How to … buy into a share block prop­erty

Al­though new share block de­vel­op­ments are not com­mon nowa­days, there is a fairly large num­ber of es­tab­lished, ex­ist­ing schemes in South Africa that you can buy into. There are also many re­tire­ment com­plexes that op­er­ate us­ing the share block own­er­ship sys

Weekend Argus (Saturday Edition) - - PERSONALFINANCE -

In many ways, share block own­er­ship is sim­i­lar to sec­tional ti­tle own­er­ship. The key dif­fer­ence is that in a share block scheme, you own shares in a com­pany that owns the land and build­ing; you do not own an in­di­vid­ual unit. You have a “use and oc­cu­pa­tion” agree­ment with the com­pany en­ti­tling you, as a share­holder, to the use of a par­tic­u­lar part of the com­pany’s prop­erty, and you are is­sued with a share cer­tifi­cate in­stead of a ti­tle deed.

Share block prop­erty sale and own­er­ship is gov­erned by the Share Blocks Con­trol Act. Share block com­pa­nies must be reg­is­tered with the Reg­is­trar of Com­pa­nies. By law, a seller may not sell shares in a share block scheme un­less the com­pany has the words “share block” or “aan­dele­blok” as part of its name.

When you buy shares in the share block com­pany, you are en­ti­tled to oc­cupy a spec­i­fied por­tion of the build­ing owned by the com­pany and to vote at its gen­eral meet­ings. You will be al­lo­cated vot­ing rights in pro­por­tion to the num­ber of shares you hold.

There are cer­tain risks to this type of own­er­ship. If other share­hold­ers in the share block scheme re­peat­edly fail to meet their monthly levy pay­ments, and other cred­i­tors of the com­pany, such as the lo­cal mu­nic­i­pal­ity, are not paid, this can jeop­ar­dise the fi­nan­cial sta­bil­ity of the scheme.

Ju­dith van der Walt, a sec­tional ti­tle spe­cial­ist with a com­pany called 95 of 86 Con­sul­tants, says even if there is no bond on the prop- erty (for ex­am­ple, it was pur­chased 20 years ago and the bond has been paid off), a cred­i­tor can still get a judg­ment against the com­pany in re­spect of monies ow­ing to the cred­i­tor, and a court can still or­der that the prop­erty owned by the com­pany is sold to pay its cred­i­tors, if nec­es­sary.

No action can, how­ever, be taken against you as an in­di­vid­ual share­holder to meet the debts of the com­pany un­less you have signed surety for the com­pany’s debt. But if the prop­erty of the com­pany is sold as a re­sult of a court or­der to pay the com­pany’s debts, you will lose your right to the con­tin­ued use of your por­tion of the prop­erty. You will have lost your in­vest­ment and may have to find a new place to live.

If the com­pany is wound up, the share­hold­ers are en­ti­tled to re­ceive the pro­ceeds of such wind­ing up in ac­cor­dance with the pro­vi­sions of the mem­o­ran­dum and ar­ti­cles of as­so­ci­a­tion of the com­pany, or in pro­por­tion to their share­hold­ing in the com­pany.

When a share­holder sells his shares, it is a nor­mal sale trans­ac­tion be­tween two par­ties, ex­cept that you are deal­ing with the sale of shares and not the sale of im­mov­able prop­erty. The money does not go to the com­pany but to the per­son you are buy­ing the shares from.

ES­TAB­LISHED BLOCKS

David Warm­back, a part­ner at Dur­ban-based law firm Shep­stone and Wylie, says most ex­ist­ing share block schemes in South Africa were es­tab­lished many years ago.

“Many such schemes have op­er­ated for decades on the Dur­ban beach­front where it was tra­di­tion­ally not pos­si­ble to open sec­tional ti­tle reg­is­ters. Many of th­ese and other share block schemes are very well run and quite fi­nan­cially se­cure,” he says.

If you are buy­ing shares in an older, well-es­tab­lished share block scheme, you will be re­quired to pay the full price for your shares in the scheme be­fore you are al­lowed to take oc­cu­pa­tion.

One of the dis­ad­van­tages of buy­ing into a share block scheme is that your pur­chase price will be more dif­fi­cult to fi­nance. You may not be able to get a home loan to buy a unit in a share block scheme (un­like buy­ing a free­hold or sec­tional ti­tle prop­erty), be­cause there is no prop­erty that can be bonded as se­cu­rity for the money ad­vanced by the bank. How­ever, you may be able to ob­tain a loan from a bank us­ing your share cer­tifi­cate as se­cu­rity in the form of a pledge and ces­sion of such shares.

You will also gen­er­ally be re­quired to put down a big­ger de­posit com­pared with a free­hold or sec­tional ti­tle sale. The pe­riod of the loan is likely to be shorter, and the rate of in­ter­est on the loan is likely to be higher.

LEVY AND TRUST FUND

As in a sec­tional ti­tle prop­erty, in a share block scheme you have to pay a monthly levy for ad­min­is­tra­tion and main­te­nance costs.

The levy cov­ers costs such as the rates, the pay­ment of staff, in­sur­ance pre­mi­ums, the costs of a manag­ing agent, and com­mon wa­ter and elec­tric­ity (if you do not have sep­a­rate me­ters).

The amount you pay is in pro­por­tion to the num­ber of shares you own. For ex­am­ple, if you own 10 000 shares and Tom owns 20 000 shares, he might have the use of a two-bed­room flat com­pared to your one-bed­room flat. Tom would also have greater vot­ing rights than you, and he would pay a levy that may be twice the amount of yours.

Ac­cord­ing to the Share Blocks Con­trol Act, the share block com­pany must have a trust ac­count, and money in this ac­count must be kept sep­a­rately from all other funds. The trust ac­count must be used only to pay the com­pany’s loan obli­ga­tions. The share block com­pany, like other com­pa­nies, must pro­duce reg­u­lar, au­dited fi­nan­cial state­ments.

Un­less it was stated as an in­ten­tion at the time the shares were ini­tially of­fered, a share block com­pany may not in­crease its loan obli­ga­tion without the ap­proval of at least 75 per­cent of the share­hold­ers hold­ing at least 75 per­cent of the votes.

As a share­holder you have the right to elect direc­tors for the share block com­pany at the com­pany’s an­nual gen­eral meet­ings. You are also el­i­gi­ble to be­come a di­rec­tor of the com­pany. The direc­tors meet through­out the year to dis­cuss how the prop­erty is be­ing man­aged.

OBLI­GA­TIONS

Your obli­ga­tions as a share­holder in a share block scheme are to: Pay the monthly levy; Re­pay your por­tion of the com­pany’s loan obli­ga­tion each month, if ap­pli­ca­ble;

Keep your exclusive part of the build­ing in a neat and tidy con­di­tion;

Al­low the com­pany rea­son­able ac­cess to in­spect your sec­tion of the build­ing when nec­es­sary;

Be re­spon­si­ble and fi­nan­cially li­able for any re­pairs to the in­te­rior of your unit, such as fix­ing a burst geyser in your flat; and

Take out house­hold con­tents in­sur­ance. The share block com­pany will not ac­cept re­spon­si­bil­ity for dam­age aris­ing from an ac­ci­dent or an in­jury oc­cur­ring within your unit but should have a pub­lic li­a­bil­ity pol­icy cov­er­ing it against mishaps oc­cur­ring on the com­mon prop­erty.

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