Now sectional ti­tle bod­ies cor­po­rate must keep a sep­a­rate fund for big ex­penses

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Some own­ers of sectional ti­tle prop­er­ties could see their levies in­crease sig­nif­i­cantly in the near fu­ture, be­cause the Sectional Ti­tles Schemes Man­age­ment Act (STSMA), which came into ef­fect yes­ter­day, re­quires bod­ies cor­po­rate to con­trib­ute a cer­tain amount of money to a re­serve fund each year.

Mak­ing it com­pul­sory for bod­ies cor­po­rate to es­tab­lish and main­tain a re­serve fund specif­i­cally for fu­ture re­pairs and main­te­nance is one of the in­no­va­tions in­tro­duced by the STSMA and the new reg­u­la­tions is­sued in terms of the Act.

The STSMA re­peals and re­places the sec­tions (mainly sec­tions 36 to 48) of the Sectional Ti­tles Act (STA) of 1986 that gov­erned the ad­min­is­tra­tion and man­age­ment of schemes. How­ever, the STA has not been abol­ished; its sec­tions on how sectional ti­tles schemes must be es­tab­lished will re­main in force.

The STA re­quired a body cor­po­rate to “es­tab­lish a fund” (open a bank ac­count) suf­fi­cient to pay for all the ex­penses in­curred to ad­min­is­ter and man­age the com­mon prop­erty (for ex­am­ple, mu­nic­i­pal ser­vices, main­te­nance, in­sur­ance pre­mi­ums and wages).

Now, un­der the STSMA, a body cor­po­rate must es­tab­lish two sep­a­rate ac­counts: an “ad­min­is­tra­tive fund”, to cover its es­ti­mated an­nual op­er­at­ing costs (in­clud­ing main­te­nance and re­pairs), and a “re­serve fund”, to cover the cost of fu­ture main­te­nance and re­pairs.

The aim of the re­serve fund is to force bod­ies cor­po­rate to bud­get for on­go­ing main­te­nance and re­pairs. Many schemes draw up bud­gets and de­ter­mine levies with­out mak­ing long-term pro­vi­sion for ma­jor main­te­nance and re­pairs; in­stead, they im­pose spe­cial levies when­ever ex­pen­sive re­pairs to the com­mon prop­erty can­not be de­layed any longer.

NEW RULES

In terms of the new pre­scribed man­age­ment rules ( one of the an­nex­ures to the reg­u­la­tions), bod­ies cor­po­rate will still be al­lowed to im­pose spe­cial levies if they need in­come to meet a nec­es­sary ex­pense that can­not rea­son­ably be de­layed un­til pro­vided for in the fol­low­ing year’s bud­get.

The reg­u­la­tions pre­scribe the for­mula a body cor­po­rate must use to de­ter­mine the min­i­mum al­lo­ca­tion to the re­serve fund when it draws up its an­nual bud­get. This is based on the amount in the re­serve fund at the end of a fi­nan­cial year and the to­tal con­tri­bu­tions col­lected in that year. The cal­cu­la­tion is as fol­lows: • If, at the end of the fi­nan­cial year, the money in the re­serve fund is less than 25 per­cent of the to­tal con­tri­bu­tions to the ad­min­is­tra­tive fund for that year, then, in the next fi­nan­cial year the min­i­mum al­lo­ca­tion to the re­serve must be 15 per­cent of the con­tri­bu­tions to the ad­min­is­tra­tive fund.

• If, at the end of the fi­nan­cial year, the money in the re­serve fund is equal to or more than 100 per­cent of the to­tal con­tri­bu­tions to the ad­min­is­tra­tive fund for that year, the body cor­po­rate does not have to top up its re­serve fund.

• If, at the end of the fi­nan­cial year, the money in the re­serve fund is more than 25 per­cent, but less than 100 per­cent, of the to­tal con­tri­bu­tions to the ad­min­is­tra­tive fund for that year, the con­tri­bu­tion to the re­serve fund must at least equal the amount the body cor­po­rate bud­gets to spend from the ad­min­is­tra­tive fund on re­pairs and main­te­nance in the com­ing year.

