The ranking of preferred creditors claiming outstanding amounts when properties in homeowners associations are sold in execution are always: payments to the municipality for outstanding rates and municipal charges first, the HOA second in line with the bank holding the mortgage third on the list of payees, but what has often happened is that the banks have stepped in and had waivers signed in favour of the banks by the HOA’s managing agents to move up to second in line in preferred creditors, says Michael Bauer, general manager of the property management company IHFM.
The logic behind this was that an agreement would be reached between the HOA and the bank, in the case of a property being sold in execution, that once the bank had received the amounts due to them they would then pay the outstanding levy amounts over to the HOA in question. This, however, in some cases has not happened and the HOA was left to fight the debtor for the amounts due themselves, which resulted in many being put at risk financially, says Bauer.
A recent Supreme Court of Appeals decision which reviewed two High Court rulings (in cases involving Willow Waters HOA and Kyalami Estates HOA), has put HOAs back into a position where they can rely on case law to support their right to hold back a levy clearance certificate if there is money owed on the property. This effectively halts the transfer until the full levy amounts due have been paid.
This is a welcome decision, said Bauer, as HOAs and bodies corporate are wholly dependent on levies being paid in full as this is usually their only source of income to pay for services for the scheme.
Now, said Bauer, when there are sales in execution, if liquidators want to sell a property in execution they will have to settle the levy amounts outstanding with the HOA or come to an agreement with the HOA before they can sell the property.