Management, conduct and house rules
By Judith van der Walt
Every sectional title scheme is governed by a set of rules comprising management and conduct rules. If the developer does not make new rules when opening the sectional title register, the management and conduct rules prescribed by the Sectional Titles Act of 1986 ("the 1986 Act") automatically applies to the scheme. After the opening of the register, the members of the body corporate are entitled to amend the management rules by unanimous resolution and the conduct rules by special resolution. Subject to further procedural requirements imposed by the 1986 Act, the amendments to the management and conduct rules will only come become enforceable once the new rules have been filed in the scheme's register at the Deeds Registry where the register is held.
It is therefore clear that all management and conduct rules have to be filed in the scheme's register before they can be enforced, irrespective of the fact that they have been amended or adopted by unanimous or special resolution. The question now arises: what about house rules? Can the members of the body corporate make house rules?
It is quite a common occurrence to find a management rule (or a "Schedule 1 Rule") applicable to sectional title schemes registered under the provisions of the Sectional Titles Act of 1971 ("the 1971 Act"), empowering the trustees to make house rules. The scope of these house rules is usually limited to rules in connection with the health, safety and cleanliness of the common property. Any house rule which purports to deal with a section for example, is therefore not enforceable but house rules do not have to be filed in the scheme's register at the Deeds Registry to be enforceable.
The rules prescribed in terms of the 1986 Act do not empower the trustees to make house rules. However, there is no prohibition against empowering trustees to make such house rules but such power must be embodied in a new management or conduct rule. If trustees were empowered to make house rules under the 1971 Act, they are still entitled to so irrespective of the fact that the 1986 Act does not allow for it.
In many circumstances, house rules create confusion. The reasoning behind the obligation to file rules in the Deeds Registry is to make the rules freely available to any interested party. On inspection of the register, any interested party will be able to establish immediately what rules apply to the scheme. If trustees are empowered to make house rules they can adopt new house rules at their trustee meetings as they see fit without informing owners of the new house rules and without taking into account the views of a certain majority of owners.
I do not ever suggest to or encourage trustees to make house rules. I believe that the issues often dealt with in house rules are better dealt with in conduct rules. The process of adopting rules by unanimous and special resolution is more inclusive and transparent and encourages good governance in a sectional title scheme.
Judith van der Walt is an attorney, notary and conveyancer at Paddocks, a specialist sectional title firm operating throughout South Africa.
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Monday, September 8, 2008
Monday, September 1, 2008
Buying into a Sectional Title Scheme – What You Don’t Know Can Hurt You!
By Jennifer Paddock
___________________________________________________________________________________
Jennifer is a lawyer and consultant at Paddocks, a specialist sectional title firm. For further information, please call 021 674 7818 or visit www.paddocks.co.za .
Introduction
The rise in popularity of sectional title ownership over the last two decades is a testament to the fact that sectional title ownership is fast becoming the preferred home ownership option for both resident owners and buy-to-let investors. Modern lifestyle demands the ability to enjoy the benefits of facilities such as good security, gymnasiums, communal pools and the like. However, individual ownership of these benefits proves costly both in terms of time and money due to the corresponding maintenance obligations attached to such amenities. In sectional title ownership, these benefits can be enjoyed whilst the maintenance and financing of such amenities is shared by all owners of the scheme.
Despite its advantages, sectional title ownership is notoriously considered more complex than conventional title ownership and for good reason… Buying into a sectional title scheme is a commitment by the new owner to form part of a community which is governed by legislation and rules and which has financial and administrative obligations which must be met. As an investor it is important for you to know exactly what you are buying, what your management obligations will be, what costs you will be responsible for after transfer and what rules you will be bound by before putting pen to paper. In sectional title ownership, ignorance is not bliss because what you don’t know can hurt you. So read on before you sign a sectional title deed of sale…
What exactly are you buying?
You will often hear people speaking of buying a “flat”, an “apartment” or a “townhouse” when referring to what they buy in sectional title schemes, yet technically all of these terms do not describe what they are in fact buying. When you buy into a sectional title scheme you are buying a composite thing called a “unit”. A unit consists of a section together with a share in the common property. A section is an area which you own exclusively (such as a townhouse or apartment) to the median line of the walls, floors and ceilings. The common property is an area which you will co-own with all other section owners and includes all areas of the scheme which are not included in the sections such as driveways, entrance foyers, stairs, lifts, gardens, swimming pools and so on.
