Weekend Argus (Saturday Edition)
Legal loophole holds key to keeping cash
Developers can avoid paying rates on luxury flats in Cape Town by not registering properties
IMAGINE living in a sprawling luxury penthouse apartment in one of South Africa’s wealthiest neighbourhoods – and not paying rates to the city that services your area.
A loophole in the law seemingly allows property developers to do just that.
Whether by opportunistic design or pure good fortune, this is what Irish developer Pascal Phelan has achieved for at least the past four years.
He has managed this by not registering at the Deeds Office the top floor of the Cape Royal Luxury Hotel & Spa in Green Point.
The floor includes the suite which Phelan claims as his South African home.
According to news reports, the penthouse has been occupied by Phelan since as far back as 2010.
In September 2012, he conceded in court papers that the unit had not “yet” been registered in the Deeds Office.
Yet, until today the unit remains unregistered and no rates have been paid to the City of Cape Town, depriving the city of substantial revenue.
Phelan is the sole director of Cape Royale The Residence, the company that developed Cape Royale hotel.
The penthouse he occupies covers an area of 491m2.
One of the hotel’s 60m2 units, with a municipal value of R1.5 million, attracts rates of about R1 600 a month.
Rates on a 500m2 penthouse, with an estimated value of R15m, would be about R16 000 a month, or R192 000 a year.
Because the flat is not registered, it technically does not exist and has escaped the City of Cape Town’s radar.
However, the city’s valuation department found out about it in May last year, but only conducted a site inspection this month.
Ian Neilson, the executive deputy mayor and mayoral committee member for finance, said this week that the city had measured the portion and that it would be valued “in the fourth supplementary valuation that is to be certified at the end of May”.
The valuation department was still busy with the valuation, which, said Neilson, “is complex”, adding that the valuation “looks set to be substantial”. The property was being valued as hotel rooms, which means it would attract the full commercial rates tariff, he said.
Once the valuation was finalised, the city would begin charging rates.
“We will separately examine whether there would be merit in an application to backdate the valuation and rates,” he said.
Neilson said a “large unregistered portion” was being valued as a “developer’s right of extension as a registered right” – which overcomes the lack of registration of the unit (at the Deeds Office)”.
When asked why it took the city a year to value the property, Neilson said the valuation department responded to “data triggers, sent mainly from the Deeds Office and the Planning and Building Development Management Department. In this instance, there are no building plan records… in the valuations system”.
Councillor Johan van der Merwe, mayoral committee member for Economic, Environmental and Spatial Planning, said this week that the city’s Planning and Building Development Management department had initiated legal action against the owner “with a notice to obtain written approval for unauthorised building work”.
The notice period asks for plans to be approved within 60 days from the date of issuing of the notice, said Van der Merwe.
“If the owner fails to do so, the matter will be handed over to the city’s Legal Services department for court action.”
Adam Pitman, Phelan’s lawyer, denied allegations that his client had abused his developer rights to avoid paying rates.
“It is normal practice for a developer to reserve rights of extension… The amount of rates is a non-issue and a negligible amount.”
But another attorney said he had never come across such an incident, as developers normally registered units quickly so that they could be sold. He conceded that this appeared to be a loophole to escape paying rates and even levies if the developer occupied the unit.
“The Sectional Titles Act does not stipulate when a unit, built in terms of a developer’s right of extension, must be registered.
“The act only states that the right lapses after a designated time,” he said.
According to the law, Phelan’s company has until 2020 to register the unit.
Cape Royale is a sectional title scheme. Although Phelan’s company is the single biggest owner of units in the hotel, companies and individual investors own most of the units.
A large number of units are in a rental pool, which is managed by a company of which Phelan is also the sole director.
Phelan was the chairman of the Cape Royale body corporate until May last year, when the body corporate was placed under administration because of a fiduciary failure on the part of Phelan and one other trustee to members of the body corporate.