Own­ers go to ar­bi­tra­tion to get prop­er­ties out of Cape Royale rental pool

Weekend Argus (Saturday Edition) - - PERSONALFINANCE - ANGELIQUE ARDÉ

A bat­tle be­tween dis­grun­tled in­vestors and the com­pany that man­ages their prop­er­ties high­lights the is­sues that can arise when you put your prop­erty in a rental pool.

The own­ers of 17 units in Cape Royale Lux­ury Ho­tel & Spa, a fives­tar ho­tel in Cape Town, have started ar­bi­tra­tion pro­ceed­ings to can­cel their agree­ments with the com­pany that man­ages the rental pool, on the grounds of al­leged breach of con­tract – and they are claim­ing dam­ages.

The com­pany that man­ages the rental pool is Cape Royale Lux­ury Res­i­dence. In terms of the rental pool agree­ment be­tween the own­ers and the de­vel­oper, dis­putes be­tween par­ties to the agree­ment must be re­ferred to an ar­bi­tra­tor.

Ear­lier this year, the ho­tel’s body cor­po­rate was placed un­der ad­min­is­tra­tion af­ter the High Court found that trustees Paschal Phe­lan and Bet­tina Heiberg had failed to ful­fil their fidu­ciary du­ties to the body cor­po­rate. Judge Vin­cent Sal­danha found that Phe­lan, in his ca­pac­ity as chair­man of the body cor­po­rate, had also failed to en­sure that his in­ter­ests – in the de­vel­op­ment com­pany and in Cape Royale Lux­ury Res­i­dence – did not com­pro­mise or af­fect his fi­nan­cial du­ties to the body cor­po­rate.

Phe­lan is the sole di­rec­tor of Cape Royale Lux­ury Res­i­dence, ac­cord­ing to a search on the Lex­isNexis Risk Man­age­ment web­site this week.

The ad­min­is­tra­tion or­der was handed down in re­sponse to an ap­pli­ca­tion by an owner who has a unit in the ho­tel’s rental pool.

The owner claimed that the trustees were guilty of gross ne­glect and in­com­pe­tence in the man­age­ment of the body cor­po­rate’s fi­nan­cial and gen­eral af­fairs.

Nolands Foren­sics was ap­pointed as the ad­min­is­tra­tor un­til May 30 next year, when it must file a re­port to the High Court for its pe­riod of ad­min­is­tra­tion, as well as for the fi­nan­cial years 2009 to 2012.

The ho­tel has about 130 units, 82 of which are in the rental pool.

Own­ers of units in a rental pool have a right of oc­cu­pa­tion for only part of the year, while for the rest of the year their units are let to tourists and busi­ness peo­ple on a short-term ba­sis. The net in­come is di­vided be­tween the own­ers. An owner’s per­cent­age of the to­tal in­come is based on a for­mula and is paid af­ter the de­duc­tion of the levy and the rental pool costs.

The 16 claimants say they are en­ti­tled to can­cel their rental pool agree­ments and claim dam­ages from the rental pool man­age­ment com­pany be­cause of the fol­low­ing al­leged breaches of the agree­ment:

◆ The man­age­ment com­pany has failed to pro­vide own­ers with au­dited fi­nan­cial state­ments for the rental pool;

◆ There has been in­cor­rect ac­count­ing of the net rental in­come;

◆ The rental pool in­come has been di­vided in­cor­rectly, be­cause the units in the rental pool have been val­ued in­cor­rectly;

◆ The man­age­ment com­pany failed to reg­is­ter the rental pool in ac­cor­dance with di­rec­tives is­sued by the South African Rev­enue Ser­vice (SARS); and

◆ The man­age­ment com­pany has failed to re­pay in­put VAT to own­ers (see “VAT and rental pools”, right).

A five-year fore­cast sent to own­ers, dated Fe­bru­ary 2009, pro­jected a net rental in­come of R26.5 mil­lion for 2011, af­ter man­age­ment and per­for­mance fees. But the ac­tual rental pool re­turn for 2011 was R5.4 mil­lion, ac­cord­ing to a spread­sheet sent by Elmarie van Log­geren­berg, fi­nan­cial man­ager of Cape Royale, to one of the own­ers.

