Sectional Title Scheme Management: What Investors Need To Know

Subject to local authority town planning regulations, building restrictions and common law, owners of freehold title properties are free to manage their properties as they please. A sectional title owner however, is governed by a number of additional restraints that set out strict procedures as to how the property must be managed and who is responsible for such management.

As an owner in a sectional title scheme, you own your section (flat, apartment, townhouse or freestanding house) exclusively, and you co-own a portion of the common property (all other areas in the scheme that do not form part of the sections) in undivided shares - generally based on the floor area of your section. You may also have rights to one or more of the exclusive use areas which are parts of the common property that have specifically been set aside for your exclusive use.

It seems logical that, because you own your section exclusively, in this area you are entitled to make all the decisions on your own and you alone are responsible for maintenance and repairs. Following the same logic, the common property is owned by every owner. Therefore, every owner should be allowed to participate in decisions made regarding its use, and every owner must contribute to its maintenance and repair. This is where the concept of communal ownership comes into play in the sectional title context. Owners can make decisions together and are dependent on each other in terms of the expenses of communally owned areas of the scheme. It has been said many times that co-ownership is the mother of all disputes. For this reason, the legislature has implemented strict rules and procedures to help streamline and control the processes involved in communal decision-making and financing sectional title sphere.

The key role players in sectional title management are:

1. the owners - making up the body corporate;
2. the trustees - who are elected by the members of the body corporate as the managers of the scheme;
3. the chairperson - who is elected by the other trustees; and
4. the managing agent - who may be contracted to help the trustees perform the functions of the body corporate.

What laws and rules apply?

• The Sectional Titles Act, of 1986 (“the Act”), is the legislation providing for and governing sectional titles in South Africa. It deals with scheme management including the following: the composition of the body corporate and its functions and powers, the trustees and their functions and powers, rules applicable to schemes, and the duties of owners. Every owner, trustee, chairperson and managing agent should have a copy of the Act and try to familiarise themselves with its management provisions.
• The prescribed management and conduct rules are annexed to the Act and are automatically applicable to a scheme, unless they are amended, substituted, added or deleted. Where this is the case, the scheme operates according to its amended rules.
• The Estate Agency Affairs Act, of 1976, governs managing agents, and, according to its regulations, managing agents are required to be in possession of a valid Fidelity Fund Certificate(“FFC”) at all times when collecting or receiving levies from sectional title schemes.
• The National Building Regulations and Standards Act, of 1977, is also relevant to sectional title schemes, as it prescribes that all building plans must be approved by the local council before any building may commence.
• The town planning scheme regulations govern and restrict the manner in which an occupier may use the sections in ascheme.

The role of the body corporate

The body corporate is a legal entity made up of all the owners in a scheme. Membership of the body corporate is compulsory and occurs automatically when a section is transferred into a buyer's name. It continues until that person is no longer the owner of a section in the scheme. The body corporate exists to manage and control the scheme by ensuring that its financial, administrative and physical needs are attended to.

The functions of the body corporate include:

• running the ‘levy fund’;
• operating the scheme's bank accounts;
• insuring the buildings for full replacement value;
• maintaining the common property;
• keeping owner records;
• providing various types of information;
• ensuring that there is an address where the scheme’s correspondence can be received;
• lodging notifications of rule changes with the Registrar of Deeds; and
• enforcing the scheme's rules.

The way in which a body corporate makes decisions is by owner resolutions at duly convened meetings. The annual general meeting (“AGM”) is the principal meeting at which the body corporate makes important decisions such as electing trustees, appointing an auditor or accounting officer, approving the budget of expenditure for the following year and any other decisions that may be necessary because of the inclusion of items of special business on the agenda.

In the time between AGMs, special general meetings of owners may be called by the trustees, or by the owners themselves in certain circumstances. These meetings arise if or when business needs to be considered and/or decided upon before the next AGM. Instead of calling a special general meeting, owners can also make certain decisions using the ‘round robin’ process, in which they sign a circulated text setting out the text of the resolution.

