Picture source: Gallo Images/Getty

By Roger Green

There can be no more shattering and calamitous event than for one’s home to collapse or be swept away with the loss of all personal belongings. This occurred to some homeowners during the floods in 2022.

The total or partial destruction of freestanding units in sectional title schemes revealed inadequacies in the sectional titles legislation. Neither the Acts nor the rules provide clear guidelines on how aspects of the catastrophe should be dealt with.

Section 17 of the Sectional Titles Schemes Management Act 8 of 2011 (the Act) deals with the destruction of a multi-unit building. Section 17(8) provides that if only one building is destroyed then the provisions of s 17 apply with necessary changes. The members are left to decide what changes.

Much hinges around insurance. Section 3(1)(h) of the Act requires a body corporate to insure the buildings for their replacement value. Rule 23(1)(b) of the Management Rules requires that the insurance policy specifies a replacement value for each unit excluding the member’s interest in the land; provided that any member may require the replacement value specified to be increased.

The body corporate prepares estimates of the replacement values for approval at a meeting of members. By virtue of r 23(2) a member is responsible for the payment of additional premiums should the member wish to increase the replacement value. Rule 23(1)(d) makes a policy enforceable by any holder of a registered mortgage bond. Typically, an insurance policy will insure ‘the body corporate and all individual unit owners and all mortgagees’.

Because the insurance policy is taken out in the name of the body corporate and because the proceeds of a policy are paid to the body corporate, disputes can arise between trustees and affected owners. Trustees tend to overlook s 3(6) of the Act, which provides that ‘the body corporate is, for the purposes of effecting insurance … , considered to have an insurable interest for the replacement value’ (my italics). If the body corporate is considered to have an interest, then it is manifest that the underlying insurable interest vests in the owner of the unit.

If an owner decides to remove the rubble, restore, or compact the ground and rebuild the unit then it is clear that the full proceeds of the policy for that particular unit must be paid to the owner. Section 3(1)(j) of the Act requires the body corporate to apply insurance money received to the rebuilding and reinstating of the buildings. However, differing views arise when a unit is not rebuilt or where there is partial destruction.

Section 17(3)(b) of the Act requires the owners to pass a resolution to authorise the application of the insurance money received, the payment of money to owners and the subsequent amendment of the sectional plan. Regrettably the section does not stipulate when payment must be made. Accordingly, an owner can be left without a home and without receipt of the insurance funds, which have been paid to the body corporate. That enables the trustees to argue that the full proceeds should not be payable to an owner to reimburse that owner for the destroyed home. It can be contended that the affected owner should be paid only the market value of the building and that the balance should be used to remove rubble from the site and restore the ground to its prior level. What happens to the balance of the proceeds once the restoration of the land has taken place? Some argue that the balance belongs to the body corporate. That could not be correct.

Once it is clear that an owner does not wish to rebuild a destroyed home and the insurance money has been paid out, certain steps should be taken immediately. The insurance company should be told to cancel the premiums payable on the destroyed buildings. The rates department must be told to cancel rates. The trustees should pass a resolution in terms of s 3(2) of the Act to exempt the owner from liability for further contributions, including special contributions in terms of s 3(3). It can be argued that the obligations of the owner continue until the sectional plans have been amended in the deeds office and the title deeds cancelled. That process could take many months and would be highly prejudicial to the traumatised owner. Legally an owner may still be a member of the body corporate until the title deed is cancelled but such owner should not have any further financial obligations.

After a decision not to rebuild has been taken, s 17(9) of the Act requires the body corporate to give notice to the registrar of deeds of the destruction of the buildings so that the plans can be amended and the title deeds cancelled. The section incorrectly refers to a unanimous resolution not to rebuild. That conflicts with s 17(1)(a) where the building is deemed to be destroyed ‘upon the physical destruction of the building’. The existing wording would require the members in terms of s 17(1)(b) by unanimous resolution so to determine. However, that section would require the consent of all bondholders.

