Advice and Opinion

Maintaining financial stability in sectional title schemes

It is important, when considering purchasing a unit in a sectional title scheme, that the buyers ensure the financials of the scheme are healthy, particularly in today’s tough economic climate, says Willem le Roux, director of the sectional title finance company Propell.

“What many do not realise is how fast a sectional title’s financial situation can deteriorate if there is a shortfall in levy collections or if there is a problem with the financial management”, he said.

As a member (an owner of a unit) of a body corporate, it is in that owner’s interests to be actively involved in the management of the scheme. Members should at least attend the annual general meeting, and if other meetings are held during the year to discuss other matters, the owner should attend those too. Those owners who are up to the task should make themselves available for election as trustees.

“The AGM is the meeting where the trustees are elected and it is important that the right people are chosen for the various jobs that need to be done. There is no point in someone who does not have the skills required for the job being elected to do it”, he said.

Trustees should prioritise the recovery of outstanding levies, either via a levy collections company such as Propell or their managing agent, and this sort of problem should never be left for too long, he advised.

If levies are in dispute, the body corporate should first go to arbitration. Where a delinquent owner has no valid defence, the body corporate can apply directly to court for relief. Court orders can be enforced by means of repossession of assets or sequestration of the owner.

“Trustees should be warned, however, that in some cases, when it comes to claiming outstanding levies, any of the above might still not remedy the situation”, said le Roux.

There have been cases that have gone to court only to find, after the body corporate applied for repossession, that the bond holder refuses to consent to the sale by the sheriff of the owner’s unit. Sequestration of the owners could be applied for in this case but if they are up to date on other major payments, this will not be approved as insolvency law principles state that this process cannot be used unless it will be to the benefit of all the creditors.

“Where there are protracted court cases to try recoup money outstanding”, said le Roux, “the body corporate may in the meantime have to raise a special levy, firstly to cover the costs of the court case and secondly, to cover the outstanding amounts, which other owners might be reluctant to do. In extreme cases, if the situation is not resolved quickly, other owners might also stop paying their levies, begrudging the payment while some get away with non-payment”.

This is where a reserve fund set aside (which will become a necessity for all sectional title schemes to have eventually) to protect it against financial distress and mismanagement, will assist a great deal.

“It would be wise for bodies corporate to reassess their levies for the year and add a reserve fund amount into the budget as soon as possible, and not wait until they absolutely have to do it. While many might not see a reserve fund as a necessity, it is good forward planning for schemes to have a decent amount in reserve for emergencies and as contingency funds for maintenance and assistance where there are shortfalls”, he said.

“It is better to have planned ahead and anticipated something going wrong, than to have the whole scheme put at risk financially,” he said.