Exploring Sectional Title Law, how your Managing Agent can Help with Compliance

The Sectional Titles Act, No 95 of 1986, is a cornerstone piece of legislation in South African property law, which governs the ownership, management, and control of Sectional Title Schemes. To this day, it provides a robust legal framework that regulates how these Schemes are established and administered.

The Evolution of the Law

Some may assume that a cornerstone law is static by nature, but this is not the case. For instance, when the Sectional Titles Schemes Management Act (STSMA) came into effect, huge portions of the Sectional Titles Act (STA) were removed. Since these two separate acts sound so similar, and cover very similar areas, it is easy for even experienced trustees and owners of Sectional Title properties to find themselves scratching their heads, wondering how these legal changes affect Schemes they opened seven years ago in 2016.

To keep things simple, let’s start by exploring the STA a little, and let’s see if we can make sense of the evolution it has gone through over the years.

Sectional Title Schemes are governed by four main laws in South Africa.  (Source Article)

These are:

• The Sectional Titles Act (STA) which regulates the ownership, letting and use of Sectional Titles Schemes in the country. Originally promulgated in 1971 and revised in 1984, this was the first and second generation of the law. Today, the chief focus of this act is on regulating the acquisition, division, transfer, registration, and establishment of section properties, and the establishment of sectional titles regulation boards.
• The Sectional Titles Schemes Management Act (STSMA), effective since 2016, sets out the functions and powers of Bodies Corporate. The STMA’s focus is on regulating management and operational requirements within a Body Corporate or Sectional Title Scheme. When the STSMA was put into law, most of the STA’s own regulations on management were stripped down, effectively letting the STSMA override the STA in those areas.
• The Community Schemes Ombuds Service Act (CSOMSA), formed alongside the STSMA, assists in dispute resolutions.
• And, finally, the Sectional Titles Amendment Act (STAA), which seeks to close loopholes and fill any other gaps that were spotted in the previous three acts. The STAA has been effective since 2020, and chiefly affects how Homeowners’ Associations, complex managers, and Bodies Corporate can play with Sectional Title Schemes.

Putting it simply, the consumer-related portion of the revised STA- the governance, the management, and so forth- was moved into the new STSMA.

This left the old act responsible only for the conveyancing related aspects- transfer, registration, acquisition, partitioning, and so forth. The intent behind the STSMA’s takeover in those areas was to streamline all necessary changes into legislation.

The STSMA and the amendments introduced in 2020 by the gap-filling STAA, then, together form the acts that govern the management of your Scheme once it is built or set up under the STA.

Note that, in the rare case where the STSMA or STAA does not cover a situation pertaining to management, yet the STA does, Section 10 (12) of the STSMA prescribes that “Any rules made under the original STA are deemed to be made under this Act”.

An oversimplified explanation of what this means in practice, is that the STSMA overrides the STA, except in cases where the STA covers something that the STSMA does not.

Even though it has been stripped down, the STA, as the foundational act for the STSMA, can still fill in any blind spots as needed. Of course, Section 10 (12) was first penned in 2016. From 2020 and beyond, the STAA takes precedence over both in areas that it covers.

With that context in mind, we can now proceed further.

The Sectional Titles Act

The STA defines a Sectional Title Scheme as the separate ownership of units within a building or complex, along with a shared ownership of common property. Applying to both residential and commercial properties, it gives people the opportunity to own a portion of a property rather than having to pay for the entire building.

As touched on earlier, this act provides the legal framework for the creation of Sectional Title Schemes, which involves the registration of a sectional plan with the relevant deed’s office.

This sectional plan needs to show all the units, as well as the common property, within the Scheme. Each unit is then given a unique sectional title number and can be transferred or mortgaged independently. This setup is what allows partial ownership of a building or complex to be regulated, managed and protected by the STSMA.

The Sectional Titles Schemes Management Act

Building on the above, the biggest impacts made by the STSMA are in:

1. Body Corporate rules

The STSMA puts significant emphasis on a Body Corporate’s obligation to maintain their Scheme’s buildings. This maintenance must be done through the use of a reserve fund to ensure that future costs are covered for long-term repairs, and that repairs to common property can always be carried out.