As a buyer, you may also benefit from exclusive use rights allocated to your section which allow you to use a portion of the common property to the exclusion of all other owners, for example a parking bay. Exclusive use rights may be allocated to a section by either being formally registered on the sectional plans of the scheme (in terms of section 27 of the Sectional Titles Act 95 of 1986 “the Act”) or more informally by passing a rule which gives the owner of a section the right to use such an area (in terms of section 27A of the Act). If you have been allocated exclusive use rights in terms of section 27 or section 27A it is important to understand that although you have the right to use an area of the common property exclusively, that does not mean that you exclusively own that area. It remains part of the common property and is therefore still owned by all the owners of sections, however no other owner has the right to use it besides you.
Before signing a sectional title deed of sale it is important for you to obtain and analyse a copy of the registered sectional plan of the scheme. Ask yourself the following questions: is the extent of the section described in the deed of sale the same extent shown on the sectional plan? Are any and all exclusive use areas allocated to me in the deed of sale allocated to the section which I am buying on the sectional plan? Asking these questions will help to prevent the all too often experienced headache when a unit owner finds out after transfer has taken place that what he thought he was buying (in terms of his deed of sale) is not in fact allocated to him on the registered sectional plan. Ask the estate agent, managing agent or seller for a copy of the registered sectional plan, alternatively find the sectional plan you are looking for on Sectional Titles Online( www.sto.co.za).
Your participation in the management of the scheme
Buying a unit in a sectional title scheme comes with automatic membership to the governing body of the scheme, called the ‘body corporate’. Membership is mandatory so even if you are a buy-to-let owner you, as owner, are the member of the body corporate and not your tenant. The body corporate is an association of owners which exists to run the scheme from a financial and administrative point of view and maintain the common property. Owners elect a board of trustees to carry out the body corporate obligations at every Annual General Meeting (“AGM”) and in many schemes the trustees contract with a managing agent to assist them in this regard.
What costs will you be responsible for?
All costs related to your section, which you own exclusively, are for your own account. Remember that you only own your section to the median line of its floors, walls and ceilings and therefore the foundations, ‘outer-skin’ and roof of the building are common property and are therefore not your exclusive financial responsibility. All costs related to the common property, which is co-owned by all owners, as well as all payments for the general running of the scheme are paid by the body corporate from its levy fund. These costs include insurance of the buildings to their full replacement value, maintenance and repair of the common property, wages of staff employed by the body corporate and so on. The body corporate estimates its expected expenditure each year, takes this budget to the AGM for approval and once approved, divides the estimated expenditure between the owners (generally in accordance with each owner’s ‘participation quota’ – a calculation which determines the fraction of each owners contribution in relation to their floor area) to work out each owner’s ordinary levy. Each owner is then liable to pay such contribution, generally in monthly instalments.
If a necessary expense arises during the course of the year for which the body corporate did not budget, the trustees are entitled to raise a ‘special levy’. The trustees can decide whether the special levy is to be paid in one lump sum or in instalments and owners have no choice but to pay it. Owners whose levies are in arrears will be unable to vote on general resolutions at general meetings and will also be charged interest on these arrear amounts. The trustees are entitled to institute levy collection procedures in the Magistrates Court to recover the outstanding amounts from such owners.
As a prospective buyer, it is vital that you find out not only what ordinary levies you will be responsible for (ask to see a copy of the seller’s levy statements) but also to ascertain whether there are any anticipated special levies on the horizon. You can find this out by asking the trustees or the managing agent. You can also inspect the common property carefully to establish if there are any obvious defects which are going to require expensive repairs or maintenance work. A substantial special levy, for example to replace a lift in the building, could have you reaching far deeper into your pockets than you ever expected because once you’re an owner you have to pay special levies raised. Do everything you can to find out about special levies before putting pen to paper and then at least you have the choice of investing despite the risk of extra expense.
Other expenses for your account are rates (which by mid-2008 will be payable directly to Municipalities by all sectional owners), water and electricity (these are sometimes included in your levies depending on whether the scheme has implemented separate water and electricity meters or not), maintenance of geysers serving your section (whether or not they are situated on common property) and contributions towards maintenance of your exclusive use areas.
How do the rules of the scheme restrict the use of your unit?
