Legislative changes to the management of sectional title schemes

The new Sectional Titles Schemes Management Act 2011 and the Community Schemes Ombud Service Act 2011 have just been released. These amendments will have important implications to the management of sectional title schemes.

On 1 October 2016 the long-awaited Sectional Titles Schemes Management Act 2011 and the Community Schemes Ombud Service Act 2011 were signed by the President of South Africa and officially published in the Government Gazette.

Some immediate implications of the two new Acts that sectional title scheme owners and trustees need to be aware of and comply with, are:

1. Each person appointed as a proxy for an owner in a scheme may only represent a maximum of two owners at a general meeting. In the past, an appointed proxy could represent numerous owners. If a single owner owns more than two units in a scheme, an appointed proxy may represent such an owner; as long as the units are owned by one entity.

The implication of this rule amendment is that it may become very difficult for bodies corporate to obtain the required quorum at annual general meetings. Meetings may now be postponed more frequently than in the past.

Benefit: More owners will be encouraged to attend general meetings. A regular turnover of trustees may also benefit the scheme by resulting in more owners with experience on how to manage a scheme. In the past, one person could potentially manipulate the voting process due to the number of proxies they hold. This may no longer happen.

2. Bodies corporate must now prepare two different budgets every year for presentation and approval at annual general meetings. The first budget is the administrative budget which makes provision for the daily and monthly expenses for the scheme. The second, new budget is the reserve fund budget which must be prepared annually to provide for future maintenance work and improvements to the buildings.

Bodies corporate will now have to use professional building and maintenance estimators to calculate costs for various maintenance projects and improvements over a period of 10 years. These budgets need to be updated annually (prior to the annual general meeting) for review by all the members in the scheme.

The effect of this change is that estimators may charge for every annual quote which will be an additional cost to the body corporate.

Benefit: This amendment will result in better financial planning over the long term which should eliminate the need to raise excessive special levies for maintenance obligations.

3. With immediate effect, schemes will be obligated to collect fees payable to the ombud service. It will be collected from every owner in the scheme and is payable quarterly. The fees will be calculated based on the existing levy per unit, to a maximum of R40 per unit. Levies payable for a unit of R 500 and less will be exempted from paying towards these fees. However, the fees will be collected from the body corporate as a collective entity and will need to be budgeted for annually.

Additional fees will be payable to the ombud service for ad hoc services provided by their office

This amendment will directly impact the finances of schemes where additional levies will need to be collected on top of existing income.

Benefit: The relatively low contribution to the operational costs of the ombud office will allow bodies corporate and its individual members, unlimited access to legal advice and assistance with resolving disputes within schemes.

4. Schemes are now obligated to have minimum liability insurance of R10 million. Some bodies corporate may already have this cover in place through their existing insurance policies.

Where it is not in place, additional premiums may be payable for the additional insured peril.

Benefit: This amendment will ensure that the body corporate is protected from potential claims for any injury to a person or object while on the grounds of the scheme.

5. In the old Act, fidelity insurance was optional for bodies corporate to cover itself against fraudulent activities by any trustees or employees of the body corporate. With the new Act, it is compulsory.

The amount of fidelity cover required will be determined by considering both the administrative budget and the surplus funds available to the body corporate at the last day of the previous financial year of the scheme. Again, this will mean additional insurance premiums payable by the body corporate.

Benefit: This will ensure that the body corporate’s surplus funds are protected against possible fraudulent activities by trustees or other employees of the body corporate. In the event of such losses, the cash funds will immediately be reinstated so that the trustees and managing agent may continue with daily operations of the scheme.

6. A body corporate may now, by special resolution, appoint an execute managing agent to perform all the functional duties of the trustees and exercise the same powers. The executive managing agent will assume all the fiduciary responsibilities of the trustees and must report to the trustees every four months. This will remove the day-to-day responsibilities of trustees, who do not get paid for their duties. The responsibility will shift to the managing agent who will have limited carte blanche to manage the affairs of the body corporate.

The amendment will result in managing agent increasing their management fees substantially to reflect the added responsibility and risk.

Benefit: Where bodies corporate opt to appoint such an executive managing agent, it will result in less fiduciary responsibilities on the appointed trustees and fewer delays by trustees as the managing agent can now make quicker, educated decisions based on experience and knowledge.

7. New requirements have now been put in place regarding the adoption of a special resolution at a special general meeting. Once the members have resolved to adopt or reject a special resolution, no further action or implementation of such a resolution may take place for a minimum period of seven days after the meeting. This period will effectively serve as a cooling down period. During this period, members may reconsider the resolution that was passed. If at least 25% of the total of votes are against or in favour of passing the resolution, they have to direct their objection in writing to the body corporate and request another special general meeting where the resolution will be reconsidered.

Bodies corporate may now find themselves voting on resolutions that have already been voted on at a previous special general meeting. Decisions by special resolution may now be more difficult to obtain.

Benefit: It provides members of a scheme the opportunity to reconsider the outcome of a resolution passed at a meeting and allows members who may not have participated in the original meeting, to cast their vote.

In summary, the management of sectional title schemes will now become more complicated. Trustees will have far-reaching fiduciary responsibilities and the cost of managing and living in a sectional title scheme will increase substantially. Long term financial benefits will be achieved if the scheme is managed effectively and in terms of the new legislation allowing for interactive participation by more members than in the past.