But the reg­u­la­tions do not ex­plain how bod­ies cor­po­rate must de­ter­mine the con­tri­bu­tions to the re­serve fund for the next fi­nan­cial year when, un­til now, they have not been not re­quired to have a re­serve fund.

The trustees are au­tho­rised to use the money in the re­serve fund to pay for work car­ried out in terms of the body cor­po­rate’s main­te­nance and re­pair plan – an­other in­no­va­tion in­tro­duced by the new pre­scribed man­age­ment rules. Bod­ies cor­po­rate must now draw up a plan for the main­te­nance, re­pair and re­place­ment of “ma­jor cap­i­tal items” on the com­mon prop­erty “within the next 10 years”.

The def­i­ni­tion of “ma­jor cap­i­tal items” in­cludes elec­tri­cal sys­tems, plumb­ing, drainage, heat­ing and cool­ing sys­tems, lifts, car­pet­ing and fur­nish­ings, roof­ing, paint­ing, wa­ter­proof­ing, com­mu­ni­ca­tion sys­tems, paving and park­ing ar­eas, se­cu­rity sys­tems and any recre­ational fa­cil­i­ties.

The plan must set out the cur­rent con­di­tion or state of re­pair of each cap­i­tal item; when each item, or com­po­nent of that item, will have to be main­tained, re­paired or re­placed; what this will cost; and the ex­pected life-span of these items, or com­po­nents, once they have been main­tained, re­paired or re­placed.

The man­age­ment rules pre­scribe a for­mula that a body cor­po­rate must use to de­ter­mine the an­nual con­tri­bu­tion to the re­serve fund to main­tain, re­pair or re­place a cap­i­tal item. This is based on the es­ti­mated cost of main­tain­ing, re­pair­ing or re­plac­ing the item, less any pre­vi­ous con­tri­bu­tions made for this pur­pose, di­vided by the item’s ex­pected life-span.

WHAT ELSE IS CHANG­ING?

Other changes in­tro­duced by the STSMA and the reg­u­la­tions in­clude:

• Pro rata share of spe­cial levy on trans­fer. Un­der the STA, the per­son who owned a unit on the date on which the trustees passed a res­o­lu­tion to im­pose a spe­cial levy was li­able for the spe­cial levy, un­less the of­fer to pur­chase stated oth­er­wise. In other words, the seller, not the buyer, had to pay the spe­cial levy in full be­fore the prop­erty trans­fer could go through. So, if the trustees voted to im­pose a spe­cial levy, say, two days be­fore the date of trans­fer, the seller would be li­able for it, even though the buyer, not the seller, would ben­e­fit from the money spent.

In terms of the STSMA, the buyer is li­able for a pro rata share of the spe­cial levy from the date on which he or she takes trans­fer of the unit.

• Trustees can no longer make cer­tain de­ci­sions. The STA gave trustees the power to: rent out parts of the com­mon prop­erty to an owner for less than 10 years; take out loans to fund the up­keep and man­age­ment of the scheme; and buy, sell or a mort­gage a unit in the scheme. De­ci­sions on these mat­ters now re­quire a spe­cial res­o­lu­tion of the body cor­po­rate.

• A cap on in­ter­est on ar­rear levies. Un­der the STA, penalty in­ter­est on ar­rear levies could be de­ter­mined in one of two ways: the body cor­po­rate could set the rate of in­ter­est by adopt­ing a res­o­lu­tion, or if it did not take such a res­o­lu­tion, the trustees could set a rate of in­ter­est up to the rate in the Pre­scribed Rate of In­ter­est Act.

The STSMA stip­u­lates that penalty in­ter­est may not ex­ceed the max­i­mum rate un­der the Na­tional Credit Act for what are known as “in­ci­den­tal credit agree­ments”. It is cur­rently two per­cent a month.

• Re­cov­ery of ar­rear levies. A body cor­po­rate can ob­tain an or­der from the Com­mu­nity Schemes Ombud Ser­vice to re­cover ar­rear levies in­stead of hav­ing to go to court, as was the case un­der the STA.

• Changes to vot­ing rules. A per­son may act as a proxy for a max­i­mum of two own­ers. And un­der the new Act, when votes are counted (in num­ber, not value), each owner has only one vote, ir­re­spec­tive of how many units he or she owns.

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