titles Act, and ensuring that the owners and tenants comply with the Body Corporate rules.

There are considerable differences with regards to investing in the two type of properties. Goslett provides some benefits and challenges to both forms of ownership:

The benefits of sectional title ownership

Security – Living near your neighbours in a more communal environment is perceived to be more secure than living on a freehold property. Also, most sectional title developments have excellent security around the perimeter and at the entrance, which is included in the monthly levies. Freehold property owners are entirely responsible for their security – they need to pay to secure the perimeter, and often for an armed response security company to patrol their area.

A fixed monthly cost – Unlike freehold property owners who have to pay for their home insurance and the upkeep of the pavement, garden, and exterior of their home, sectional title owners pay a monthly levy instead. The levy includes – insurance premiums, maintenance of the common property, wages and salaries of cleaners, security and other staff involved in maintaining the common property, as well as any water and electricity required for the common property. Apart from the levy, sectional title owners only need to pay their rates and taxes, the unit’s insurance, the contents of their home, their private gardens and for their monthly electricity and water consumption. The cost of maintaining pools, tennis courts, communal park areas and clubhouses in the development is shared.

Affordability and communal living – Generally speaking, a sectional title unit within a complex is more affordable than a freehold house. Also, when compared to freehold neighbourhoods, on average communities living in sectional title schemes boast close-knit communities and far greater interaction with their neighbours.

The benefits of freehold ownership

Independence – With full title ownership, the owner is in complete control and is financially responsible for the property in its entirety. However, when you invest in a sectional title scheme, you will own part of a scheme, meaning that the owner has invested in and is part of a small community. As a result, they will need to comply with the management and conduct rules as laid out by the Body Corporate.

Majority rules – The rules and regulations of any particular complex may change and, unlike freehold property owners, sectional title investors or owners may not be happy with the changes, but won’t have the power to change them in an individual capacity.

Simplicity – The legalities of sectional title ownership can be complicated – there are issues about participation quotas, nominated values, exclusive areas, and quorums.

Lack of freedom – Sectional title owners do not have the freedom to make improvements to their property. Those who want to renovate, need to get approval from the Body Corporate before they can begin building.

Liable for the debt of the Body Corporate – If you are investing in a sectional title scheme, you will be liable for the debt of the Body Corporate. As such, it is important to deduce whether the scheme is managed correctly and that the financial statements of the Body Corporate are in order.

“Both types of properties have their pros and cons, so when deciding, it is important to weigh up the options and decide on a home that will meet your needs both now and for the next five to seven years,” Goslett concludes.