Sectional Title: All the ins and outs – Part 2
Part 2 continue on the previous post “All the in’s and out’s”.
You can read more about : Your exclusive-use rights, Knowing what you will end up paying for & What will you pay on top of the levy.
Click “Read More” to continue…
3. Your exclusive-use rights
Perhaps no other aspect of sectional title gives rise to more head-scratching and mix-ups than exclusive-use rights. Many people incorrectly believe that an exclusive-use right is a type of individual ownership, akin to owning a section, whereas, as the term implies, what this right confers is the right of use and enjoyment. Exclusive-use areas (EUAs) remain part of the common property, which means that the body corporate has the final say on what can and cannot be done on and with these areas.
Exclusive-use rights do two things:
* They give an owner or a group of owners the right to use a part of the common property to the exclusion of other owners and residents; and
* They entitle the body corporate to recover from the holder of the exclusive-use right the costs associated with the upkeep of the EUA.
If a sectional title purchase includes an EUA, the first thing you need to establish is what type of exclusive-use right you own, because some exclusive-use rights are more secure (and valuable) than others. The two types are often known by the section of the STA under which they were created.
A section 27 right is a registered right to an area of the common property that has been surveyed and is shown on the sectional plan. Registered exclusive-use rights can be bonded, leased or made subject to servitude rights, as with any real right in immovable property. If you hold a registered exclusive-use right, you have an absolute right that can be enforced against another person by instituting legal proceedings.
Registered exclusive-use rights are transferred or ceded by notarial deed. If an exclusive-use right is shared by a number of owners, an owner wanting to transfer his or her right must obtain the written consent of the other owners.
Registered exclusive-use rights are usually created by the developer of the scheme. However, a body corporate can create registered EUAs by taking a unanimous resolution. These areas must be surveyed and shown on the sectional plan.
A section 27A exclusive-use right is created in terms of the scheme’s rules, either the PMRs or the conduct rules. Remember that the PMRs are amended by a unanimous resolution, whereas the conduct rules are amended by a special resolution; therefore an exclusive-use right created in terms of the management rules is more secure than one created under the conduct rules.
Rights created by the rules are not real rights in immovable property. This type of EUA will not appear on the sectional plan, although it should be shown on a scale plan that is included with the rules that created the EUA. A rule-created exclusive-use right is automatically transferred when the owner of the unit on which the right has been conferred sells his or her unit.
The second thing you need to check is your monthly contribution on the EUA. (Technically, the term “levy” applies only to sections, but most bodies corporate call exclusive-use contributions levies, too.) Whether you hold a section 27 or a section 27A right, you will be required to pay a contribution to the body corporate to offset the expenses associated with maintaining the EUA, including the provision of utilities and the cost of insurance. If the monthly contributions are insufficient to cover the cost of a repair, the body corporate is entitled to call on the owner to make an additional contribution. And this is where problems and ill-feeling can arise …
In theory, the exclusive-use contributions collected from owners should be ring-fenced and used only to repair and maintain their EUAs. In most cases, however, exclusive-use contributions are treated like normal levies and end up in the “pot” of funds that pay for the expenses associated with all of the common property. This may not be a problem if the EUAs consist of a number of similar, relatively low-maintenance areas, such as open parking bays. But an EUA may include a swimming pool, an electrified fence or a garage with an automatic door mechanism, in which case the costs will mount when it’s time for repairs or refurbishment.
You must find out how the body corporate determines the contribution on an EUA, whether all holders of exclusive-use rights pay the same amount, even if their EUAs include substantially different amenities, and whether or not the contribution covers every expense associated with that EUA. If the body corporate doesn’t ring-fence exclusive-use contributions, it is in your interests to keep a record of your contributions from the day you take transfer of the EUA.
The norm with EUAs is for the body corporate (meaning the trustees) to be responsible for maintaining and repairing the area, while the holder of the right is liable for the costs associated with maintaining and repairing the EUA. In sectional-title-speak, “responsible” means “whose problem it is to do the work”, while “liable” is a euphemism for “who must pay the bill”. In the world of sectional title, these two duties are sometimes conferred on different parties.
Responsibility and liability for EUAs is often dealt with in the rules, particularly if the exclusive-use rights were created by the rules. The rules may make an owner directly responsible and liable for his or her EUA, or an owner may be responsible for maintaining the area while still paying a contribution to the body corporate. The important thing is to check the rules and to ask questions of the seller.
4. Know what you will end up paying for
It’s amazing how many prospective buyers will visit the flat they have their eye on two or three times, but never take a cursory look at the rest of the property.
The body corporate must foot the bill for all expenses associated with the common property, except for those areas of the common property where owners have been granted exclusive-use rights.
The fact that you never use a facility is irrelevant; if it’s on the common property, you – along with all the other owners – are liable for its maintenance and repair, in proportion to your participation quota (or other formula).
Some developments were built when labour, water and electricity were relatively cheap, and before multiple kitchen appliances, satellite dishes, and access-control and security systems became commonplace. The impact on levies of hefty increases in the price of utilities and the cost of maintaining high-tech equipment was not a consideration. When live-in domestic workers were the norm, many developments were built with domestics’ quarters and bathrooms on the common property.
If you are a serious buyer, you should ask to be shown around the entire property. Use this opportunity to take note of the facilities and the overall condition of the common property. If you have already obtained a copy of the sectional plan, you will be able to ask informed questions about the ownership status of garages, storerooms and “private” gardens. Even one lift will add substantially to a body corporate’s electricity bill, while you may be shocked to find out how much it costs to maintain that “lovely” landscaped garden. Incidentally, it can cost between R500 000 and R700 000 to replace a lift in a low-rise block – and where do you think the money to pay for this will come from?
