Demanding your interest – a new era for sectional titles

March 1st, 2017

By Tertius Maree

A new era for sectional title schemes, in fact for ‘community schemes’ was introduced on 7 October 2016 with the publication (GN R1231 GG40335/7-10-2016) of the regulations for the Sectional Title Schemes Management Act 8 of 2011 and the Community Schemes Ombud Service Act 9 of 2011 (the Act), signalling also the coming into effect of these two pieces of legislation. To describe the new playing field now created as revolutionary is not entirely inappropriate. In this article, I deal with only a very small part of its new demands on trustees, managing agents and attorneys.

In terms of the standard set of Management Rules, which henceforth applies to all new sectional title schemes and to a limited extent to all existing schemes, the rate of interest recoverable in respect of unpaid levies is capped:

‘21(3) The body corporate may, on the authority of a written trustee resolution –

(a) …

(b) …

(c) charge interest on any overdue amount payable by a member to the body corporate; provided that the interest rate must not exceed the maximum rate of interest payable per annum under the National Credit Act (2005) Act No 34 of 2005), compounded monthly in arrear.’

Prior to the final publication of the Regulations, a draft, published for comment, equated the maximum rate to the rate as per the Prescribed Rate of Interest Act 55 of 1975. Such rate has seldom been adjusted and is currently 10,25% per year. The final provision in the Management Rules provides for a maximum rate (formula rate) calculated not according to the prescribed rate of interest, but to a rate allowed under the National Credit Regulator (NCR).

For trustees to determine what the maximum rates are – which they are entitled to implement against arrear levies (levies rate) – they need to determine the NCR category. This would be the rate for ‘incidental credit agreements’, being 2% per month. The applicable levies rate may then be compounded monthly in arrear. The formula rate may of course change from time to time.

The question arises what happens when the formula rate changes after the trustees have determined the rate applicable to arrear levies, or even after an action has been instituted against an owner for arrear levies and interest? If the trustees have fixed the levies rate correctly, at the time of determination of the levies, such rate will remain until the rate is again determined by the trustees after the next annual general meeting (AGM).

What is, therefore, important to keep in mind is that:

  • Both the levies and the levies rate may only be determined by the trustees at a meeting of the trustees, and not by the members at a general meeting.
  • Levies, as well as the levies rate may only be determined once a year, after each AGM.
  • When determining the levies rate the trustees must take cognisance of the current provisions of the NCR.

Why do I state that the levies rate may only be determined once per year? Nothing obvious will be found in the Regulations or in the Act itself to support this view. However, it could not have been the intention of the legislature to allow trustees to adjust the levies rate on an ad hoc basis. By allowing the trustees to apportion the levies rate selectively, could lead to results, which may be seen as vindictive in certain circumstances and not in line with constitutional principles.

When action is taken or a demand issued against a levies defaulter, one then only has to take cognisance of the levies rate determined by the trustees in respect of the current year. That is, however, if the arrears to be collected are only in respect of the current (financial) year. I put ‘financial’ between brackets, because as is known by trustees and managing agents, the financial year does not necessarily coincide precisely with the 12 months from the date of determination of the current levies until its recurrence after the next AGM.

Having considered all of the above complications, it would be advisable for the trustees to rather determine a conservative levies rate, which could be re-imposed annually without risk of exceeding the formula rate. In ‘normal’ circumstances this should not be problematic, but it could become a problem if an agreement is entered with a levies financier by whom a specific, higher rate of interest is required.

This issue invites some comment on the legislature’s seeming objective underlying these provisions, namely, to protect levy debtors against excessive interest liabilities, as evidenced by the earlier proposal that the levies rate be equated to the prescribed rate of interest.

The relationship between a sectional title body corporate and a levy defaulter cannot be compared to the relationship between a creditor and a debtor in the ordinary course of commerce. The body corporate consists of an association of unit owners, of which the debtor is one. Financial pressures experienced by the debtor could similarly be endured by his co-owners who nevertheless pay their levies regularly. Non-payment by levy defaulters often result in shortages, which may have to be made up by the regular payers, if necessary by means of special levies. The interest on any loan, which may have to be procured to make up the shortfall will inevitably be at a high rate of interest and any undue indulgence extended to levy defaulters can accordingly not be justified.

In terms of Management r 25(2) the trustees are required to deliver a final demand before they are entitled to take action for recovery of arrear levies.

Are there any additional requirements as to the content and format for such demand with which it must comply and which affects its legality in order to serve as the basis for collection procedures?

A 2013 judgment by Davis J in the Western Cape High Court in Combined Developers v Arun Holdings and Others 2015 (3) SA 215 (WCC) illustrates how intricate a matter as simple as a demand for payment could become.

As it happens, this matter, although not involving sectional title law, also involved the calculation of interest with reference to a rate external to the contract, namely the repo rate. In this case the contract between the parties stipulated that failure to pay a due amount within three business days after receipt of a written demand, would constitute an ‘event of default’ entitling the creditor to call up the full loan plus interest. The demand forwarded by the applicant to the respondent by e-mail stated: Please see below and attached. We have not yet received payment. Will you correct the situation and if payment was made, please forward proof of payment (paraphrased).

The respondent reacted to this immediately by paying the capital amount due, however, without the additional mora interest, which had accrued from the due date, which amounted to only R 86. The applicant then proceeded to claim the full balance of the loan, being R 7,6 million.

However, the ‘demand had not set out the exact amount due’. Several further aspects, including constitutional principles were considered, but for present purposes what is important is that the wording of the e-mail message presented as a formal demand could not be regarded as being an unequivocal demand for a specific amount due. The exact amount payable was not mentioned and the text was not unequivocal about payment. Accordingly the action did not succeed.

It is of interest and somewhat perturbing to note that the wording of Management r 25(2) does not specifically require that the amount of the arrears must be stated in the demand, in comparison with very specific requirements regarding the interest due.

Trustees and managing agents, as well as attorneys collecting arrear levies on behalf of bodies corporate, would be well advised to note the principles highlighted in the Combined Developers judgment, and also to take care that interest claimed complies with the requirements of Management r 21(3)(c).

Lastly on the theme of recovery of arrear levies, s 3(2) of the Act determines as follows:

‘Liability for contributions levied under any provision of subsection (1), save for special contributions contemplated by subsection (4) accrues from the passing of a resolution to that effect by the trustees of the body corporate, and may be recovered by the body corporate by an application to an Ombud from the persons who were owners of units at the time when such resolution was passed: Provided that upon the change of ownership of a unit, the successor in title becomes liable for the pro rata payment of such contributions from the date of change of such ownership’ (my italics).

This is followed by a similar provision in respect of special levies.

The question arises about the phrase in italics. Must all levy recovery actions henceforth be instituted through the office of the Ombud?

There are two views on this, namely that, because no other option is mentioned, all procedures must be initiated via the ombud service. Probably the more correct interpretation is that s 3(2) provides an alternative to court procedures, as indicated by the word ‘may’.

The new legislative environment for community schemes is undoubtedly one in which many questions will still arise and participants will have to ensure that provisions of the Acts and regulations are well understood, in order to avoid the many pitfalls.

Tertius Maree BA LLM (Stell) is an attorney at Tertius Maree Associates in Stellenbosch.

This article was first published in De Rebus in 2017 (March) DR 26.