Every sectional title scheme is governed by the Act but each scheme may have different management and conduct rules which are in place to regulate the way the scheme is run and the way in which the owners and occupiers behave. All owners and occupiers are bound by the scheme’s rules so even if you are a buy-to-let investor you are responsible for ensuring that your tenants are aware of the rules (you are obliged to attach a copy of the scheme rules to your written lease agreement) and abide by them. The rules of a scheme can be incredibly restrictive and therefore it is essential that you read and understand the rules before committing to being bound by them when buying into the scheme. If you own pets, check the rules to see if pets are allowed in the scheme – resident-owners regularly suffer enormous heartache when they buy into a scheme, move in and are given notice that the scheme’s rules do not allow pets. Buy-to-let investors likewise may need to ascertain whether short-term letting is restricted as many schemes have rules which do not permit leases of less than three to six months.
Any changes which you wish to make to the common property will need trustee and/or body corporate approval. If you want to place an air conditioning heat exchange unit or a satellite dish outside your section, these first need to be approved by the body corporate. Remember that anything outside of your section is common property and therefore co-owned by all owners of sections so even minor changes to it need prior body corporate approval. If you have an exclusive use balcony area which you wish to enclose, you cannot simply get approval of your building plans by the local authority and go ahead with the enclosure, you need to get the trustees to sign your building plans before the local authority will approve them. In short, sectional title ownership involves a community aspect which restricts an owner’s use far more than conventional title. In sectional title your interests are not the only interests that are to be considered and the body corporate constitutes an additional layer of governance to which conventional title is not subject.
You may get a copy of the rules from the estate agent, the managing agent, the seller or your local Deeds Registry. Check them to see if there are any rules which you are not happy to abide by. It must be noted that rules are not absolute and can be amended, substituted or deleted, but the procedures and levels of agreement amongst owners required to achieve this often make it difficult to do so.
Things to look out for:
The financial status of the body corporate
The body corporate is responsible for maintaining and repairing the common property and if the body corporate is in debt, your investment could suffer dramatically. The financial position of the scheme and any reserve funds can be checked by obtaining a copy of the financial statements adopted at the last AGM of the body corporate– ask the estate agent, seller, trustees or managing agent for a copy of these and inspect them.
Is the scheme subject to future development rights?
If the developer or the body corporate have future development rights to extend the scheme, these rights must be disclosed in every deed of sale for units in that scheme. If you sign a deed of sale and find out afterwards that the developer or body corporate hold future development rights which were not disclosed in your deed of sale, you are entitled to walk away from the contract.
Are you buying off-plan?
It is not unusual to buy a unit in a sectional title scheme before the scheme has been registered or even before the building has been built. If you are buying ‘off-plan’, as sales of this nature are often called, the latest date of completion must be stipulated in the deed of sale. You should not pay any money directly to the developer until the certificate of completion has been issued. Money may be held in trust, either by an attorney or an estate agent, on the developer’s behalf until the certificate of completion is issued, but the developer is not entitled to receive any consideration until then.
Conclusion
Knowledge is power. If you are buying into sectional title, the more you know about this type of title, the more likely you are to protect your investment. So before you buy, take the time to investigate the scheme fully and once you’re a sectional title owner keep your finger on the pulse of the body corporate by attending meetings. Consider becoming a trustee, or even the chairperson so that you are able to maintain control and are not hit with any nasty surprises.
This article is courtesy of Jennifer Paddock published in the Paddocks Press newsletter and permission to publish has been granted from the Paddocks Publishing division.
Find property to buy or sell in South Africa.
By Jennifer Paddock
___________________________________________________________________________________
Jennifer is a lawyer and consultant at Paddocks, a specialist sectional title firm. For further information, please call 021 674 7818 or visit www.paddocks.co.za .
Introduction
The rise in popularity of sectional title ownership over the last two decades is a testament to the fact that sectional title ownership is fast becoming the preferred home ownership option for both resident owners and buy-to-let investors. Modern lifestyle demands the ability to enjoy the benefits of facilities such as good security, gymnasiums, communal pools and the like. However, individual ownership of these benefits proves costly both in terms of time and money due to the corresponding maintenance obligations attached to such amenities. In sectional title ownership, these benefits can be enjoyed whilst the maintenance and financing of such amenities is shared by all owners of the scheme.
