Amendments to rules have sectional title owners worried

The interests of sectional title owners could be jeopardised by two recent amendments to the regulations under the Sectional Titles Act (STA).

One amendment means that owners can now attend and speak at trustees' meetings only by invitation, while the ambiguous wording of the other has opened the door to disputes over levy increases.

The amendments became effective on August 1.

When the STA came into effect in 1986, the accompanying regulations included a number of annexures, including Annexure 8, better known as the Prescribed Management Rules (PMRs).

Sectional title experts are scratching their heads over the correct interpretation of a new rule that authorises trustees to increase levies at the end of a body corporate's financial year. One interpretation could enable trustees to impose huge increases on owners.

A sectional title scheme must hold its annual general meeting (AGM) within four months of the end of its financial year. The body corporate should approve a budget, and the trustees must set the levies so that there will be sufficient income to meet the budgeted expenditure, plus make reasonable provision for future maintenance and repairs.

One of the PMRs made provision for a body corporate to raise revenue in the period between the end of the financial year and the date of the AGM. PMR 31(4A) required owners to continue paying their contributions at the same level as during the expired financial year. The rule also gave trustees the authority, at the end of the financial year, to increase contributions by up to 10 percent to take account of expected higher liabilities.

In amendments to the PMRs in March 2013, PMR 31(4A) was deleted. Some commentators believe it was deleted by mistake.

The deletion not only removed the basis in law for owners to pay levies once the financial year had ended; it meant that trustees could not increase levies until the AGM had taken place.

Property lawyers suggested that trustees remedy the removal of PMR 31(4A) by, before the financial year expired, passing a resolution to raise a special levy that would run from the end of the financial year until the AGM. In effect, owners would continue to pay the same levies, but they would be classified as special levies. However, it was unclear whether trustees could require owners to pay more than they had paid in the expired financial year.

The Minister of Rural Development and Land Reform, Gugile Nkwinti, has restored the rule, now called PMR 31(4Aa), but the wording has been changed to read: "After the expiry of a financial year and until they become liable for contributions in respect of the ensuing financial year, owners are liable for contributions in the same amounts and payable in the same instalments as were due and payable by them during the expired financial year: provided that the trustees may, if they consider it necessary and by written notice to the owners, increase the contributions due by the owners by a maximum of 10 percent excluding capital expenditure to take account of the anticipated increased liabilities of the body corporate..."

The poor wording means that the provision in the rule that grants trustees the authority to increase levies is open to two interpretations:

           1. The trustees can increase the levies by up to 10 percent to cover operating, or running, expenses                only; or

           2. The cap of 10 percent applies only to operating expenses, whereas trustees can increase levies                  by any amount in order to cover "capital expenditure".

To complicate matters, neither the STA nor the regulations define or refer to "capital expenditure", and it is unclear how this term should be interpreted in the context of a sectional title scheme.

Tertius Maree, an attorney who specialises in sectional title, says the last sentence of the rule seems to grant trustees the discretion to ratify or change the levy increase once the body corporate has approved the budget at the AGM, whereas they have no such discretion and must determine levies only according to the approved budget.

Maree says the wording of the rule will "probably give rise to uncertainties and disputes. It certainly does not simplify matters..."

PMR 31(4Aa) also does not specify how much written notice the trustees must give owners if they decide to increase the levies. However, PMR 31(3) states that, within 14 days after each AGM, the trustees must advise each owner in writing of the levies that will be payable by him or her during the ensuing financial year. Therefore, trustees could regard 14 days as the minimum notice period.

Trustee meeting: right to attend withdrawn

Sectional title owners are dismayed by an amendment to the Prescribed Management Rules (PMRs) that means they are no longer entitled to attend and speak at trustees'meetings.

PMR 15(5) stated that any owner in a sectional title scheme was "entitled" to attend and speak at a meeting of the trustees of the scheme, although the owner could not vote at the meeting. The rule has been amended to state that an owner may attend a trustees' meeting "on invitation". The amendment does not specify who must extend the invitation."

The amended rule also no longer includes the phrase "and speak", which could be interpreted to mean that, even when an owner is invited to attend, he or she may only observe the proceedings."

Trustees have the authority to make important decisions without seeking a mandate from the owners - for example, raising a special levy - and prudent owners often attend trustees' meetings so they can monitor how trustees are managing the body corporate's money and property.

Sectional title expert Graham Paddock says the removal of the owner's right to attend trustees meetings means that, unless special general meetings are held, the owners now have only one assured right of participating in scheme administration: to attend the annual general meeting.

Personal Finance asked the Department of Rural Development and Land Reform why PMR 15(5) was changed, but no comment was provided.

Source : Personal Finance