What happens when the wheels come off?

Private Property South Africa

The body corporate – as represented by the trustees – is the custodian of value in a sectional title scheme. But what happens if the management and administration deteriorate to unacceptable standards?

The failure to efficiently collect levies is one of the most common – and often triggering – factors in the deterioration of a sectional title scheme. While some owners may view this non-collection as a welcome bonus, the reality is that unpaid levies can cripple a scheme in short shrift.

And it’s more common than one expects.

The Sectional Titles Act is a prescriptive piece of legislation governing every aspect of sectional title property ownership. And, it has at its core, a variety of checks and balances to promote good governance and the precedence of owners’ needs and rights.

With the Act as a base it is not uncommon for a minority, or even single owner, to challenge and act against an irresponsible majority where it is obvious that social and/or financial degradation has set into a particular scheme.

Clearly if the majority of owners, through their elected trustees, are failing in their fiduciary duties the so-called normal mechanisms contained within the Act to correct such actions will not be effective. These include the option of dismissing trustees and having them replaced or the calling of an emergency general meeting. In both instances the irresponsible majority would still be able to overrule and maintain the chaotic status quo.

In addition to the overall loss in value because of the prevailing unacceptable conditions, unit holders may soon find their investments unmarketable because of banks refusing to grant new loans. Unchecked, this sorry state can result in the inevitable total loss of each owner’s investment.

However, if sufficient financial resources are available, rehabilitation and restoration of the scheme can take place through Section 46 of the Act.

This provision allows for an owner, local authority or creditor to apply to the High Court for the appointment of an administrator. The administrator will assume all the powers of the trustees and owners – to the exclusion of the body corporate – and is empowered to take whatever actions are required to resolve maintenance issues and the payment of body corporate debts; ensuring levies are collected and the raising additional funds if necessary.

As you can imagine, the process of rehabilitation is not a walk in the park. In fact, it may become clear to some owners that they are not in a position to bear the additional financial obligations that are required to correct previous poor management and they may have to opt out of their units. The good news is that at least prospective buyers are likely to offer a more realistic price for the property once the administrator is in place.

To make a meaningful difference, the administrator requires fast access to funds to pay outstanding bills and carry out essential repairs and maintenance. And, in these circumstances, traditional banking sources are often loathe to lend into this sector of the market. However, help may be at hand through organisations that specialise in sectional title financing.

As can be seen, administration under Section 46 of the Act is for extreme cases where the scheme owes substantial amounts of money, is very badly managed or the body corporate is deeply divided and conventional methods of control are ineffective.

Obviously prevention is always better than cure. So if you own a unit, take an active interest in how your investment is managed. Become involved but perhaps most important; ensure that levies are collected timeously. Levies are the lifeblood of sectional title schemes, without which your investment may spiral into an irreversible decline.

Written by Propell and reprinted with permission from Home Front, August 2004

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