The role of the trustees

The trustees are elected by the body corporate at each AGM to manage the scheme and carry out the functions of the body corporate until the end of the following AGM.

The functions of the trustees include:

The trustees have a ‘fiduciary relationship’ with the body corporate, which implies that every trustee must act honestly, in good faith and in the best interests of the owners and the body corporate at all times. This means that if trustees have material interests in any contracts with a body corporate, they must disclose the nature and extent of such interests at the earliest opportunity. This fiduciary relationship exists to protect the body corporate, as it constrains all acts performed by its trustees within the scope of their actual or apparent authority.

No fewer than 50% of trustees must be owners, it is therefore possible for the body corporate to elect non-owner trustees. Owner trustees generally work on a volunteer basis but may be compensated if the body corporate decides to do this via a special resolution to that effect. A non-owner trustee may be remunerated at a rate agreed upon between the body corporate and the trustee without the need for a special resolution.

The trustees generally meet more frequently than the owners do, this being usually monthly or quarterly, to decide on the day-to-day issues necessary to run the scheme. It must be noted that the trustees are the servants of the body corporate, and owners, in general meetings, have the capacity to restrict the scope of the trustees' decision-making power. For example, the body corporate may give the trustees authority to spend a specific amount of body corporate funds without first consulting the body corporate. Similarly, the body corporate can, by adhering to certain procedures, issue directives compelling the trustees to carry out particular duties.Trustees may resign or be removed from office by majority vote at a general meeting before completion of their one year appointment, provided that the possibility of this removal from office was disclosed in the notice of that meeting.

The role of the chairperson

At the commencement of the first meeting of trustees after an AGM, the trustees must elect a chairperson, who will hold office until the end of the following AGM. The chairperson's main function is to chair the meetings of both owners and trustees. Their only additional power compared to that of other trustees is that they have a casting vote when there is a deadlock among trustee voters. This means that if, once each trustee has voted (including the chairperson), there are an equal number of votes, the chairperson may vote again to break the deadlock.

The role of the managing agent

It is not compulsory for the trustees to appoint a managing agent, and many smaller schemes manage their affairs without the assistance of a managing agent due to the competence and active participation of their owners. In other schemes, especially medium to large-sized schemes, the workload involved in managing the affairs of a body corporate as well as the usual lack of compensation, encourages trustees to appoint a managing agent to bear most of the workload.

In terms of the prescribed management rules, the managing agent must be appointed by written contract for an initial period of one year, with one month's written notice of termination to be given by either party thereafter. The scope of the managing agent's services will be specifically stipulated in the contract of appointment. Generally however, managing agent is appointed to control, manage and administer the common property and any obligations the body corporate has to any public or local authority on behalf of section owners. The functions delegated to the managing agent usually include the responsibility and authority to collect levies.

As managing agents are governed by the Estate Agency Affairs Act and are required to be in possession of a valid Fidelity Fund Certificate (FFC) at all times the body corporates who employ them are protected against theft of their moneys, being collected or received body corporate levies, which are generally held in trust accounts administered by these managing agents. Unfortunately, this requirement is not well-policed and enforced in reality, there are many managing agents practising without FFCs, placing the moneys of body corporates at risk.

Managing agents may be removed from office without notice if they have breached any of the provisions in the contract or if found guilty of conduct that in common law would justify the termination of a contract between employer and employee.

In summary

The difference between a well managed scheme and one that is poorly managed can be hundreds of thousands of rand saved or lost on your investment. Good sectional title scheme management is a skill which requires knowledge of the applicable legislation and rules as well as active participation by owners, trustees, the chairperson and possibly a managing agent. Protect your investment by learning more about sectional title scheme management and becoming personally involved in the management of your scheme. Instead of complaining about trustees, go to their meetings. Or better still, serve as a trustee!

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