Sectional Title: All the ins and outs – Part 3
This is the final part of ”All the ins and outs” and continue on the previous post “All the in’s and out’s”…
You can read more about : What will you pay on top of the levy?, What alterations will you be able to make?, Will the scheme change in the future?, Is the property adequately insured?, Will the scheme suit your lifestyle? and Act in limbo…
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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?
6. What alterations will you be able to make?
You can extensively remodel the interior of your section without seeking the approval of the body corporate, but it is a violation of PMR 68 to carry out any alterations that will impair the structural integrity of the building, while the Act creates implied servitudes of support between each section. You need to check that the interior walls of your section are not load-bearing if you are buying with the intention of knocking them down. Low water pressure is often a problem in older buildings where the sections on the upper floors are supplied by water tanks on the roof. Insufficient water pressure can rule out installing modern mixers in showers, baths and kitchens, and even affect the operation of washing machines and dishwashers. What if you want to enclose your patio or veranda? The level of consent will depend on whether the area forms part of your section or the common property (which includes EUAs). You are not allowed to make improvements to, or erect a permanent structure on, an EUA without the approval of the trustees. Even if it does form part of your section, you will have to obtain the permission of the trustees, because PMR 68 also states that owners may not do anything to their sections that is likely to prejudice the harmonious appearance of the building. Therefore, if they grant permission, the trustees will set conditions for what the enclosure may look like. If the area forms part of the common property, enclosing it will amount to increasing the floor area of your section. The body corporate has to a take a special resolution to allow a section to be extended. You will also have to submit a sectional plan of extension to the surveyor-general for approval. The participation quota of the scheme will have to be adjusted to take account of the extension. If the extension will result in the floor area of the section being increased by more than 10 percent, all bondholders of sections will have to grant their consent. The “harmonious appearance” rule also means you cannot change the style or colour of exterior doors or windows without the trustees’ permission. You may not make even minor changes or affix anything to the common property without the consent of the trustees. This will affect whether you are able to install an awning, satellite dish or air-conditioning unit.
7. Will the scheme change in the future?
It is a legal requirement that you, as a buyer, are informed whether the developer has any “section 25 rights” in the scheme – in simple terms, whether the developer registered a right to add to the scheme in future. “Future” can mean in 10 or 20 years’ time. A developer has to file plans showing the extension at the same time as it takes out the extension right. Adding to a scheme can substantially change the look and feel of a development – not to mention the value of your investment (will you still have that view?). Developing a scheme further can also have financial implications that may not necessarily be in your favour. Although extending the scheme may increase the pool of levy-paying owners, the new phase may require more maintenance and repairs. Unless rules are created to ring-fence the income and expenditure of the various phases, some owners may feel that they are unfairly subsidising the operating costs of other owners.
8. Is the property adequately insured?
The STA requires a body corporate to take out an insurance policy that covers the buildings to their full replacement (not market) value. This policy, which will cover the risks commonly associated with a residential property, applies to the entire property, not just the common areas. Before the AGM, you should be sent a schedule setting out the replacement values of each section. In too many cases, the trustees simply increase the level of insurance in line with inflation each year. Over time, this can result in the property being under- or over-insured. How do you know if your sections are adequately insured? If the scheme consists of more than about 10 units, the property should be valued by a professional valuer every two to three years. A professional valuer has access to up-to-date data about the cost of building materials and labour in each province, and will be able to provide the trustees with a comprehensive report on what it would cost to rebuild the property. There’s no reason why this report should be withheld from body corporate members. When assessing a property, the valuer will probably inspect the interior of only a few of the sections. An owner who has carried out extensive remodeling may think that his or her section is under-insured relative to most of the other sections. In this case, the owner can insure his or her section for a higher value, but will have to pay a higher premium. Insurance premiums are included in the monthly levy. Unless the body corporate has amended the relevant management rule, owners are liable for the excess on claims for damage to their sections. The body corporate’s insurance policy will not cover household contents.
9. Will the scheme suit your lifestyle?
Remember that creating, amending or deleting a conduct rule requires the consent of two-thirds of the owners, so you can be sure that the rules express the norms and standards that the overwhelming majority of owners want to prevail. They say there are “only” three sources of conflict in sectional title schemes: pets, parking and people.
