Sectional Title: All the ins and outs – Part 1

Sectional title: All the ins and outs – Part 1

The moment you become an owner in a sectional title scheme, you enter into a series of interlocking relationships – largely with people you don’t even know – that will affect what you can do with your property, how you can use and enjoy your home, and the demands that can be made on your finances.

Buying into a complex usually involves a trade-off between the type of home we wish we could have and what we can afford, and where we want to live and what’s available on the market. Similarly, in an ideal world, we would buy only in a scheme that was well run, financially sound, and had no major structural defects or maintenance problems. And we would buy only once we had full knowledge of what we were letting ourselves in for.

Unfortunately, many prospective purchasers have only the faintest idea what sectional title ownership involves, and the restraints and obligations it imposes. It is only after they move in that they wish they had conducted a thorough due diligence of what they were buying into.

It’s impossible to cover every aspect of sectional title ownership in this article, but over the next three post we should put you in the picture about the main features of sectional title and enable you to ask some intelligent questions before you sign on the dotted line.

 

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1. Your statutory rights and obligations

The Sectional Titles Act (STA) of 1986 defines the rights and obligations of the various stakeholders who bring a sectional title scheme into being, and who manage and live in it. These rights and obligations are also set out in the Prescribed Management Rules (PMRs) and the Prescribed Conduct Rules, which were issued under the Act. Many people do not realise the extent to which what can and cannot be done in a sectional title scheme, how it should be done and by whom it should be done, has been carefully defined.

When you take transfer of a sectional title unit, you automatically become a member of the body corporate, which consists of all the owners (whether natural or artificial persons) of units in the scheme. The body corporate is required to meet at least once a year, when it must transact certain mandatory business, including adopting a budget and electing trustees. In addition to the annual general meeting (AGM), the body corporate may, if necessary, meet at other times during the year, in what are called special general meetings.

Some body corporate decisions require only a simple majority vote, but many require a much higher level of consensus:

* Ordinary resolutions. Decisions that can be made by passing an ordinary resolution with a simple majority include approving the budget, electing or removing trustees, and imposing specific restrictions or directions on the trustees.

* Special resolutions. A special resolution requires the consent of 75 percent of the owners. Some of the decisions that must be made by special resolution are amending the conduct rules, suing the developer of the scheme, authorising “non-luxurious” improvements (see “Definitions”, below) to the common property and revoking the appointment of a managing agent.

* Unanimous resolutions. Most of the PMRs can be amended if the body corporate passes a unanimous resolution, which requires a quorum of 80 percent of the owners and no votes against the resolution (abstentions are counted as votes in favour). Other decisions that require a unanimous resolution include alienating or leasing part or all of the common property and making “luxurious” improvements to the common property.

Apart from resolutions made in a general meeting, some decisions require the written consent of each owner – for example, acquiring land to extend the common property and authorising a section or exclusive-use area to be used for a purpose other than that shown on the sectional plan.

The PMRs flesh out the rights and responsibilities of owners and the powers and functions of trustees, while the conduct rules establish norms and standards to govern how the residents will live (hope-fully, in harmony) on the property. Many bodies corporate do not make any amendments to the PMRs, but most schemes have substantially added to or changed the Prescribed Conduct Rules. It is important that you obtain a copy of the management and conduct rules before you buy into a scheme, because these rules define the constraints that you will have to live with as an owner.

The trustees are the executive of the body corporate, responsible for the day-to-day management of the scheme. Although the trustees are accountable to the body corporate, they have the authority to make a number of decisions without reference to the owners (unless a resolution restricting their powers has been passed). Examples of these decisions are: to impose a special levy, appoint a managing agent, approve the consolidation or subdivision of sections, impose fines for contraventions of the conduct rules (if the rules provide for fines), and convene a special general meeting.