This act also sets out guidance for the collection of levies from the members of the Body Corporate to cover the common expenses and operating costs for the financial year ahead. These levies are paid into two separate funds: The reserve fund we just mentioned, which covers long-term maintenance, and the administrative fund, which handles the day-to-day, immediate running and operational costs.

To ensure that the funding for long-term costs is always sufficient, the STSMA requires no less than 25% of the budgeted annual levy to be set in reserve every year to avoid a legislated additional contribution to reserves equivalent to 15% of the annual levy.

Reinforcing this long-term responsibility is the Prescribed Management Rules that accompany the STSMA, which in part requires a Body Corporate to prepare a ten-year plan for the maintenance, repair, and replacement of the common property of a Scheme. The STSMA’s regulations and rules do not ask us to merely think one year ahead, but many.

2. Control over the finances of a Body Corporate

The STSMA imposes a clear requirement for the determination of the contributions to the above funds. It requires the contributions to be reasonably sufficient as opposed to being sufficient in the opinion of the Body Corporate. This prevents a Body Corporate from ever agreeing to shirk financial responsibility to care for and maintain its own Scheme.

It also sets out rules requiring the passing of special resolutions (refer blog: Participation in Decision-making) by the Body Corporate. These resolutions are to address various matters within the bounds of the STA, STSMA, and STAA, such as the buying, selling, and mortgaging of units within the Scheme (mostly STA), as well as the borrowing of any money and the letting of common property (mostly STSMA).

3. The promotion of openness and transparency

With the previous requirements mentioned, it nearly goes without saying that Bodies Corporate are also obliged to keep full and accurate books of account.

These books must contain the details of all income and expenditure by the Scheme, as well as hold records of all its assets and liabilities. This ensures that all pivotal financial information is retained, allowing members to gain meaningful insight into the financial position of the Body Corporate in order to make effective decisions.

Compliance matters within the STSMA

In addition to its other regulations, the STSMA sets out key areas of performance for Trustees. To ensure legal compliance, these Trustees need to manage the following:

Scheme Rules and Regulations

Sectional Title Schemes are governed by Scheme rules, which cover the use and management of the sectional units and common property by the people living there. It is, indirectly, a code of conduct informing how property may be considerately used. The rules are binding on all owners and residents within the Scheme and are enforceable under the STSMA.

To those who have not had to share space with wildly different people, the necessity of these rules might seem odd. However, whenever large groups of people from different backgrounds and personal preferences live together in a Community Scheme, all manner of situations can arise.

Typical everyday problems can quickly become a point of contention; the neighbours playing their music too loud, the constant barking of a dog, the problematic parking of a car owner, waste disposal messes, and other faecal matters just waiting to hit the fan.

Financial Management

Ensuring compliance for the administration of finances is a task that requires great trust. It also requires:

• The preparation of an annual budget for the maintenance and repair of the property.
• The collection and management of levies.
• The handling of arrears.
• The keeping of accurate records
• The facilitating of financial audits.

The intricate level of detail required is prescribed by the management rules set out in the STSMA and includes:

• Books of accounts, with bank account details for the administrative and reserve funds.
• Budgets and financial statements for the current and records for the previous six financial years.
• Contact details for every trustee, owner, and tenant.
• The minutes of meetings and resolutions.
• Details of consents and approvals.
• Written contracts that the Body Corporate is party to.
• All legal records and opinions.
• Copies of correspondence sent or received.

The annual financial statements and budgets must, by law, be shared with the owners at the Annual General Meeting for the collective property.

This is a key process that empowers owners to discuss the financial position of the Scheme they are in, as well as agree to favourable plans for future upkeep or development. This transparency and openness are vital for trust, as the Scheme’s income requires a levy charge based on the planned budget, and ultimately it will be the owners who pay these levies to fund these plans.

