Key checklist when appointing financial management agency for sectional title scheme

RECENT reports that point to dishonesty by managing agencies in the financial management of sectional title schemes have r e s ul t e d i n t r ustees reviewing their agreements with their managing agents and insurers as well as their fiduciary roles as trustees.

This is by no means a bad thing, according to Martin Bester, managing director of Intersect Sectional Title Services, who s i t s on t he SA Property Owners Association residential and sectional title committee and is an alternate member of the Sectional Titles Regulations Board.

“When considering t he appointment of a managing agency, a basic checklist should be ticked off. If the agency doesn’t comply with items on the list, the trustees should s e r i o usly r e c o nsi d e r t he appointment,” bester says.

The managing agency must be i n possession of a valid fidelity fund certificate, issued by the Estate Agency Affairs Board (EAAB).

“All managing agents are estate agents, by definition and by virtue of the nature of their work, so they must be registered members of the EAAB and, as long as they operate one or more trust accounts, they must contribute to the EAAB’s fidelity fund, with contributions based on the interest earned on the trust account balances.

“The EAAB’s fidelity fund will protect bodies corporate against t heft and or f raud resulting i n l oss of f unds held in trust by managing agencies, provided the agency is registered with the EAAB and complies with the EAAB’s requirements.”

Over and above a valid fidelity fund certificate, Bester advises that managing agencies should also have professional indemnity cover. This protects agencies against errors, omissions or wrongful acts that result in financial loss.

“If a body corporate suffers losses as a result of a managing agency’s error, omission or wrongful act, then it may have recourse t o t he managing agency. It would therefore be advisable for the trustees to ensure that such cover is in place and that the managing agency is capable of dealing with such claims. It’s important to bear in mind that most agencies have more than one client – any of which could lodge such a claim.”

Bester also recommends that managing agencies should have fidelity guarantees of their own.

“This cover is put in place to protect the managing agency against theft or fraud by any of its employees, resulting in a financial loss for the managing agency.

“Trustees would be advised to insist on this so that they may be assured that the agency has the resources to continue operating and providing essen- tial services in the event of such a loss.

“The body corporate should also have fidelity cover in its own policy to cover the loss of any monies outside the managing agency’s control. Examples of this would be petty cash, cash recoveries and/or monies held by trustees or employees of the body corporate.”

In summary, if the managing agency is registered with t he EAAB a nd meets t he EAAB’s requirement and is in possession of a valid fidelity fund certificate, then the body corporate’s funds, held in trust by the managing agency, is p r o t e c t e d by t he EAAB’s fidelity fund.

T h e managing a g e n c y should also have its own insur- ances to cover losses through theft, fraud, errors, omissions and wrongful acts. The body corporate should also have its own fidelity cover.

“Trustees should also ensure that trustees’ indemnity or liability cover is present in the body corporate’s insurance policy,” says Bester.

“This is to cover the trustees if the body corporate becomes legally liable for costs as a result of their wrongful acts, so long as such acts are in good faith and subject to the exceptions of the insurance policy.”

A c c o r d i n g t o B e s t e r, trustees should also insist on monthly management accounts s o t hat t he cash movement, variance to budget and assets and liabilities can be scrutinised.

Trustees should also approve all payments made by the managing agency on behalf of the body corporate, and this may be done in a number of ways.

“The auditor, too, plays a role in this process. Body corporate accounts are audited annually by the appointed auditor, provided the scheme is made up of 10 units or more.

“Therefore the appointment of a managing agency, an insurance broker and an auditor are all important duties of t he body cor porate,” s ays Bester.

“Homework done in this process will result in reduced risk and overall better corporate governance.”