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

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.