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Sectional Titles Amendment

23 June 2005

I attended the first briefing of the Committee in Parliament and advised Members on problems with the wording used in the first draft. The draft Bill was subsequently amended twice before being passed by the Committee.

The Sectional Titles Amendment Act of 2005 will seek to eliminate legal uncertainty and interpretation problems by amending the definition of "Exclusive Use Area" to remove a reference to one of two sections dealing with exclusive use rights, section 27. I believe that, rather than removing the reference to section 27 the words, "or section 27 A" should have been added to the definition.

Parking bays, gardens, servant's quarters and garages are commonly designated exclusive use areas. These areas are part of the common property, which is jointly owned by the owners of sections in a sectional scheme in proportion to their participation quotas. A unit comprises a section together with the aforementioned joint ownership of common property. The section is the individual flat or town house that one owns. Participation quotas are calculated by dividing the extent in square metres of the section by the total extent of all of the sections and expressing this to the fourth decimal place. Importantly it is the total of the sections, not the units so it does not include the extent of the common property.

As exclusive use areas form part of the common property one does not own the area, merely the right to use it to the exclusion of others. Section 27 rights are deemed in terms of section 27(6) to be rights to urban immovable property and one can raise a loan by registering a mortgage bond over an exclusive use area that is created in terms of this section. The amendment extends this to include rights of lease, personal servitude of usufruct, usus and habitatio.

These are what is known as limited real rights in immovable property as they fall short of the right of ownership, but are nevertheless similarly protected by registration at the Deeds Office.

The law recognises that only owners of units in a scheme may own rights to exclusive use of parts of the common property (of which they are joint owners). The Act goes so far as to stipulate that if the developer of a scheme still owns rights to exclusive use areas after the last unit is sold he ceases to be a member of the body corporate and thus forfeits these rights to the body corporate.

There is room for concern that the membership may open up the possibility of non-members of the body corporate owning rights over property that is not owned by them jointly with the other members. This could have been avoided by a provision in the amendment, but it appears that this opportunity may have been missed.

Section 27 A rights are another thing altogether. These rights do not result in an amendment to the sectional plan, but are created in terms of the management rules of the body corporate. The section specifically states that these rights do not constitute rights to urban immovable property and that the provisions of section 27(6) do not apply. It follows that this amendment should have no effect on section 27 A exclusive use areas.

When an owner wishes to extend the boundaries of his or her section, perhaps by enclosing a balcony or walling in a patio, a strict procedure must be followed. A special resolution of the body corporate must authorise the changes, the sectional plan will have to be amended and, if the extension increases the participation quota of the unit by more than five percent then the permission of all of the mortgagees of units in the scheme must be obtained in writing. The amendment increases the threshold to ten per cent.

The amendment then goes further to make an unnecessary change to the words, "section or sections". It does not make a difference whether one or more sections is increased because the participation quotas are relative to each other. It is not the extent in square metres of the increase, but the extent relative to the total extent of all the sections. The total participation quotas always add up to 100%, or 1 to be technically correct.

Developers who are tardy about complying with the requirement of convening an inaugural meeting of owners within 60 days of the registration of the first unit in the scheme should sit up and take notice of an amendment to section 36(7)(a) of the Act, which also requires them to provide owners with the following documents at the meeting: a copy of the sectional plan; a municipal certificate showing that all rates have been paid; and proof of income and expenditure up until the date of establishment of the body corporate.

The body corporate comes into existence as soon as the first unit is registered in the name of its new owner. Currently the penalty for non-compliance is a paltry R1000.00. The threat of imprisonment for a period of up to two years now looms. In spite of emotional calls from ANC and DP members of parliament for the period to be increased to five years it seems we will have to be satisfied with two.

In terms of the Adjustments of Fines Act this equates to a R50 000 maximum fine - fifty times harsher than the current penalty. Developers should keep reading because a further provision applies when they exercise a right to extend a scheme in terms of section 25 of the Act.

Immediately after completion of the first unit in an extension, the developer will now have to immediately apply for the registration of the relevant plan of extension. Should this not be done within ninety days the developer will be liable to the body corporate for levies. Currently he technically cannot be obliged to pay until the plan is registered. No clearance certificate in terms of section15B(3)(a)(i)(aa) will be issued unless the amounts payable to the body corporate have been paid.

In other words the developer will not be able to sell any more units as he will not be able to transfer them into the buyer's name. Prospective buyers should be aware of this.

Finally, the provision in the amendment that sectional title practitioners were most excited about is the amendment to section 46 that would have taken away the possibility of being held liable for the unpaid debts of one's neighbours.

When a body corporate is unable to pay its debts and a creditor, such as a local authority, takes judgement against the body corporate, all of the members are jointly liable for the debt even if they have duly paid their share thereof.

The first draft of the Bill provided that as long as they had paid all amounts "due" to the body corporate themselves, they could not be joined in court proceedings and held liable. The only problem with this was the wording. "Due" should have read "Due and Payable". A levy for the full financial year is due when a resolution to this effect is passed by the trustees subsequent to the Annual General Meeting. It is usually, however payable in monthly instalments.

As it stood an owner would have had to pay his or her levies for the full financial year before being protected by the amendment.

The provision has, however, been changed to such an extent that it now requires the owner to have paid a contribution required by the body corporate in respect of that particular debt. This change was introduced by Voyager Property Management (a loan financier) and Graham Paddock (possibly soon to be the ombudsman for sectional title).

How are we to distinguish between money paid towards a particular creditor when an owner is in arrears? Owners pay levies in terms of section 37(1). The levy is paid in a single amount. It would be an administrative nightmare to try and split the levy up into payments towards each individual item each month. What would happen where the owner was in arrears and the body corporate argued that the payment must first be allocated to arrears? Why has such an equitable and simple provision been complicated in this manner? The feeling in the sectional title community had been that local government would insist on being excluded from the provision.

Is there perhaps more to the change than meets the eye?

Who would benefit from the change? Certainly not the owners of units as suggested by Paddock/Voyager. It would be creditors such as the loan financiers who substitute one debt for another, thus being totally immune from the newly worded section.

It would have been in the interests of sectional title had the amendment been allowed to go through in such a way as was consistent with the stated objectives thereof.

This would not only be fair and equitable, but would serve as the best incentive ever to pay one's levies and alleviate the cash flow problems of countless bodies corporate.

The Bill has been passed by the National Assembly. It now goes to the provincial councils, where it will no doubt also be passed. Then it will be placed on the desk of Thabo Mbeki for signature. If anyone sees the President, please ask him not to sign it!

Russell Warner
Courtwell Consulting

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