The recent ruling by the Supreme Court of Appeal where the body corporate of Gardens Lodge in Cape Town was found to have charged a “patently exorbitant” interest rate on levies that were outstanding, is a lesson to many other bodies corporate in the way members’ outstanding levy accounts should be managed, says Michael Bauer, managing director of SAProperty.com.
“Charging interest on overdue levies is not meant to be an income stream for the body corporate but rather a deterrent mechanism, something put in place to prevent owners from falling into arrears with their levy accounts“, says Bauer.
In this particular case, the owner challenged an interest rate of 34,8% per annum, compounded monthly, which added to an amount of R233 383. Over and above the interest, the body corporate had added charges for legal monitoring and collection of the outstanding debt.
While the Sectional Title Schemes Management Act does allow for interest to be charged on overdue amounts and for legal costs to be covered by the defaulting owner (PMR 25(4)), it stipulates in the Management Rules that,
“21(3) The body corporate may, on the authority of a written trustee resolution –
(c) charge interest on any overdue amount payable by a member to the body corporate; provided that the interest rate must not exceed the maximum rate of interest payable per annum under the National Credit Act (2005) Act No 34 of 2005), compounded monthly in arrear.”
What is important to keep in mind is that the levies and the levy interest rate can only be determined by the trustees at a meeting of the trustees, and not by the members at a general meeting. The levies, as well as the interest rate is determined once a year, after each AGM and that trustees must heed the current provisions of the National Credit Regulator requirements when determining the levy interest rate.
“In addition, it must be remembered 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.