Trust in the body corporate of sectional title schemes
Understanding sectional title properties shouldn’t be complicated.
Big terms like body corporates and board of trustees shouldn’t scare you.
Though it sounds like I am making up words as I go along – if you plan to invest in property, there is a big chance that you will be looking at buying sectional title property first, before moving on to freehold properties.
Sectional title is a legal term where people own a section in a block of flats. Your section might be limited to a flat (or house or duplex unit) – and might include or exclude a parking spot.
It differs from freehold property in the sense that you often don’t own the land – how can you own the land if your flat is on the ninth floor?
Within a sectional title scheme, there are some big words that you would need to understand in order to know who owns what and what each person is responsible for:
- Sectional ownership – your flat, which you paid for is your section. This is not to be confused with fractional ownership. Fractional ownership would be where 10 people together own a percentage of a flat
- Common property – The stairs, pool or lifts are not owned by one flat, but by all the owners collectively.
- Some areas are common property with exclusive use – this might include your garden, parking spot or similar. It means that you have exclusive use of that section, yet the land is technically common property.
The body corporate
It is culturally acceptable to blame everyone else for things. For this reason, the government decided to rename ‘all owners’ of a sectional title scheme to the ‘body corporate’.
Though owners would vehemently deny this, it’s true that when you buy a flat in a sectional title block, you are becoming part of the body corporate!
As an owner, you own a share in the body corporate – in sickness and in health. In wealth and debt.
Some body corporates are more than a group of blame-shifting investors – many bring innovation and interesting solutions to problems such as safety and security, handling cash, day to day maintenance and generating cash flow.
I have seen a body corporate find innovative ways to supplement their income. I know of blocks that created an extra flat on common property that they rent out or/and offer the space on the roof for rent to mobile phone companies to place/install their aerials.
Fees and levies
Seeing that all owners take responsibility as the body corporate, everybody needs to contribute some money.
This is where levies come in.
Somebody needs to pay for the garden.
Somebody needs to pay to make sure that the fence is kept in good condition.
Levies are calculated by using the total expenses as the guide. The following could influence your unit’s levies:
- Size of the unit – larger units will have higher levies
- Number of units in the block could mean lower levies
The following can influence the amount you pay for levies:
- Emergency fund reserves
- Unplanned and emergency situations can call for special levies to be needed
- If maintenance is needed, the levies need to cater for it
- Utilities – If NERSA decides to give Eskom another 50 % increase, it will also affect your levies, as many common areas use lighting, electric fences and electric gates.
If you’re interested to learn more about monthly fees you need to budget for your investment property, check my post here.
The annual general meeting (AGM)
So 200 people need to take responsibility for what happens to their investment.
To make this easier, there is a yearly meeting for all the owners.
This is called the AGM (annual general meeting) – recently also called the yearly general meeting.
Before this meeting happens you will get a big envelope in the mail which will include:
- Audited statements (these need to be approved by the body corporate at the meeting)
- Letter from the chairman of the board of trustees (better known as the trustee report)
- The 10-year maintenance plan
- Updates about maintenance, legal aspects and other factors about the block
- Proposed levy increases
The following needs to be remembered during the meeting:
- A quorum (33 % of all owners, if there are more than 4 owners) needs to attend the meeting to make it a legally binding meeting
- The owners together will need to approve the previous meeting notes and financial statements
- Owners with outstanding levies are not allowed to vote.
- An owner can give you a signed form so that you can represent them. This is known as a proxy. Check here for some legal info on this.
If you own a flat in the block, it is in your interest to make sure that you attend these meetings.
The board of trustees
You can imagine that having 200 owners makes admin a nightmare!
To simplify this, the body corporate needs a few people they can trust to represent them.
At the AGM, the body corporate will vote for a small group of people (normally between 5 and 7) who the body corporate (owners) authorise to make decisions on behalf of the block.
These people are called the board of trustees.
They will often get orders from the owners at the AGM to look into certain issues such as parking or security.
The board of trustees will need to:
- Look after the common property – or hire someone to take care of it. This includes
- The exterior of the building
- Lights in common areas and water connections
- Security, gates and fences
- Make decisions on how to handle people that don’t pay their levies:
- Oftentimes I will ask a lawyer to go – on behalf of the body corporate – and collect the money following legal routes.
If you can be on the board of trustees, it will be hard work, but you will know what’s going on in your investment – and you will have a say about how these things will be handled.
Trustees and new sectional title schemes
If the properties are newly built and a board of trustees have been selected, they will be tasked to do a few things, which include:
- The board of trustees are ordered to create a bank account so that levies can be paid into that.
- It also needs to establish insurance for in-case the block burns down or is damaged in some other way.
All existing blocks should have these in place already.
Most sectional title schemes opt to hire a managing agent. The board of trustees appoint a managing agent that will manage the sectional title scheme’s finances, levies and general management. This frees up the trustees to focus on management, more than the nitty-gritty.
Managing agents tend to have a very good understanding of sectional title law.
Just remember, no one works for free.
The aim is to make money. And everyone wants some. Managing agents charge the owners directly for:
- Sending SMSs and letters to owners who are in arrears with their levies
- Sending communications about disturbing the peace or breaking the house rules of the body corporate
They will also charge the body corporate a management fee. Often times the managing agent will offer a full package with auditors, hidden fees, maintenance staff, cleaners and every possible thing that they can make money from you.
It’s the responsibility of the board of trustees to ask questions about the fees and costs.
I know of a block that recently fired their managing agent. There was a water leak for a few months. The managing agent didn’t raise alarm bells and paid the municipality the full amount every month. It cost the body corporate their full emergency fund of R 1 million!
It’s important that the trustees and the body corporate monitor to make sure that the amounts are worth spending.
You become part of the body corporate when you buy a property in a sectional title scheme
At the AGM all the owners will elect a board of trustees who will represent the body corporate.
It’s in your interest to attend these meetings.
Please pay your levies – don’t be a ****.
Now, with your new gained knowledge – go!