Despite its advantages, sectional title ownership is notoriously considered more complex than conventional title ownership and for good reason… Buying into a sectional title scheme is a commitment by the new owner to form part of a community which is governed by legislation and rules and which has financial and administrative obligations which must be met. As an investor it is important for you to know exactly what you are buying, what your management obligations will be, what costs you will be responsible for after transfer and what rules you will be bound by before putting pen to paper. In sectional title ownership, ignorance is not bliss because what you don’t know can hurt you. So read on before you sign a sectional title deed of sale…
What exactly are you buying?
You will often hear people speaking of buying a “flat”, an “apartment” or a “townhouse” when referring to what they buy in sectional title schemes, yet technically all of these terms do not describe what they are in fact buying. When you buy into a sectional title scheme you are buying a composite thing called a “unit”. A unit consists of a section together with a share in the common property. A section is an area which you own exclusively (such as a townhouse or apartment) to the median line of the walls, floors and ceilings. The common property is an area which you will co-own with all other section owners and includes all areas of the scheme which are not included in the sections such as driveways, entrance foyers, stairs, lifts, gardens, swimming pools and so on.
As a buyer, you may also benefit from exclusive use rights allocated to your section which allow you to use a portion of the common property to the exclusion of all other owners, for example a parking bay. Exclusive use rights may be allocated to a section by either being formally registered on the sectional plans of the scheme (in terms of section 27 of the Sectional Titles Act 95 of 1986 “the Act”) or more informally by passing a rule which gives the owner of a section the right to use such an area (in terms of section 27A of the Act). If you have been allocated exclusive use rights in terms of section 27 or section 27A it is important to understand that although you have the right to use an area of the common property exclusively, that does not mean that you exclusively own that area. It remains part of the common property and is therefore still owned by all the owners of sections, however no other owner has the right to use it besides you.
Before signing a sectional title deed of sale it is important for you to obtain and analyse a copy of the registered sectional plan of the scheme. Ask yourself the following questions: is the extent of the section described in the deed of sale the same extent shown on the sectional plan? Are any and all exclusive use areas allocated to me in the deed of sale allocated to the section which I am buying on the sectional plan? Asking these questions will help to prevent the all too often experienced headache when a unit owner finds out after transfer has taken place that what he thought he was buying (in terms of his deed of sale) is not in fact allocated to him on the registered sectional plan. Ask the estate agent, managing agent or seller for a copy of the registered sectional plan, alternatively find the sectional plan you are looking for on Sectional Titles Online( www.sto.co.za).
Your participation in the management of the scheme
Buying a unit in a sectional title scheme comes with automatic membership to the governing body of the scheme, called the ‘body corporate’. Membership is mandatory so even if you are a buy-to-let owner you, as owner, are the member of the body corporate and not your tenant. The body corporate is an association of owners which exists to run the scheme from a financial and administrative point of view and maintain the common property. Owners elect a board of trustees to carry out the body corporate obligations at every Annual General Meeting (“AGM”) and in many schemes the trustees contract with a managing agent to assist them in this regard.
What costs will you be responsible for?
All costs related to your section, which you own exclusively, are for your own account. Remember that you only own your section to the median line of its floors, walls and ceilings and therefore the foundations, ‘outer-skin’ and roof of the building are common property and are therefore not your exclusive financial responsibility. All costs related to the common property, which is co-owned by all owners, as well as all payments for the general running of the scheme are paid by the body corporate from its levy fund. These costs include insurance of the buildings to their full replacement value, maintenance and repair of the common property, wages of staff employed by the body corporate and so on. The body corporate estimates its expected expenditure each year, takes this budget to the AGM for approval and once approved, divides the estimated expenditure between the owners (generally in accordance with each owner’s ‘participation quota’ – a calculation which determines the fraction of each owners contribution in relation to their floor area) to work out each owner’s ordinary levy. Each owner is then liable to pay such contribution, generally in monthly instalments.
If a necessary expense arises during the course of the year for which the body corporate did not budget, the trustees are entitled to raise a ‘special levy’. The trustees can decide whether the special levy is to be paid in one lump sum or in instalments and owners have no choice but to pay it. Owners whose levies are in arrears will be unable to vote on general resolutions at general meetings and will also be charged interest on these arrear amounts. The trustees are entitled to institute levy collection procedures in the Magistrates Court to recover the outstanding amounts from such owners.
