Understanding reserve levies in Sectional Title Schemes

Reserve levies play a crucial role in the financial health and long-term sustainability of sectional title schemes. Whether you own an apartment, townhouse, or another type of sectional title property, reserve levies ensure that your scheme can adequately plan for future repairs and maintenance without placing undue financial strain on owners. Understanding how reserve levies work, why they are important, and how they are calculated can help property owners protect their investments and avoid unexpected costs.

 

 

A reserve levy is a portion of the total levies that property owners in a sectional title scheme contribute to a reserve fund. This fund is used to cover the long-term maintenance and repair needs of the common property in the scheme. Unlike the operating budget, which covers day-to-day expenses such as utilities, cleaning, and minor repairs, the reserve fund is intended for major repairs or replacements that occur less frequently, such as roof repairs, painting, or replacing plumbing systems.

 

The concept of reserve levies has gained importance with the introduction of laws requiring sectional title schemes to have a minimum reserve fund. In many jurisdictions, including South Africa under the Sectional Titles Schemes Management Act, 2011, this fund must be adequately maintained to prevent schemes from falling into financial disrepair.

Why Are Reserve Levies Important?

 

1. Financial Planning and Stability Reserve levies help ensure that a sectional title scheme can meet its long-term maintenance obligations without needing to rely on special levies or emergency funding. Having a well-funded reserve account allows the body corporate to plan for predictable and necessary expenses, such as repainting the building every few years or replacing the roof after its useful life has ended. This proactive approach to financial planning ensures the scheme remains in good condition and avoids sudden financial shocks to owners.

 

2. Avoiding Special Levies Without a sufficient reserve fund, sectional title schemes may need to impose special levies on owners when significant maintenance work is required. Special levies can be large, unexpected expenses that put financial strain on individual owners. By building up a healthy reserve fund through regular reserve levies, the body corporate can avoid having to raise these emergency funds, thereby providing more financial predictability for all owners.

 

3. Protecting Property Values A well-maintained sectional title scheme not only improves the quality of life for its residents but also helps maintain or increase property values. Poorly maintained common areas or neglected repairs can lead to deteriorating property values, making it harder to sell or rent units in the scheme. By contributing regularly to a reserve fund, owners are investing in the long-term appeal and value of their properties.

 

 

The calculation of reserve levies is typically based on the specific needs of the sectional title scheme and is informed by a formal maintenance plan. This plan is a legal requirement in many countries and outlines the expected maintenance and repair needs of the property over a period of at least 10 years. The maintenance plan should take into account the current condition of the common property, the expected lifespan of major components (such as roofs, plumbing, and electrical systems), and the estimated costs of repair or replacement.

 

Once the maintenance plan is in place, the body corporate will calculate how much needs to be contributed to the reserve fund each year. This amount is then divided among the owners based on their participation quotas (usually linked to the size of their units) and added to their monthly or annual levies.

Some laws require that sectional title schemes maintain a minimum reserve fund amount. For example, in South Africa, the Sectional Titles Schemes Management Act stipulates that the reserve fund must be at least 25% of the scheme's annual operating budget. If the reserve fund falls below this threshold, the body corporate is required to increase the reserve levies to restore the fund to a healthy level.

 

 

Reserve levies are collected and managed by the body corporate, which is responsible for ensuring the money is used appropriately and only for its intended purpose-long-term maintenance and repairs. In some cases, the reserve fund may be kept in a separate bank account to ensure transparency and prevent it from being used for day-to-day expenses.

 

The body corporate must also provide regular reports to the owners about the status of the reserve fund, including how much money has been contributed, what maintenance has been done, and any planned future expenses. This helps owners stay informed and gives them a sense of security that their contributions are being managed responsibly.

 

 

1. Predictability of Costs One of the main advantages of reserve levies is that they provide predictability in the financial obligations of owners. Instead of facing unexpected large bills for major repairs, owners contribute smaller, regular amounts over time. This makes it easier to budget and plan for homeownership costs.

 

2. Long-Term Savings By contributing to the reserve fund, owners are essentially saving for future repairs in advance. While some owners may see reserve levies as an additional financial burden, they ultimately save money by avoiding the larger, more disruptive costs of special levies or emergency repairs that could have been anticipated.

 

3. Investment in Property Value Paying into a reserve fund is an investment in the longevity and value of the property. Well-maintained common areas, updated facilities, and a structurally sound building are all attractive features for potential buyers, helping to increase the overall marketability of units in the scheme.

 

Reserve levies are a critical component of financial planning in sectional title schemes. By contributing to a reserve fund, property owners ensure that their scheme remains well-maintained, financially stable, and free from sudden financial shocks. Reserve levies provide peace of mind, knowing that future maintenance needs are accounted for, while also protecting the long-term value of the property. Understanding how reserve levies work and why they are important is essential for all sectional title property owners.