If an owner does not have a say in how their levies are used, or to what extent they will be levied, not only would their overall Scheme be contravening the law, but the owner in question will be less willing to continue participating in the Scheme’s upkeep.

Because financial management is so important, yet good stewardship is often in short supply, the STSMA allows for the use of contracted property management specialists called Managing Agents to run financial systems on behalf of the Trustees. This allows Trustees to focus more on other aspects of running their Scheme well, while having a specialist on board to manage the resources funding it all.

Managing Agents are nearly always a worthwhile investment to ensure the smooth financial functioning Scheme, enabling Trustees to do their work more efficiently and with greater responsiveness to the needs of their clients.

Maintenance and Repairs

Trustees fulfil this duty by coordinating maintenance activities, obtaining quotations for repairs- whether directly or through their Managing Agent- and ensuring that necessary maintenance contracts are in place so that the reserve fund can be put to active, responsible use when the time comes.

This obliges Trustees to proactively address maintenance concerns, liaise with contractors and ensure owners understand their compliance with changes and developments within the complex.

Permits, clearances, insurances, the interruptions of building work can quickly become headaches for all the residents of a complex or building, so it’s best for everyone if the Trustees anticipate and prepare for problems, rather than scrambling to react to a myriad of issues as they come up.

Insurance Requirements

Even with a healthy reserve fund, a Scheme isn’t considered legally viable unless it holds adequate insurance for the buildings and common property within its domain. Trustees must seek out suitable insurance policies for the property that has been entrusted to them. They are also required to carefully review the terms of any policy they consider, as ultimately they are the ones who will process any insurance claims on behalf of their Scheme.

At a minimum, the Trustees need to ensure the following:

• That the policy they’re reviewing covers the replacement cost of buildings.
• That the policy covers the replacement costs of common property

These objectives can only be achieved so long as the Trustees maintain a competent understanding of property values as well as any trends that may affect them. The more knowledge the Trustees have in this area, the more likely they are to find or negotiate a good deal. Obtaining insurance at reasonable rates can be difficult without this knowledge, particularly for older buildings or Schemes with unique features.

The Role of Managing Agents in Ensuring Compliance

 Earlier we touched on Managing Agents, also known as Property Management Specialists.

Now, there are many self-managed Schemes run by excellent, capable, and fully- independent Trustees. That said, for most Sectional Title Schemes, the benefits of including a reputable property specialist to assist the Trustees are great.

Competent, trustworthy specialists will supply your Trustees with their experience, offer property management insights, and advise on all manner of building services. Even with brilliant Trustees on board, it’s always a good idea for a Body Corporate to consider enlisting a specialist too.

Managing Agents can act as the administrative backbone of Sectional Title Schemes. They can perform all the complicated tasks described above far more efficiently than the layman Trustees. They can also ensure proper communication between relevant parties to ensure a proper decision-making process can take place.

They are also skilled at resolving disputes between residents and can take appropriate steps to remedy the situation, using or issuing warnings, enforcing fines, or pursuing legal action where required. Skilled Managing Agents can be a powerful asset to resolve disputes and restore harmonious living within the Scheme’s community.

Managing the payment of levies is important for the financial health of a Scheme, and it has to be run professionally. Managing arrears can lead to financial strain and difficulty meeting maintenance and repair obligations or funding property services. Managing Agents have effective debt collection strategies, letters and templates, negotiation skills and the insight to legal remedies to ensure legal administrative compliance of a Scheme.

Given the ongoing evolution of the legislation, as per our introduction,

Trustees are obliged to stay abreast of these changes. They (and the owners) can certainly benefit from expert advice on the interpretation and application of the relevant acts to their specific property and community.

Given the complexity of the responsibilities of Trustees and the nature of the role (unpaid, non-professional, part time) it can make great sense to retain the services of qualified property professionals.

Good Managing Agents will bring their property expertise, management ability and legal insight to the table and help Trustees to deliver their responsibilities properly, ensuring full compliance with the often difficult legal background governing your Scheme.

An Interesting read: Who is responsible to ensure body corporate compliance with relevant legislation?

Also read: Payment of sectional title trustees