The aim of this portion of the legislation amendment is to ensure schemes create “rainy day” funds and shield homeowners from the special levies that bodies corporate demand from time to time when major repairs or refurbishments take place.
“One of the new stipulations of the Sectional Titles Schemes Management Act is that schemes are now required to have a reserve fund, implied by the regulations to be maintained equal to 25% of the scheme’s total annual levy budget,” says Specialist Conveyancing Attorney, Peet van Rooyen, of Dykes Van Heerden Inc.
“Although the amendment to the Sectional Titles Schemes Management Act was signed into law this month, it was approved way back in 2011, and efficient, well-established bodies corporate will have taken advantage of the five-year gap to get ahead and begin accumulating the necessary surplus.”
The aim of this portion of the legislation amendment is to ensure schemes create “rainy day” funds and shield homeowners from the special levies that bodies corporate demand from time to time when major repairs or refurbishments take place.
Once-off special levies are usually hefty, and aren’t in most cash-strapped homeowners’ budgets, often plunging households into debt to service them. While numerous developments have already created their required level of reserves or are well on the way to doing so, Van Rooyen says there are also many schemes that have not used the grace period to add small top-up increases to annual levies, and homeowners in those schemes now face the prospect of substantial levy hikes next year while trustees play administrative catch-up.
“Not only are separate records, budgets and bank accounts mandatory for the general levy and the reserve fund; they must be independently audited every year by an impartial person or company not involved in the scheme’s financial administration.” In real terms, though, what does this mean for existing owners and prospective buyers of sectional title properties?
“The reality is that property owners could see their levies increase by up to 25% initially, until adequate reserves have been accumulated. This is in addition to the standard fixed annual increases required to cover the rising costs of maintaining the development,” says Van Rooyen.
“Once the reserve fund has been adequately established, provision has been made for lower contributions, but owners can expect reserve fund levies to be charged, unless the value of the reserve fund is equal to 100% of the scheme’s total levy budget.” Van Rooyen says regulation two of the act also stipulates that, if the reserve fund is less than 25% of the previous year’s maintenance contributions at the start of a new financial year, the owners in the scheme must add 15% to their total levy budget for the coming year as a contribution to bolster the reserve fund.
“If at the end of the financial year the remaining reserve funds are less than 100% but more than 25% of the value of the past year’s administration fund contributions, then the contribution to this fund must be at least equal to the repair and maintenance budget which has been formulated for the coming financial year,” says Van Rooyen.
“While the intent of the new regulations are laudable, their implementation and management require a whole new level of administration and accountability, and trustees will have to raise their game considerably to achieve and maintain compliance,” says Lew Geffen, Chairman of Lew Geffen Sotheby’s International Realty. “Not only are separate records, budgets and bank accounts mandatory for the general levy and the reserve fund; they must be independently audited every year by an impartial person or company not involved in the scheme’s financial administration,”
Geffen says trustees must also prepare a detailed written 10-year plan for the use of the reserve fund, and report back to owners annually on its progress and implementation and more often than not, this document will have to be prepared by an outside consultant with the necessary expertise at an additional cost to owners. He says the complexities of implementing the new requirements are compounded by a very short window of 90 days in which to meet seven of the key requirements. “These include registering the scheme and lodging all governance documentation with the Community Schemes Ombud Service (CSOS), establishing a reserve fund and opening a separate bank account as well as compiling and submitting the new fund’s budget and financial statements,” says Geffen.
“Many of these steps are time-consuming and involve reams of documentation as well as a level of expertise that smaller schemes with more simply structured body corporates will struggle to complete in time.”
Arnold Maritz, Cape Town Southern Suburbs Co-Principal for Lew Geffen Sotheby’s International Realty, says it is now essential for prospective buyers to add scheme management to their list of priorities when choosing property, especially investors with budget restrictions.
“Sectional title levies cover various expenses such as insurance, administrative fees and the maintenance costs of the common property and onsite facilities, and it must be remembered that the more amenities there are and the larger the grounds, the higher the levy,” says Maritz.
“First-time buyers on a tight budget should therefore look for low maintenance schemes that are well run and maintained, and whose financial statements are in good order. Request a copy of the financial statements, and look for the presence of a reserve fund, as well as any adverse figures for non-payment by other owners in the complex.”
Maritz says sectional title properties will remain the more affordable option, and they will continue to attract first-time buyers. However, it is essential that prospective buyers don’t just look at the property and the purchase price.
“They have to take the new Act and its financial implications into consideration when calculating their budgets and decide what they can afford in the long run, including any substantial levy increases,” he says. “There is a very apt Afrikaans phrase that applies here, which is that sometimes ‘goedkoop is duurkoop’, or directly translated, buying cheap initially doesn’t always cost less long term.”
He says it’s also a good idea to compare the levy for the subject property with those in similar complexes nearby on a “per square metre” basis as this will help to establish a balance between the lowest levy payable versus the expected capital return on the investment. Van Rooyen says while it may be daunting, especially for schemes that have only just begun the process, it must be borne in mind that the homeowners are members of the body corporate and in terms of their governing rules as prescribed by the new regulations, they have to approve the annual administration and reserve fund budgets.
“So whilst increases may be unavoidable for many schemes, the trustees cannot just increase the levies arbitrarily. Home owners are not entirely powerless here; they do have a voice,” says Van Rooyen.