Managing agents, Trustees & The Sectional Title Schemes Management Act 8 of 2011

The Sectional Title Schemes Management Act (STSMA) no 8 of 2011 and the Community Services Ombuds Service Act (CSOS), were promulgated on 7 October 2016 – and are now included with parts of the old Sectional Title Act 95 of 1986, which are still in force,

The STSMA will deal with the operational requirements around the management of Body Corporate schemes, while the CSOS will assist with any disputes which may arise. The CSOS (the Ombud offices) will also act in a compliance capacity for other communal residential complexes, such as security estates (where a Home Owners Association manages the complex), retirement villages and share block schemes.

An experienced managing agent with the necessary resources and expertise would benefit smaller schemes without adequate knowledge of the new Sectional Titles Schemes Management Act. Effective management is critical to an Estate or sectional title schemes, not only in the short term but also to the value of owners’ investments.

Managing agents are appointed by the Body Corporate trustees in terms of this Act and this should be done by way of a written contract which must be signed by at least 2 trustees.

The trustees appoint a managing agent for no longer than 3 years with a 2 month notice period.

Separate records, budgets and bank accounts are mandatory for the general levy and the reserve fund. These records must also be independently audited every year by an impartial company not involved in the scheme’s financial administration.

The Regulations require that the registered auditor should not have participated in the preparation of the annual financial statements or should not have advised on any aspect of the accounts of the body corporate during the period being reported on. The audited annual financial statements need to be considered at the Annual General Meeting which should be held within four months after the end of the financial year end.

A detailed written 10-year plan for the use of the reserve fund must be prepared by Trustees, and an annual progress and implementation report must be made to owners. This document will have to be prepared by an outside consultant with the necessary expertise at an additional cost to owners.

The requirements of the Act are generally time-consuming and involve a level of expertise that smaller schemes with simply structured body corporates will struggle to complete and adhere to.

It is vital for prospective buyers to make scheme management a priority when buying a sectional title property, especially investors with budget restrictions, and they should look for an Estate or Scheme that is well run and maintained, with a reserve fund and small resident debtors’ book.

The levies generally cover Estate or scheme expenses such as insurance, administrative fees and maintenance costs of the common property and on-site facilities. Buyers must be aware that the more amenities there are and the larger the grounds, the higher the levy.
The new Act and its financial implications must be considered by buyers when determining their affordability of a property and try to prevent the very apt Afrikaans phrase “goedkoop is duurkoop”

The STSMA legislation that was gazetted in October 2016, has major implications for the budgets and administration of Sectional Title schemes.

Schemes must have cash in a reserve fund

Andrew Schaefer, MD of property management company Trafalgar*, states the reason for this is that the new legislation introduces a compulsory requirement for all schemes to establish and/ or maintain a substantial reserve fund to cover the future cost of any major maintenance projects or emergency repairs to common property.

Heritage Estate has to this extent set up their levy stabilisation fund and, in this regard, 3.5% of the proceeds of any sale in the Estate will be paid into this fund upon registration of the property into the new purchasers’ name. No clearance certificate will be issued by the Body Corporate unless the Conveyancer has given the undertaking that these monies have been paid. (Heritage Estate – Annexure 1 – Management Rules – Clause 25 (7))

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.

Existing owners and prospective buyers of sectional title properties

Existing property owners in a sectional title development, could see their levies increase by up to 25% until adequate reserves have been accumulated. This would be in addition to the standard annual increases required to cover the rising costs of maintaining the development.

A reserve fund must be established, and owners must 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 states:
• 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.
• 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.

The implementation and management of these new regulations requires a whole new level of administration and accountability, and Managing Agents, Body Corporates and trustees will have to raise their game considerably to achieve and maintain compliance.

https://www.saica.co.za/Portals/0/Technical/LegalAndGovernance/AuditRequirements.pdf
https://www.privateproperty.co.za/advice/news/articles/new-sectional-title-legislation-what-owners-and-investors-must-know/5134
https://www.trafalgar.co.za/stsm-act-need-know-right-now/