Avoid Costly Mistakes: The Hidden Risks of Poor Management in Small Sectional Title Schemes

In South Africa, particularly in smaller sectional title schemes comprising just a few units, proper management is often neglected. This issue is frequently overlooked by prospective buyers, often to their detriment causing serious legal, financial, and administrative consequences.

Recently, two of our clients submitted an offer to purchase a unit in a sectional title scheme comprising of only two units. We were asked to review the sale agreement for a sectional title unit before signature. Meyer de Waal, senior conveyancer at MDW Cape Town Inc., noted, “I realized that buyers were not provided with any additional information regarding the sectional title scheme or its management.”

It became immediately apparent to the MDW Cape Town Inc. legal team that the agreement lacked critical information regarding the operational status and governance of the sectional title scheme. No supporting documentation was provided to confirm that the body corporate was functional. Essential records such as the scheme’s financial statements, minutes from the most recent Annual General Meeting, insurance policies, and a copy of the conduct and management rules were notably absent.

MDW Inc advised that “additional clauses be added to the sale agreement that the seller or agent must provide a full set of financial statements of the body corporate, copies of the minutes of the meetings held at the last Annual General Meeting, Insurance information and copies of the rules of the sectional scheme.”

However, none of these documents could be produced and it became apparent that the body corporate, although established, was not operational and functional.

To better understand the implications, Daniela Papa from MDW Cape Town Inc. conducted further research into the legal and practical consequences of purchasing property in a dysfunctional sectional title scheme.

What Happens When a Body Corporate Is Non-Functional?

In South Africa, the body corporate is a legal entity tasked with administering a sectional title scheme. When it becomes dysfunctional, owners can face a range of legal, financial, and administrative issues. Key risks include:

1. Legal Consequences

• Non-compliance with the Sectional Titles Schemes Management Act (STSMA):
  • The STSMA mandates that a body corporate must be established when a sectional title scheme is registered.
  • Failure to comply with legal requirements can result in fines or legal action from regulatory authorities.
• Lack of Authority for Decisions:
  • Without a functional body corporate, there is no legal entity to make binding decisions about the property, potentially leading to disputes among owners.

2. Financial Problems

• Unpaid Levies:

• • A body corporate is responsible for collecting levies to fund maintenance and utilities. Without it, there’s no structured system for collecting these funds.
  • Owners may face arrears or legal disputes due to non-payment or unequal contributions.

• Difficulty in Securing Insurance:

• • It is mandatory for a body corporate to insure the entire property. Without it, the property is left uninsured, exposing owners to significant financial risks in the event of damage or liability claims.

3. Maintenance and Management Issues

• Neglect of Common Property:

• • Without a functional body corporate, common property areas (e.g., gardens, parking areas, swimming pools) may fall into disrepair, reducing property value.

• Disputes Over Responsibilities:

• • Owners may disagree over who is responsible for repairs, leading to conflict and inaction.

4. Regulatory Penalties

• Section 34 of the Community Schemes Ombud Service Act (CSOSA) makes it a criminal offense to not comply with the CSOSA Act or its regulations. It also outlines the penalties for non-compliance
• Failure to Comply with Tax Obligations:

• • A body corporate is required to register with SARS and file tax returns. Non-compliance can result in penalties and interest.

• Inability to File Annual Returns:

• • If the body corporate does not file annual returns with the Community Schemes Ombud Service (CSOS), penalties may be imposed.

5. Impact on Property Value and Sales

• Reduced Marketability:

• • Potential buyers may be hesitant to purchase units in a scheme without a functional body corporate, as it indicates poor governance and potential financial risks.

• Difficulty in Securing Financing:

• • Banks may refuse to grant home loans or bonds for properties in a scheme without a functional body corporate.

Remedies Available to Owners

Fortunately, there are legal pathways available to owners in a dysfunctional scheme:

1. Calling a Special General Meeting (SGM) – Prescribed Management Rules 53 & 54 Any member of the body corporate can initiate a SGM to elect new trustees. To do so:

• Owners holding at least 25% of the total participation quotas must support the call.
• At least 14 days’ notice must be given to all members, unless a shorter notice period is agreed upon unanimously.

2. Court Application for Appointment of an Administrator – Section 46 of the Sectional Titles Act

• If convening an SGM is not feasible, a member or creditor can apply to the High Court for the appointment of an administrator. This appointed individual will assume the powers and responsibilities of the body corporate, as directed by the court.

The first remedy is less expensive than the second, but it will be necessary for an owner to rely upon the second remedy in circumstances where it is not possible for the owner to comply with the aforementioned requirements to call a special general meeting.

Therefore, members of a dysfunctional Body Corporate aren’t left without a remedy and such members will be able to rely upon the mentioned remedies to get the management and administration of the Body Corporate back on track.

CONCLUSION

Buying into a sectional title scheme comes with responsibilities—and risks. A non-functional body corporate can significantly impact your investment, both financially and legally. This case illustrates why it is essential to conduct comprehensive due diligence before signing any offer to purchase.

Always consult with your attorney before entering into a sale agreement to purchase property, especially for sectional title units. A few precautionary steps today could save you from significant complications tomorrow.

FOR ENQUIRIES:

Meyer de Waal

MDW INC meyer@mdwinc.co.za

021 461 0065 & 083 653 6975

Daniela Papa

daniela@mdwinc.co.za

021 461 0065 & 083 783 8494