Body corporate trustees and the abuse of power

Hijacking of sectional title schemes isn’t something found in movies – it’s a real threat. I’ve seen a few cases of these in the last few years and can have devastating effects on the body corporate – both financial and interpersonal. Cases where body corporate trustees abuse their power aren’t an isolated thing. We see this in cases such as The Blyde where Balwin defecated on the heads of all the owners (metaphorically speaking). with a majority shareholding, they were able to force through their agenda.

Why hijack a sectional title scheme or HOA?

If there’s money to be made – people will try and get a piece of the pie. While the Sectional Title Schemes Management Act (STSMA) does not explicitly prohibit trustees from earning a salary for their services, it imposes fiduciary duties on trustees, requiring them to act in the best interests of the body corporate and the sectional title scheme as a whole. As such, any compensation received by trustees must be reasonable and justifiable, and any potential conflicts of interest must be disclosed and managed appropriately. For more information, check out Section 40(1)(a) of the STSMA.

But just because there’s a law against illegal activities such as milking the BC for all its worth, doesn’t deter people from doing so. When trustees abuse power given to them by the owners, it can lead to issues including operational mismanagement, overpaying on services, improper/unnecessary services being rendered, higher levies and, essentially, a blatant disregard for the majority’s concerns. Let’s delve into the crucial points surrounding this alarming phenomenon and explore potential solutions.

How do body corporate hijackings happen?

So there’s this sectional title scheme where the owners take no interest in the block. As with normal people, they are more interested in living rather than the legal aspect of the block. At the annual general meeting (AGM) of the scheme, someone arrives out of the blue with knowledge superior to the owners. He asks all the right questions that make the owners doubt that the managing agent and trustees did their job. Naturally, he gets voted onto the board of trustees.

In short, the following tactics are used at the AGM:

• Voting:
  • Coercing with owners to vote for certain people
  • Manipulating proxies – For example, rental agents get proxies from landlords and can outvote other owners
  • Misinterpreting voting rules such as owners with arrear levies not having the right to vote, which they do have or who can be a trustee.
• Bullying and positioning themselves as a person with knowledge at an AGM
• Stirring and creating unrest among the owners

What decisions can trustees make?

Now that a trustee (and sometimes trustees!) are on the board, they can make decisions that will affect all the owners, including:

• Which contractors will be used by the body corporate
• Which managing agent should be used
• How the finances will be spent
• How to deal with homeowners that do not align with their goals

Financial mismanagement of the body corporate and trustees

We know that all laws have loopholes. For example, we know that trustees aren’t allowed to financially benefit from being a trustee without the knowledge of the other trustees (and owners) – both from an ethical, moral and legal perspective. But as part of the game, they find ways to funnel money to themselves through untraceable means such as quotes from friends and outright corruption.

Once the hijacking trustee(s) cease control through an AGM, they may mismanage funds, make unilateral decisions, and delay crucial matters to benefit themselves. For example, a R300 000 shaft plumbing pipe replacement becomes critical and only one quote is required.

In an extreme case, The managing agent pays out extra kickbacks to them for letters sent to owners. They faked the financial statements to hide their doings. The shocker is that no owner picked up on this except one – and he was silenced through intimidation.

Irregular quotes for operational work of the body corporate

In many cases, the hijacker is asked to be in control of getting quotes. Most body corporates add a directive that any amount above R 10 000 needs three quotes. So the gate breaks and needs fixing.

This is where the magic happens.

The trustee may strategically reveal the cheapest quote to one of his friends, John, who owns Gate Fixing Pty Ltd. John is then able to lower his price to get the job. And lo and behold – a kickback is funnelled through trusts, friends of friends and/or proxy companies.

Lawyers assisting rogue trustees

I recently discovered how trustees can use certain lawyers for gain and intimidation. the simplest case is where lawyers are appointed to handle the block’s legal affairs – and trustees get a commission based on the monies recouped.

I’ve heard of a case where the person received a fine because their car wasn’t parked 100% inside of the parking spot. Without taking extra time, a lawyer was appointed and a letter of demand was sent to the owner. The owner could not go to CSOS, as restrictions say if there is a legal case open, then they cannot assist. They had to pay for more lawyers to push back – but the body corporate had ‘endless’ fees they could pay through the cost of all the owners’ levies.

Non-Financial Hijacking Of Body Corporates

I have a friend who had an interesting issue. The chairman allowed himself special, executive rights, signed off by the other trustees. For example, he allowed himself to extend his property onto common property by building a patio and braai area. Though one could argue that the trustees could technically allow it, it’s not ethically right.

One of the worst cases I’ve heard of was when trustees changed the sections in the sectional title scheme to favour certain persons!

Trustees are in control of all communications to owners. They need to confirm the managing agent sends out the monthly invoices and communicates anything relevant to the owners. With all channels controlled by them, dissenting voices could easily be restricted and their position well protected.

Tactics of Intimidation and Control by Trustees

In (sometimes not so) extreme cases trustees protect their position by a reign of fear. They intimidate anyone who doesn’t align with their goals and victimise owners to achieve their goals. This could be done through assigning fines for no apparent reason, phone calls or other means. I’ve had my fair share when I was the chairman of a block of flats – where one of the trustees intimidated me. I resigned as chairman to avoid being in the firing line. However, I know that they resigned as well soon after, as they couldn’t handle the heat in the kitchen either.

In some cases, I’ve had DMs on X (Twitter) where owners would be forcefully removed from the AGM due to them ‘becoming aggressive’ – but this is just a ploy to meet their ends.

What can you do to avoid trustees’ abuse of power?

We know there are at least four cases at the Hawks at the moment that are being investigated. Unfortunately, CSOS can be quite useless at times that it is needed. Their legal right is also restricted, especially in this regard.

I recommend that you, as an investor become more involved in your investment – even if this is your primary residence. Here are some pointers:

• We, as owners also need to be at the AGMs:
  • Scrutinise the financial statements, 10-year maintenance plan and other documents supplied before the AGM.
  • Ask relevant questions. If you don’t understand what they mean with R 400 000 for ‘Maintenance’, ask to see the invoices – you can submit these queries before the time.
• You as an owner are legally allowed to attend trustee meetings. Exercise your right.
• As a heads-up, don’t invest in a property where a single owner owns more than 50% of the units.

Directives and restrictions on trustees

At the AGM, you need to list directives/restrictions on trustees. Putting down the right rules will make it more challenging for rogue trustees to milk the system:

• Decide on a reputable auditor who corroborates that the bank statements align with the invoices. If need be, audit the previous year’s statements again.
• Manage how much trustees can pay out without letting owners know:
  • Restrict the amount that cannot be spent unless a Special General Meeting (SGM) is called
  • Restrict the amount that can be spent on one contractor. If the amount is more, then they need to get approval from the owners via email or an SGM. For example, if more than R 30 000 is spent on a contractor, the trustees need to send communications out to all owners to state why. If more than x number of complaints is received, they need to get more quotes or change the contractor
• Order the trustees to send out the meeting notes after every trustee meeting, so that everyone can see what is being discussed.

The Blyde vs Balwin – a case study

Conclusion:

Owners need to understand their rights – and the legal options that they can exercise. Ideally, no body corporate should be hijacked – and all trustees need to be truthful and work for the better of the block. But in cases where trustees are not – owners need to stand together and fight the corruption.

It is not prudent to rip out a rogue trustee’s aorta with a bic pen.

But do exercise your legal right to outvote them.

Happy investing!