As a prospective buyer, it is vital that you find out not only what ordinary levies you will be responsible for (ask to see a copy of the seller’s levy statements) but also to ascertain whether there are any anticipated special levies on the horizon. You can find this out by asking the trustees or the managing agent. You can also inspect the common property carefully to establish if there are any obvious defects which are going to require expensive repairs or maintenance work. A substantial special levy, for example to replace a lift in the building, could have you reaching far deeper into your pockets than you ever expected because once you’re an owner you have to pay special levies raised. Do everything you can to find out about special levies before putting pen to paper and then at least you have the choice of investing despite the risk of extra expense.
Other expenses for your account are rates (which by mid-2008 will be payable directly to Municipalities by all sectional owners), water and electricity (these are sometimes included in your levies depending on whether the scheme has implemented separate water and electricity meters or not), maintenance of geysers serving your section (whether or not they are situated on common property) and contributions towards maintenance of your exclusive use areas.
How do the rules of the scheme restrict the use of your unit?
Every sectional title scheme is governed by the Act but each scheme may have different management and conduct rules which are in place to regulate the way the scheme is run and the way in which the owners and occupiers behave. All owners and occupiers are bound by the scheme’s rules so even if you are a buy-to-let investor you are responsible for ensuring that your tenants are aware of the rules (you are obliged to attach a copy of the scheme rules to your written lease agreement) and abide by them. The rules of a scheme can be incredibly restrictive and therefore it is essential that you read and understand the rules before committing to being bound by them when buying into the scheme. If you own pets, check the rules to see if pets are allowed in the scheme – resident-owners regularly suffer enormous heartache when they buy into a scheme, move in and are given notice that the scheme’s rules do not allow pets. Buy-to-let investors likewise may need to ascertain whether short-term letting is restricted as many schemes have rules which do not permit leases of less than three to six months.
Any changes which you wish to make to the common property will need trustee and/or body corporate approval. If you want to place an air conditioning heat exchange unit or a satellite dish outside your section, these first need to be approved by the body corporate. Remember that anything outside of your section is common property and therefore co-owned by all owners of sections so even minor changes to it need prior body corporate approval. If you have an exclusive use balcony area which you wish to enclose, you cannot simply get approval of your building plans by the local authority and go ahead with the enclosure, you need to get the trustees to sign your building plans before the local authority will approve them. In short, sectional title ownership involves a community aspect which restricts an owner’s use far more than conventional title. In sectional title your interests are not the only interests that are to be considered and the body corporate constitutes an additional layer of governance to which conventional title is not subject.
You may get a copy of the rules from the estate agent, the managing agent, the seller or your local Deeds Registry. Check them to see if there are any rules which you are not happy to abide by. It must be noted that rules are not absolute and can be amended, substituted or deleted, but the procedures and levels of agreement amongst owners required to achieve this often make it difficult to do so.
Things to look out for:
The financial status of the body corporate
The body corporate is responsible for maintaining and repairing the common property and if the body corporate is in debt, your investment could suffer dramatically. The financial position of the scheme and any reserve funds can be checked by obtaining a copy of the financial statements adopted at the last AGM of the body corporate– ask the estate agent, seller, trustees or managing agent for a copy of these and inspect them.
Is the scheme subject to future development rights?
If the developer or the body corporate have future development rights to extend the scheme, these rights must be disclosed in every deed of sale for units in that scheme. If you sign a deed of sale and find out afterwards that the developer or body corporate hold future development rights which were not disclosed in your deed of sale, you are entitled to walk away from the contract.
Are you buying off-plan?
It is not unusual to buy a unit in a sectional title scheme before the scheme has been registered or even before the building has been built. If you are buying ‘off-plan’, as sales of this nature are often called, the latest date of completion must be stipulated in the deed of sale. You should not pay any money directly to the developer until the certificate of completion has been issued. Money may be held in trust, either by an attorney or an estate agent, on the developer’s behalf until the certificate of completion is issued, but the developer is not entitled to receive any consideration until then.
Conclusion
Knowledge is power. If you are buying into sectional title, the more you know about this type of title, the more likely you are to protect your investment. So before you buy, take the time to investigate the scheme fully and once you’re a sectional title owner keep your finger on the pulse of the body corporate by attending meetings. Consider becoming a trustee, or even the chairperson so that you are able to maintain control and are not hit with any nasty surprises.
This article is courtesy of Jennifer Paddock published in the Paddocks Press newsletter and permission to publish has been granted from the Paddocks Publishing division.
Find property to buy or sell in South Africa.
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