Very few schemes have professional trustees – most trustees are members of the body corporate who volunteer their time and services. Although the majority of schemes contract with a managing agent, the responsibilities of trustees can be onerous and time-consuming, which is why trustees are often retired or semi-retired owners. However, you should not assume that the people who, year after year, are elected to the board of trustees will be around forever. The day might come – and it might be a lot sooner than you would like – when, if you want to safeguard your investment and lifestyle – you will have to become a trustee.

 

2. Do you know what you are buying?

The defining principle of sectional title is the distinction between a section and the common property. What you can do with your property without seeking the consent of the trustees or the body corporate, and the extent of your financial liability for what has to be fixed or upgraded on the common property, is determined by the division between your section, or sections, and everything else.

A section is a part of the property that has been demarcated as such on a sectional plan and can be individually owned. Each section is defined by an imaginary line – called the median line – that runs through the middle of the walls, doors, windows, floor and ceiling that form the physical boundaries of that section. What is outside of the median line is either another section or common property. A section can be a residential flat, a garage or a storeroom. A section may include a garden or a balcony. If you, for example, buy a flat, a separate garage and a separate storeroom, you will be the owner of three sections.

When you buy into sectional title, however, what you actually own is not a section, but a unit, which always consists of a section and its undivided share in the common property.

“Undivided share” means that no owner can claim ownership of a certain part, or parts, of the common property. Your share of the common property is not, for example, the exterior wall outside your section. In a sense, your share is at once everywhere and nowhere.

Your undivided share of the common property is determined by the size of the section, or sections, that you own. This share, which is known as your participation quota, is calculated by dividing the floor area of the section (rounded off to the nearest square metre) by the total floor area of all the sections.

The result is expressed as a decimal fraction correct to four places.

Your participation quota will usually determine:

* The value of your vote at general meetings of the body corporate. Votes at general meetings are usually taken by a show of hands, in which case an owner has one vote for each section registered in his or her name. However, the chairman has the discretion to change the voting method to a poll, in which case the value of each owner’s vote is reckoned by his or her total participation quota. An owner can ask the chairman of the meeting for votes to be counted in value instead of number, which request may be agreed to. Special resolutions of the body corporate must always be counted in both number and value.

* Your liability for levies (including special levies). Any contribution you are required to make to the body corporate should be based on your participation quota. The exception is contributions for exclusive-use areas.

* Your liability for body corporate debts.

But the participation quota does not always determine the value of votes or liability. Either the developer (when the scheme’s register is opened) or the body corporate (by taking a special resolution) can make rules that alter the effects of the participation quotas. These rules could create an entirely new basis on which the value of votes or liability is determined – such as the market value of the sections – or they could state that the participation quotas will determine the “basic” liability of all the owners, while setting a formula that will determine their liability for “additional” contributions for certain types of expenses. The scheme’s management rules will state if the effect of the participation quota has been changed.

In sectional title, it is unwise to assume that “use” equates with “ownership”. The fact that a townhouse comes with a landscaped garden and braai area, or that an enclosed balcony can be accessed only via the living room in a flat, does not automatically mean that this area forms part of its adjoining section.

The only way to know for certain where a section starts and ends is by inspecting the sectional plan. Sections are demarcated by solid lines. If the section includes an unenclosed area, such as a balcony or veranda, the division between the enclosed section and the open area will be demarcated with dashed lines. The sectional plan will be accompanied by a schedule, which will state the floor area and the participation quota of each section. Each section is allotted a number, which will probably not be the same as its door number. The sectional plan will also show if there are any registered exclusive-use areas on the common property.

The body corporate is entitled to rent out parts of the common property to owners. If the seller of a unit is renting an area that you want to be able to use, such as a parking bay, don’t assume that, as the new owner, you can automatically take over the lease. Ask for a copy of the lease agreement and find out what will happen to this area on transfer, as well as any obligations on you, as the lessee.

Part 2 – Will continue on next post.

Source: This article was first published in the first-quarter 2015 edition of Personal Finance magazine.

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