In a let­ter that was sent to another for­mer owner, dated Septem­ber 1, 2010, Nathan Sch­midt, man­ag­ing di­rec­tor of Phe­lan Hold­ings Hos­pi­tal­ity Group, gave the rental pool in­come for the sec­ond quar­ter of 2010 as R57 308 in April, mi­nus R255 412 in May, and R2 312 120 in June. For the sec­ond quar­ter, the for­mer owner re­ceived R23 530 (be­fore the de­duc­tion of his body cor­po­rate levy), so he earned about R7 800 a month in that quar­ter. He paid R3.2 mil­lion for the unit.

In its plea to the claims, Cape Royale Lux­ury Res­i­dence de­nies each of the al­leged breaches of the agree­ment. It also de­nies that it is re­spon­si­ble for the in­cor­rect ac­count­ing of the net rental in­come.

Cape Royale Lux­ury Res­i­dence fur­ther claims that the un­happy own­ers’ pur­ported can­cel­la­tion of the rental pool agree­ments is un­law­ful and amounts to re­pu­di­a­tion, thereby en­ti­tling the com­pany to can­cel the agree­ments.

It says that “de­spite the claimants’ re­pu­di­a­tion of the rental pool agree­ments and the man­age­ment com­pany’s ac­cep­tance thereof and its can­cel­la­tion of the agree­ment, the claimants are not en­ti­tled to with­draw their units from the rental pool un­til March 2014”. When you buy prop­erty from a de­vel­oper, in­stead of pay­ing trans­fer duty to the South African Rev­enue Ser­vice (SARS), you pay value-added tax (VAT) to the de­vel­oper. The de­vel­oper, as a VAT-reg­is­tered ven­dor, pays it over to SARS as out­put tax.

If you place the prop­erty in a rental pool, the rental pool has the right to claim, on your be­half, your VAT back from SARS. This is in­put VAT. This re­fund should be paid back to you

And, “as a con­se­quence of the ter­mi­na­tion of the agree­ments, the claimants are all li­able to pay SARS any VAT or other taxes owed by virtue of the ter­mi­na­tion of the rental pool agree­ments”.

In re­sponse to ques­tions re­lat­ing to the rental pool, Lilly le Roux, in­house le­gal coun­sel for So­lar Cap­i­tal, said Phe­lan was “not avail­able”.

Ac­cord­ing to Com­pa­nies and In­tel­lec­tual Prop­erty Com­mis­sion records, Phe­lan is the sole di­rec­tor of So­lar Cap­i­tal, which has been awarded a R13-bil­lion state ten­der to build one of the world’s largest so­lar farms in the North­ern Cape.

Phe­lan and So­lar Cap­i­tal are within a rea­son­able pe­riod of time af­ter the date of trans­fer.

Since the rental pool op­er­ates as a busi­ness on be­half of the own­ers, it needs to be reg­is­tered as a VAT ven­dor. The rental pool is also obliged to pay tax (out­put VAT) on in­come col­lected by the rental pool through the leas­ing of units.

When a prop­erty that is in the rental pool is sold and the new owner elects to leave it in the rental pool, that sale is ex­empt from VAT. su­ing In­de­pen­dent News­pa­pers for defama­tion aris­ing from an ar­ti­cle about So­lar Cap­i­tal.

Yes­ter­day, Phe­lan’s at­tor­ney, Basil de Sousa, said that “to seek com­ment from our client on al­le­ga­tions of breach (all of which have been de­nied in the plead­ings filed in the ar­bi­tra­tion pro­ceed­ings) is both in­ap­pro­pri­ate and un­timely, and will in­deed be prej­u­di­cial to the par­ties in the ar­bi­tra­tion”.

Al­le­ga­tions of breach can be prop­erly vented and dealt with at the ar­bi­tra­tion hear­ing only, he says.

The ar­bi­tra­tion hear­ing is set for April 7 next year. The ar­bi­tra­tor is Ad­vo­cate Les Rose-Innes SC.

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