Rule changes expected to benefit sectional title schemes

Private Property South Africa
Private Property Reporter

The new legislation in place for sectional titles schemes is expected to increase the demand and marketability for this growing property sector.

New rule changes (implemented in October this year) for the Sectional Title Schemes Management Act (STSMA) and Community Services Ombuds Service Act (CSOSA), are expected to play a significant role in boosting the growing demand for sectional title properties.

According to Sean Guy, manager of the Seeff Southern Suburbs Sectional Title Division sectional title properties are said to be the fastest growing sector in the housing market and show no signs of slowing down.

Sectional title schemes have specific legislation in place to ensure effective management of the scheme and to iron out any difficulties which may arise due to the nature of this type of property ownership. According to Guy, this legislation should be seen as a refinement of regulations to better meet the practical needs of the scheme.

The formation of the Office of the Community Schemes Ombud will impact on dispute resolution in sectional title schemes, homeowners’ associations and other community schemes.

How will the two acts ensure better management of sectional title schemes?

One of the main rule changes, (now a mandatory requirement for each scheme), includes the establishment of a reserve fund. The purpose of the fund is to finance the upkeep of the scheme. There have also been new rule changes around the use of proxies, and an obligation to notify the Ombud of the domicile of the body corporate.

The Ombud’s office will also assist sectional title schemes with the following:

  • Help to recover levies which are in arears

  • Help to resolve the inability to reach a special or unanimous resolution

  • Help to resolve conflicting management and conduct rules interpretation

  • Ensure the rules are safely stored and readily available to members of the scheme

According to Guy, what is important to note about the reserve fund is the suggested (but not yet confirmed) amount of 25% of the projected annual levy figure which is to be payable by all sectional title holders. This means that should the projected levies for the next financial year be calculated at R800,000, then an additional amount of R200,000 must be collected from all unit owners which will be allocated specifically to the reserve fund.

For sectional title schemes that have little or no reserves, this will inevitably result in a significant increase in levies.

How a reserve fund can benefit sectional title schemes:

According to Guy the reserve fund should not be seen as a financial burden but rather a provision put in place for the benefit of the scheme.

Many sectional title homes sometimes fall into bad shape due to inattentive financial planning and poor management which is why the establishment of a mandatory reserve fund is essential.

This becomes important when you want to sell, and in the event of the buyer needing to obtain a home loan.

According to Guy, while a positive outlook for the new legislation is encouraged, it is essential to be aware that the change in rules may create initial difficulties for many sectional title owners, particularly for smaller schemes. That said, a healthy reserve fund will lessen the need for future special levies.

Trustees and managing agents have 90 days to implement the new legislative rule changes from the date of publication in the Government Gazette, which was 07 October.

Guy explains that it is imperative that a scheme is financially stable as banks scrutinise the financial statements of any scheme when considering a purchaser's bond application. If a scheme appears to be poorly managed and not financially steady, then a bank is at liberty to decline a bond over a unit. For this reason, it is in the best interest of all sectional title owners to ensure that the scheme’s body corporate is on an excellent financial footing.

A poorly managed scheme also leads to a lack of interest from buyers which results in these types of units selling for less than the prevailing market trend.

On the other hand, schemes which are well maintained will attract higher prices, like in the case of Tudor Gardens. This 32-unit complex situated in Claremont, boasts excellent management and attentive maintenance.

The efficiency of the scheme combined with an adequate reserve fund has allowed real estate agents of Seeff to achieve excellent sale prices, as seen in their most recent sale of a renovated one-bedroomed unit which was sold for the full asking price of R27,777/sqm.

According to Tudor Gardens managing agent, because the complex has always had a significant amount of reserve funds, they have never had to raise a special levy.

Due to the body corporate being proactive, the complex is not only already compliant with the scheme’s new legislation, but property sellers can also benefit from higher sales prices.

Who is responsible for the special levy during a property sale?

According to Guy, the Act has also addressed the issue of the special levy that is in place at the time of the sale.

Previously, the full cost of the special levy, as well as the portion of the special levy due after the transfer of the unit, was left to the seller / the outgoing owner to cover.

With the new legislation going forward, a seller is only liable to pay the special levy (in place at time of sale) up until the date of transfer. The balance thereafter is to be accounted for by the purchaser, concludes Guy.

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