Every owner of a unit within a ST scheme should receive the annual financial statements. The onus is on these members of the Body Corporate (BC) to sign off on those or query them if there are errors or expenses listed that are not understood. These can be murky waters, which is why Andrew Schaefer, MD of leading property management company Trafalgar, explains what to look out for and how to challenge the Trustees or appointed Managing Agent (MA) and the process that follows.
Q1: Who is ultimately responsible to ensure the financial aspects of a ST scheme are in order?
As stipulated in the Sectional Titles Schemes Management Act (STSMA):
The Trustees: Are the primary fiduciaries responsible for managing ST scheme finances (STSMA Section 7(1).
Managing Agents: Execute instructions under contract and within their mandate.
The Chairperson: Co-ordinates trustee functions but holds no additional powers unless delegated.
The Owners (BC members): Approve budgets, review financial reports, vote on decisions and call meetings.
Q2: What are the types of financial mismanagement that may or could present?
Note that financial mismanagement can happen with or without a Managing Agent (MA) in place. That is, it can happen through the actions of dishonest or inadequately qualified Trustees or perhaps if all the Trustees resign and there is no-one actually running the scheme for a period of time.
These are the usual types of financial mismanagement that can occur:
Fraud or misappropriation: Theft of funds, unauthorised transfers, and fabricated invoices.
Unauthorised expenditure: Spending outside AGM-approved budgets or without proper resolution.
Lack of transparency: Denying owners access to financial data or avoiding scrutiny.
Improper budgeting: Setting unrealistic levies, failing to build up a maintenance reserve.
Delayed creditor payments: Late payments to service providers or insurers.
Inadequate levy collection: Poor arrears management and legal enforcement.
Conflict of interest: Undisclosed personal benefit from appointments or contracts.
Audit avoidance: Delaying or manipulating annual audits.
Reserve fund abuse: Using reserve funds for day-to-day operations.
Poor record keeping: Missing receipts, absent reconciliation reports.
Q3: If owners suspect financial mismanagement by a MA, what is the legal process to follow?
Recognising and acting on financial irregularities includes:
A. Reviewing the scheme’s financials:
Begin by requesting access to the BC’s financial documents, including:
- Annual budgets and audited financials.
- Bank statements and monthly reports.
- Levy schedules and expense breakdowns.
(The Legal references for this include STSMA Section 3(1)(f), which provides that trustees must ensure sound financial management and PMR 26(4) which provides that individual owners may inspect records with a written request.)
B. Submit a formal complaint to Trustees:
Address concerns in writing, detailing specific discrepancies or irregularities and requesting clarification or investigation.
C. Request a Special General Meeting (SGM):
If Trustees fail to respond, owners holding at least 25% of the participation quotas (PQs) may call an SGM to table motions such as: - Authorising an audit or forensic review. - Appointing legal or financial advisors. (The legal reference for this is PMR 17(4).) D. Commission an independent audit: Propose a resolution for an independent audit or investigation to uncover irregularities and strengthen accountability.
Q4: What are the legal pathways for addressing managing agent misconduct?
Step 1: Evidence gathering: Assemble documents such as bank statements, AGM minutes, managing agent contracts, and correspondence.
Step 2: Notify Trustees: Submit a formal complaint to the Trustees. Even when duties are delegated, Trustees retain the ultimate accountability.
Step 3: Demand a general meeting: Use PMR 17(4) to call a meeting to vote on actions such as suspending the MA or commissioning a forensic review.
Step 4: Report to the Property Practitioners Regulatory Authority (PPRA). If the MA lacks a Fidelity Fund Certificate (FFC) or has committed misconduct, you can submit a complaint under Section 56(1) of the Property Practitioners Act. The PPRA may suspend or deregister the agent, and /or recover funds through the Fidelity Fund.
Step 5: Lodge a CSOS dispute: Where Trustees fail to act or harm continues, file a dispute under CSOS Act Section 39(1)(e) and (f). Possible outcomes of doing this include audit orders, restitution, agent dismissal or administrator appointment.
Step 6: Take legal action: For serious fraud or theft, report the matter to the SAPS and consider civil action to recover damages or freeze funds.
Q5: If a MA agrees that there are errors, or even admits to financial mismanagement, should they be given time to correct the situation?
Only if the errors were unintentional and minor, the agent is transparent and cooperative, and no material harm or risk exists.
Do not allow them time if there is:
- Clear evidence of fraud, theft, or concealment.
- Continued errors or unwillingness to cooperate.
- Loss of trust or failure to comply with oversight.
Trafalgar’s best practice guidelines in such instances are that there should be a written agreement including a correction plan, deadline and consequences if the plan is not adhered to. In addition, a third-party auditor should be engaged to verify corrections, weekly updates should be required and access to scheme funds should be restricted during rectification.
Q6: What type of legal person represents an estate if mismanagement by an agent/agency or even the Trustees in collusion is revealed?
A MA can be reported to the PPRA, or legal action can be taken through an attorney. For fraud, a case can be opened with the SAPS.
Q7: If it is the Trustees misusing funds, how should the BC approach this difficult situation?
The MA can assist with the process, and:
- The owners can request that a Special General Meeting be called (they will need 25% of the PQ to back the request).
- The Trustees can be removed and replaced at this SGM.
- If there is fraud involved, a case can be opened at the SAPS.
Q8: What sort of evidence needs to be provided, and who supplies this to the legal representative?
Note that in accordance with PMR 26(4), any owner may inspect financial records with written notice.
Evidence Types:
- Bank statements and audit reports.
- Levy schedules and receipts.
- Meeting minutes and resolutions.
- Trustee - agent communications (emails, memos).
- Contracts and governing rules.
- Owner statements or whistleblower reports.
Responsibility for supply of these documents:
Financials: Trustees or managing agent.
Meeting records: Managing agent or Trustees.
Bank details: Managing agent or Trustees, or via the bank.
Communication: Owners, Trustees or staff.
Contracts: Managing agents and Trustees.
Audit reports: Auditor, managing agent or Trustees.
Organising for Legal Use:
- Organise by date and topic.
- Scan and back up files securely.
- Include a timeline of key events and transactions for your legal team.
*Trafalgar currently has more than 90 000 residential properties worth more than R100-billion under management in more than 1 400 community housing schemes in SA.