Many sectional title owners have been able to limit their liability for utility costs, because the body corporate decided to install pre-paid electricity meters and, in some cases, pre-paid water meters. If pre-paid meters are not in evidence, do not simply assume that the property will have meters to measure the electricity or water consumed in each section. In the absence of meters, or a formula set out in the rules, your share of the costs of utilities will be determined by your participation quota, not your consumption.
A common problem in sectional title schemes, particularly blocks of flats, is water-related damage, often a result of leaking windows or damaged waterproofing on the roof. Look for blistered and flaking paint on the walls next to windows or on the ceilings of a top-floor apartment; mould on blinds, or stains on the back of curtains are also tell-tale signs of water ingress. An area of a wall or ceiling that has been newly painted may mean that an owner is trying to hide water damage. If it is apparent that the original window-frames have been replaced, you should ask the seller or estate agent if the building has problems with water ingress, because, unfortunately, in many cases in the past, bodies corporate accepted the lowest quote from contractors who did not know how properly to seal the gaps between the new frames and the walls.
The liability for doors and windows that straddle the median line between a section and the common property must be apportioned 50-50 between the owner of the section and the body corporate. Not every body corporate has grasped this principle, and the liability (as well as responsibility) for repairing or replacing windows may have been apportioned in an inconsistent, ad hoc manner. You should ask the seller or estate agent how the body corporate of the scheme in which you want to buy deals with the issue.
One way to find out if a scheme has persistent maintenance and repair problems is to obtain a copy of the trustees’ annual report. This report is one of the documents that must be sent to all members of the body corporate before the AGM. The law does not specify the level of disclosure required in these reports, but it is highly likely that they will reveal if a scheme has ongoing major repair problems, or if it is likely that a significant amount of money will have to be spent on maintenance in the near future. A lot can change in a sectional title scheme during a year, so you should also ask for copies of the minutes of at least the two most recent trustees’ meetings.
Another tricky issue is plumbing. Many people wrongly assume that, because the pipes and hot-water cylinders form part of the original permanent fixtures, the body corporate is automatically responsible for their repair and upkeep. In fact, unless the scheme’s management rules have been amended to the contrary, owners must repair or replace the hot-water cylinder that serves their section, even if the cylinder is located on the common property. An owner is responsible and liable for the pipes, ducts and cables that are within his or her section, unless those installations also serve other sections and/or the common property, in which case it is a body corporate problem and expense.
If damp appears, the standard procedure is for the trustees to call in a leak-detection company. The source of the leak – in a section or on the common property – will determine who is responsible and liable for the repairs, and whether a claim can be made against the body corporate’s insurance policy for resultant damage. If the leak emanates from another section, this is a matter for the owners of the affected sections; the trustees are not obliged to get involved.
5. What will you pay on top of the levy?
When a unit changes hands, the new owner becomes liable for a pro-rata payment of the ordinary levy from the date on which the unit is transferred.
In the case of an outstanding special levy (see “Definitions”, below), liability depends on who the registered owner was on the date the trustees passed the resolution to impose the special levy. If the seller was the registered owner, he or she is liable to settle the entire special levy, even though it might have been payable in instalments over a number of months. The seller and the buyer could agree that the buyer will take over the remaining special levy instalments, but the body corporate will have to be party to this agreement.
If the buyer is the registered owner on the date on which the resolution is passed, he or she is liable for the special levy. It has been the case that new owners have found themselves hit with a special levy days or weeks after taking transfer – in addition to the huge costs associated with buying property. It is therefore in your interests to find out what it will “really” cost to live in a scheme.
A body corporate’s income from levies is supposed to be sufficient, not just for its operating expenses during the financial year, but also to enable it to build up a reserve fund for contingencies. The reality is that few bodies corporate set aside funds that will be adequate for major future expenses; in fact, the monthly levy (which may seem very reasonable) may cover only the predictable day-to-day operating expenses.
Special levies are supposed to be imposed only for unforeseen expenses that require immediate attention, but many trustees raise a special levy to pay for all major repairs and maintenance, because the ordinary levies are kept artificially low and budgets do not provide for a reserve fund. In their defence, the levies in most schemes would have to escalate massively to enable the body corporate to build up reserves to cover every expense that may come down the line.
In addition to the trustees’ report and the minutes of the latest trustees’ meetings, the body corporate’s most recent annual financial statements will enlighten you about your likely future liability. (If the scheme consists of 10 or more units, the financial statements must be prepared by an auditor.) The budget for the current financial year will probably be included with the financial statements. The financial statements and the budget will disclose what provision the body corporate has made and is making for future expenses. Whether the reserve funds (if there are any) are adequate will depend on the size and condition of the property, the nature of the facilities and amenities, and the age of the property (after 30 to 40 years, wear and tear will start to take its toll on the original fixtures and fittings).
The financial statements and the budget will itemise the scheme’s expenditure, but the breakdown is usually not as detailed as one would like, with the total next to the line item “repairs and maintenance” encompassing everything from, say, calling in a locksmith to painting the entire building; the amount next to “scheme management” will be similarly uninformative about how the money was actually spent.
The annual financial statements will tell you other things, such as:
* Did the body corporate collect all its income from levies, special levies and any areas of the common property that it rented out? An under-recovery of levy income is a warning sign that the scheme may have a problem with arrear levies.
* Has the body corporate taken out any loans? This may be a sign that, because of poor budgeting or unrealistically low levies over many years, the body corporate has had to borrow money to pay for essential expenses.
* Does the body corporate owe money to its creditors, such as service providers and the municipality?
Part 3 – Will continue on next post.
Source: This article was first published in the first-quarter 2015 edition of Personal Finance magazine.