Company News

New regulations se to shake up sectional title ownership

New Regulations came into effect on 7 October 2016 under the Community Schemes Ombud Service Act (CSOSA) and the Sectional Titles Schemes Management Act (STSMA), now require sectional title owners and trustees to up their game.

Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett, says that under the previous system, to a large degree trustees, owners, and sectional title schemes have been able to get away with a lot because the cost of holding them accountable has been too high for the average resident.  “Not many people can afford to pay the arbitration or litigation costs when a dispute arises, however, this will change under the new regulations,” he says. “Through the Community Schemes Ombud Service provided for in the CSOSA, residents within community schemes, such as sectional title schemes or homeowners’ associations, will be able to take their dispute to a statutory dispute-resolution service instead of a private arbitrator or the courts.”

Goslett says that this will provide residents with a far more cost effective solution to resolving their disputes with community schemes, as the service will be partly funded by taxpayers’ money with the schemes paying an annual levy to the service. He notes that those who seek intervention will pay an application fee and possibly an adjudication fee, which provides owners much-needed relief from the time consuming and costly routes provided for in the traditional route through the courts.

Despite the fact that both the CSOSA and STSMA were signed into law as far back as June 2011, both Acts came into operation on 7 October 2016. The Acts work hand in hand with the STSMA assuming that the CSOSA is operational. While the STSMA replaces sections 37 to 48 of the Sectional Titles Act, which governs how a body corporate must manage the scheme and conduct its business, the Sectional Titles Act will continue to prescribe how a scheme must be established. Although many of the provisions covered in the STSMA duplicate those of the Sectional Titles Act, there are some significant differences between the two.

A reserve fund will be mandatory

At the moment only some sectional title schemes budget for future expenditure by setting aside a percentage of the levies collected in a money market fund. Although the Sectional Titles Act does require bodies corporate to take future expenditure into account, there is currently no minimum amount that needs to be saved.  In the instance where there is not enough money because the scheme has not made provision for future expenditure, under the current system a special levy will be raised when the need arises.

Under the STSMA, a body corporate has to establish two funds, namely an administrative fund and a reserve fund. Levies must be paid into the administrative fund and only used to fund operating expenses in the current financial year. A percentage of the money collected must also be allocated to the reserve fund, which will be used to pay for future expenditure determined by a maintenance, repair and replacement plan. The body corporate will be required to draw up this plan.

Although trustees will still be allowed to raise special levies, the reserve fund is intended to cover expenditure that many bodies corporate are funding via special levies. This expenditure includes repairs that could not have been reasonably foreseen when the maintenance plan was drawn up or urgent repairs required to prevent damage to property or to ensure the safety of the scheme’s residents.

The regulations prescribe a formula that the body corporate must use to determine the minimum allocation to the reserve fund. The formula is based on the amount in the reserve fund at the end of a financial year and the total contributions collected during that period.

A comprehensive maintenance plan

Body corporates now need to prepare a plan for the maintenance, repair, and replacement of major capital items on the common property within the next 10 years. Major capital items are defined as electrical systems, plumbing, drainage, heating and cooling systems, lifts, carpeting and furnishings, roofing, painting, waterproofing, communication systems, paving and parking areas, roads, security systems and any recreational facilities.

The plan must set out the current condition or state of repair of each capital item, as well as when each item will have to be maintained, repaired or replaced. The plan must include costing and the expected lifespan of the items once they have been maintained, repaired or replaced.

Mandatory Fidelity insurance

It is compulsory for all community schemes to take out fidelity insurance against the risk of money being lost as a result of fraud or dishonesty by an “insurable person”, which means anyone who has access to the money that belongs to a scheme. A minimum amount of fidelity insurance is prescribed by the regulations and the policy must pay out without the scheme having to pursue criminal or civil proceedings.

If an insurable person, such as a managing agent, can prove that they have taken out cover that complies with the regulations, the scheme will be exempt. It is required that the insurer notes the scheme’s interest in the proceeds of the policy and agrees not to cancel it without giving the scheme at least 30 days’ notice.

Penalty interest will be capped

The regulations now cap the interest that body corporates can charge owners who default on their levies. The regulation states that the rate may not exceed the maximum rate of interest a year, compounded monthly in arrears, as it applies in terms of the National Credit Act (Act 34 of 2005). The cap restricts trustees on the amount of penalty interest charged where currently, a body corporate can decide on the rate of interest.

“The changes will have a significant effect on how sectional title schemes will conduct their business. It is advisable for sectional title owners and residents to read up on the regulations and the possible impact it could have going forward,” Goslett concludes.