Advice and Opinion

Prescribed rate of interest drop to 9 percent

As of the beginning of August, the prescribed rate of interest charged on overdue levies in sectional title schemes has been reduced from 15,5% to 9% per annum.

While Prescribed Management Rule 31 (6) allows trustees to charge interest on arrear levy amounts, the amount is not stipulated so the rate of interest is calculated according to the Prescribed Rate of Interest Act, whereby section 1 (2) dictates what interest rate is charged on overdue amounts (which has now been reset by the Minister of Justice to 9%), says Michael Bauer, general manager of the property management company IHFM.

Trustees can only charge the rate of interest above, unless it has been expressly decided by the owners at a general meeting and they have instructed the trustees to charge more, said Bauer. Previous case law, in the case of Body Corporate Lynwood Gardens v Mureli Yegi, shows that even though interest charged on overdue amounts is not meant to exceed the rate set by the Minister, if the instruction comes from the owners within the scheme, they can set it as high as they like, said Bauer.

In this particular case, the interest rate was set at 120% per year, which is inordinately high, said Bauer, but the courts upheld the decision based on the fact that it was the owners themselves that decided on the amount, and not the trustees alone.

Charging interest on overdue levies, however, is not meant to be an income earner, he said, but rather as a deterrent to owners falling into arrears in the first place and as a way of subsiding the costs of having to carry those who are behind with their payments.

It must be remembered, however, that the in duplum rule does still apply, in that the interest charged cannot exceed the capital amount due, and so when this limit is reached no more interested can be added to the overall account, said Bauer.

“The incentive for both parties must always be for the debt to be settled: for the debtor to pay this quickly to avoid further penalties, and for the body corporate not to become a lender but to recover the money as soon as possible. The trustees must follow the correct credit control procedures so that the accounts do not fall too far into arrears,” said Bauer.