* Pets. A body corporate’s policy on keeping pets – dogs, in particular – will be set out in its conduct rules. It is not unusual for the body corporate to make keeping a dog conditional on obtaining the trustees’ written permission and to place restrictions on the types of dog that can be brought onto the property. When granting permission to keep an animal, the trustees may set certain conditions with regard to cleanliness and control. If you see animals on the property, don’t assume that the scheme is pet-friendly. A body corporate may have created a “no dogs” rule, but the rule could include a “grandfather clause” to enable residents who owned dogs before the rule was registered to keep them until their animals die.
* Parking. It is unlikely that a sectional title scheme will have sufficient parking bays to accommodate the vehicles of every resident. Trustees are under no obligation to find or create parking if there is a shortage. You buy into a scheme “as it is”, and the onus rests on you to ascertain whether there will be sufficient parking for your household’s vehicles. It is incorrectly assumed that if a scheme has visitors’ parking, these “spare” bays can be allocated to residents. Providing visitors’ parking is a town planning requirement, and each municipality has a formula that determines the number of bays a scheme must set aside for visitors’ cars. It would be unlawful for the trustees to allocate these bays to residents, although it is not unusual for trustees to allow residents to park there during “off-peak” times if the bays are not occupied by visitors’ vehicles. If you don’t have enough permanent parking, find out if such a concession is available and if it will suit you.
* People. All sectional title schemes are governed by the same laws and regulations, but the character and living environment of each scheme depends on the type of people who live there. It is a generalisation, but, unfortunately, one not without an element of truth, that tenants, particularly short-term renters, are less likely to play by the rules than owners who intend to remain in a scheme for a long time. The higher the ratio of resident-owners to tenants, the greater the probability that the scheme will be well run and conflict kept to a minimum. Owner-residents have a financial and personal stake in the scheme – after all, it’s their home – whereas buy-to-let owners’ only concern may be that their rental is paid on time. The profile of the residents in a scheme is often determined by where it is located and its facilities. A building near a university campus is likely to attract students; an upmarket scheme out in the suburbs will probably have an older age profile. If a scheme has a swimming pool or recreational facilities, you will probably be the odd one out if you insist on peace and quiet on Saturday and Sunday afternoons.
Levy: The amount an owner pays to the body corporate to cover the expenses related to the common property. Levies are normally paid in monthly instalments. They are based on the estimate of income and expenses for the financial year (the budget) adopted by the body corporate at the annual general meeting (AGM). A levy becomes payable on the passing of a resolution to that effect by the trustees. Within 14 days of the AGM, the trustees must advise each owner in writing of the amount due.
Special levy: Trustees have the authority to impose a levy over and above the normal monthly levy, if circumstances warrant. A special levy is supposed to be raised only for expenses that were not foreseen in the budget and that cannot be held over until the next budget.
Non-luxurious and luxurious improvements: Prescribed Management Rule (PMR) 33 sets out the levels of consent required for non-luxurious and luxurious improvements to the common property, but the rules do not define either of these terms. It is generally accepted that a non-luxurious improvement is an essential upgrade or addition, such as replacing rotting wooden window-frames with aluminium frames. A luxurious improvement is an addition or replacement for purely aesthetic or recreational purposes, such as installing a swimming pool. However, to some extent, the nature of the scheme determines whether an improvement is luxurious or non-luxurious. For example, in an upmarket scheme where each unit is linked to a common satellite dish, upgrading the system so that residents can have an HD-PVR decoder may not be regarded as a luxury. If the trustees want to effect a non-luxurious improvement, they must give all the owners written notice. This must include details of the proposed improvement, why it is desirable, what it will cost, how it will be financed, and the effect on levies. Any owner has 30 days from the date of posting of the notice to request that the trustees convene a special general meeting to discuss and vote on the improvement. If no such request is received, the trustees may proceed with the improvement. If a request is received and a special meeting is convened, the improvement can proceed only if the body corporate passes a special resolution to that effect. The trustees can carry out a luxurious improvement only if the body corporate passes a unanimous resolution to that effect.
Act in limbo: The Sectional Titles Act has been complemented by the Sectional Titles Scheme Management (STSM) Act and the Community Schemes Ombud Services (CSOS) Act. Both of these Acts were signed into law in 2011, but, when this article was published in January 2015, neither had come into operation, because the STSM is “twinned” with the CSOS Act, and the CSOS Act cannot take effect until the Community Schemes Ombud Service is up and running. The STSM Act will not replace the Sectional Titles Act entirely; the Sectional Titles Act will continue to govern the development, consolidation and sub-division of the “bricks and mortar”, while the STSM Act will govern how the body corporate must manage the scheme. The ombud service will provide a dispute resolution mechanism for residential arrangements involving shared ownership that will obviate the need to go to court or arbitration.