Effect is given to s 17(9) by means of reg 31 to the Sectional Titles Act 95 of 1986, which provides for notification to be given in Form X of Annexure 1 to the Regulations. The regulation correctly refers to s 17(3)(a) and not to s 17(1)(b). Accordingly, the unanimous resolution required by Form X would be pursuant to s 17(3)(a), which deals only with the transfer of the interest of owners of sections, which have been destroyed.

Section 17(3)(b) of the Act stipulates that ‘the owners may pass such resolution as they may consider fit’ (my italics). Accordingly, the resolution to pay out affected owners is not a unanimous resolution in terms of s 17(3)(a). This is logical because one or two owners could block the resolution authorising payment of the insurance proceeds. However, the section should be amended to enable the trustees to pay affected owners without delay.

In terms of s 6(8) of the Act if an owner is adversely affected by a unanimous resolution, then that owner must consent to the passing of the unanimous resolution to make it effective. That could be a further hindrance. Professor CG van der Merwe in Sectional Titles (Durban: LexisNexis 2023) vol 1 at 14 – 205 lists resolutions, which must be passed unanimously. The payout of insurance proceeds is not included. Furthermore, s 39 of the Community Schemes Ombud Service Act 9 of 2011 (CSOS Act) does not provide for the ombud to make a ruling on an insurance payout. Accordingly, if a dispute were unresolved, a request could be made to the ombud to inquire whether the ombud was satisfied that the question could be dealt with. Or would the ombud decline an application for a ruling in terms of s 42(d) of the CSOS Act? The latter applies where the ombud was ‘satisfied that the dispute should be dealt with in a court of law’.

If there is a dispute concerning the amount to be paid, then as an interim measure the body corporate should be obliged to pay the owner the market value of the unit. Failure to do so renders the affected owner helpless with no home and no insurance money.

A further difficulty to be avoided is that the unanimous resolution should record that the buildings were physically destroyed in accordance with s 17(1)(a) read with s 17(3)(a)(ii) and not that the buildings are ‘deemed to be destroyed’ as that wording in terms of s 17(1)(b) would require the consent of all bondholders in the scheme. An unnecessary, time-consuming, and expensive exercise.

When a unit is not rebuilt the removal of the bricks, tiles and mortar comprising the destroyed home could be an expensive task. Access to the site might be difficult. It may be necessary to construct a roadway to enable a front-end loader and trucks to get to the site. Portion of the proceeds of the insurance policy will be applied towards such costs including professional and other fees. Contracts for restoration of the land should be concluded by the trustees only after consultation and agreement with the affected owner. Pragmatism and compassion need to be exercised by the trustees. The work contracted for should be limited to the restoration of the site of the demolished home and not include other work for which the body corporate is responsible. A factor to be considered is whether a garden area adjoining the destroyed unit was common property and not an exclusive use area.

The proposition that an affected owner is entitled to payment only of the market value of the unit cannot be supported. The disparity between market value and replacement value is indicative only of the current depressed property market. If a body corporate lays claim to portion of the proceeds of the insurance policy, then why should an owner pay insurance premiums based on the replacement value? An affected owner nonetheless must consider the costs of removing the rubble, restoring the land and all other associated costs, including the likelihood of special levies being raised to repair and restore common property in the scheme. A careful assessment may result in the owner accepting payment of a lower value.

Where there is partial destruction of a building, problems of a similar nature can arise, particularly if the roof requires repair or external walls need to be rebuilt. These, by definition, form part of the common property and trustees assert a right to supervise construction and require the use of materials to their satisfaction before agreeing to release funds to the owner or contractors. Trustees need to appreciate the pain, loss and trauma arising from partial destruction of a building. Discussions should be sensitive and reasonable.

In short, the applicable legislation needs to be reviewed, amplified, and amended.

Roger Green BCom LLB (UKZN) is legal practitioner at Cox Yeats Attorneys in Durban.

This article was first published in De Rebus in 2023 (Aug) DR 15.