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New sectional title legislation: What owners and investors must know

Posted on Nov 16, 2016

New legislation that was gazetted last month has major implications for the budgets and administration of sectional title schemes. Find out how they will affect you.

Many cash-strapped South Africans are already struggling with spiralling consumer inflation and shrinking budgets, but scores of sectional title property owners are now also faced with hefty levy hikes if their body corporates haven’t made provision for the requirements of new legislation gazetted in October.

Schemes now need to have cash in a reserve fund

One of the new stipulations of the Sectional Titles Schemes Management Act is that schemes are now required to have a reserve fund, suggested (but not yet confirmed) to be an amount equal to 25% of the projected annual levy figure.

Efficient, well-organised body corporates should have already started accumulating this money, since this amendment to the act was announced back in 2011.

An end to special levies

The aim of this legislation is to ensure schemes create “rainy day” funds and shield home owners from the special levies that body corporates demand from time to time when major repairs or refurbishments take place. Once-off special levies are usually hefty and aren’t in most cash-strapped home owners’ budgets, often plunging households into debt to service them.

While numerous developments have already created their required level of reserves or are well on the way to doing so, there are also many schemes that have not used the grace period to add small top-up increases to annual levies and home owners in those schemes now face the prospect of substantial levy hikes next year while Trustees play administrative catch-up.

In real terms, though, what does this mean for existing owners and prospective buyers of sectional title properties?

Specialist Conveyancing Attorney Peet van Rooyen of Dykes Van Heerden Inc explains: “The reality is that property owners could see their levies increase by up to 25% initially until adequate reserves have been accumulated. This is in addition to the standard fixed annual increases required to cover the rising costs of maintaining the development.

The reality is that property owners could see their levies increase by up to 25% initially until adequate reserves have been accumulated
“Once the reserve fund has been adequately established, provision has been made for lower contributions, but owners can expect reserve fund levies to be charged, unless the value of the reserve fund is equal to 100% of the scheme’s total levy budget.

“Regulation 2 of the act also stipulates that, if the reserve fund is less than 25% of the previous year’s maintenance contributions, at the start of a new financial year, the owners in the scheme must add 15% to their total levy budget for the coming year as a contribution to bolster the reserve fund.”

Van Rooyen adds that if, at the end of the financial year, the remaining reserve funds are less than 100% but more than 25% of the value of the past year’s administration fund contributions, then the contribution to this fund must be at least equal to the repair and maintenance budget which has been formulated for the coming financial year.

Lew Geffen, Chairman of Lew Geffen Sotheby’s International Realty, says that while the intent of the new regulations are laudable, their implementation and management require a whole new level of administration and accountability, and trustees will have to raise their game considerably to achieve and maintain compliance.

“Not only are separate records, budgets and bank accounts mandatory for the general levy and the reserve fund; they must be independently audited every year by an impartial person or company not involved in the scheme’s financial administration.

“Trustees must also prepare a detailed written 10-year plan for the use of the reserve fund, and report back to owners annually on its progress and implementation and more often than not, this document will have to be prepared by an outside consultant with the necessary expertise at an additional cost to owners.”

Geffen adds that the complexities of implementing the new requirements are compounded by a very short window of 90 days in which to meet seven of the key requirements.

“These include registering the scheme and lodging all governance documentation with the Community Schemes Ombud Service (CSOS), establishing a reserve fund and opening a separate bank account as well as compiling and submitting the new fund’s budget and financial statements.

“Many of these steps are time-consuming and involve reams of documentation as well as a level of expertise that smaller schemes with more simply structured body corporates will struggle to complete in time.”

Arnold Maritz, Cape Town Southern Suburbs Co-Principal for Lew Geffen Sotheby’s International Realty, stresses that it is now essential for prospective buyers to add scheme management to their list of priorities when choosing property, especially investors with budget restrictions.

“Sectional title levies cover various expenses such as insurance, administrative fees and the maintenance costs of the common property and on-site facilities, and it must be remembered that the more amenities there are and the larger the grounds, the higher the levy.

First-time buyers on a tight budget should therefore look for low maintenance schemes that are well run and maintained, and whose financial statements are in good order.
Request a copy of the financial statements, and look for the presence of a reserve fund as well as any adverse figures for non-payment by other owners in the complex.

“Sectional title properties will remain the more affordable option and they will continue to attract first-time buyers. However, it is essential that prospective buyers don’t just look at the property and the purchase price.

“They have to take the new Act and its financial implications into consideration when calculating their budgets and decide what they can afford in the long run, including any substantial levy increases. There is a very apt Afrikaans phrase that applies here, which is that sometimes goedkoop is duurkoop – or directly translated, buying cheap initially doesn’t always cost less long term.”

Maritz adds that it’s also a good idea to compare the levy for the subject property with those in similar complexes nearby on a “per square metre” basis as this will help to establish a balance between the lowest levy payable versus the expected capital return on the investment.

Matthew Raubach, Sectional Title and Area Specialist for Lew Geffen Sotheby’s International Realty between Wynberg and Lakeside says: “We have been lucky enough to predominantly sell property in blocks that have been well-managed and that already have established reserve funds with a healthy balance.

“What this has highlighted for us is how beneficial effective management is to sectional title schemes, not only in the short term but also to the value of owners’ investments. It is now even more critical and smaller schemes without the necessary resources or expertise would benefit by appointing an experienced managing agent.”

Shaun Groves, Gauteng Rental Manager for Lew Geffen Sotheby’s International Realty, believes that many Johannesburg sectional title owners are in for a nasty surprise.

From what I have seen, it appears that the majority of schemes have not planned accordingly and I have no doubt that many owners are going to feel the pain of increased levies which will compound the struggle to realise yields in a notably subdued rental market.
“This year has been particularly tough as yields have come under severe pressure and any increase in the operating cost of a property will have a direct impact on net profits. Landlords may look to offset this by increasing rentals, therefore pushing prices up and putting even more pressure on consumers.”

The rental market in Cape Town is much stronger and in the most sought-after areas, demand in the lower to middle markets now exceeds supply. However, rental prices have dropped this year in response to the continued economic downturn, with tenants also becoming increasingly educated about the market and aware of current pricing.

This is according to Lorraine-Marie’ Dellbridge, Rental Manager for Lew Geffen Sotheby’s International Realty in Cape Town’s Southern Suburbs who adds: “I have seen a number of leases including clauses that if levies or rates increase the landlord may adjust the rental accordingly but I would advise against it as a blanket practice, especially if they risk losing stable and reliable tenants.

“Not only will the landlord have to go through the onerous process of finding a suitable new tenant, it could be costly if the house stands empty which is a real possibility if the increase prices the property out of its current market.”

Van Rooyen concludes: “While it may be daunting, especially for schemes that have only just begun the process, it must be borne in mind that the home owners are members of the body corporate and in terms of their governing rules as prescribed by the new regulations, they have to approve the annual administration and reserve fund budgets.

“So whilst increases may be unavoidable for many schemes, the trustees cannot just increase the levies arbitrarily. Home owners are not entirely powerless here; they do have a voice.”


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Property Law

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The Community Schemes Ombud Service Act requires each community scheme to pay an annual levy to fund the ombud service and authorises the Minister of Human Settlements to determine the levies and fees payable to the ombud. In terms of the draft regulations released on October 3, the annual... continue reading

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New legislation that was gazetted last month has major implications for the budgets and administration of sectional title schemes. Find out how they will affect you. Many cash-strapped South Africans are already struggling with spiralling consumer inflation and shrinking budgets, but scores... continue reading