Sectional Titles Scheme Management Bill [B20 – 2010]: deliberations continued

Meeting report

Sectional Titles Scheme Management Bill
Mr Kwezi Ngwenya, Director: Framework Legislation, Department of Human Settlements took the Committee through the clauses of the Bill.

Clause 3 – Functions of body corporate
The Chairperson suggested the use of the word “maintenance” as opposed to the word “upkeep” that was presently used in the Clause.

The Committee agreed to the suggestion.

Mr R Bhoola (MF) asked if there were maintenance prerogatives for body corporates.

Prof Graham Paddock of Paddock’s Consultants responded that all common property had to be maintained by the body corporate. No part of common property was excluded.

Mr Bhoola said that in certain cases, body corporates were only responsible for certain areas.

Prof Paddock stated that a distinction between sections and common property needed to be made. The interior of a dwelling was part of a section and was not common property.

Mr T Botha (COPE) asked whether “repair” and “upkeep” had the same meaning.

Prof Paddock said that the two concepts differed.

The Chairperson suggested that the phrase “repair and maintenance” was used in the clause.  She requested that the Department provided Members with a document reflecting the changes suggested by the Committee.

Mr A Figlan (DA) referred to the term “rates and taxes” in clause 3(1) (a) (ii) and suggested that “and” be deleted.

Prof Paddock said that the intention was to place rates and taxes together as the two logically belonged together.

Mr A Steyn (DA) reminded the Department that the term “local authority” should be replaced by “municipality” as previously agreed by the Committee.

The Chairperson asked whether the body corporate constituted the owners of the sections.

Prof Paddock stated that that the body corporate was made up of owners. Usually the body corporate did not own the property but it could. The body corporate was not the owner of common property.

Ms Dlakule (ANC) asked if provision was made for the permission of the body corporate to be obtained where an owner as a member of the body corporate wished to proceed with renovations.

Prof Paddock stated that the body corporate had oversight over sections so as to prevent owners from undertaking renovations that had implications for other owners. For example, demolishing a load bearing wall would adversely affect the structure of the building.

Mr Steyn stated that the owners of property were responsible in their individual capacity for rates and taxes. The situation could however change if a municipality decided that the body corporate was responsible for rates and taxes.

Prof Paddock said that at present the body corporate was responsible for the payment of electricity, water, garbage removal and sewerage services. It was possible that the body corporate could become responsible for the payment of rates and taxes in the future.

The Chairperson felt that a percentage of payments by owners to the body corporate should be ring-fenced for maintenance purposes.

Prof Paddock said that the contributions made to the fund by owners were for operations and maintenance. A percentage could be applied to a reserve fund. The drafters of the Bill had considered a suggestion that provision should be made for an operational fund and a reserve fund. The provision setting out the percentage that should be set aside would be reflected in the Regulations.

Ms Bongiwe Lufundo, State Law Adviser, said that the Department had forwarded a suggestion to her in this regard. The Committee needed to consider the suggestion.   Prof Cornie van der Merwe of the University of Stellenbosch, acting as a consultant to the Department, had made the following suggestion:

“Article 3(1) (a) and (b):
To establish an administrative fund which is reasonably sufficient to cover the estimated annual operating costs.
To maintain a reserve fund, which is reasonably sufficient to cover the cost of future maintenance and repair of the common property.

Notes:
More detail of the required reserve funding can be dealt with in the regulations under the Sectional Titles Scheme Management Bill.
Consider adding orders to article 39 of the Community Schemes Ombud Service Bill to complement these provisions.”

The Chairperson suggested that the issue was flagged and that Mr Kwezi should continue with the briefing.

The Committee agreed to the suggestion.

Mr Steyn suggested that a definition was needed for “financial institution”, referred to in Clause 3 (1) (f).

Mr Bhoola asked what was meant by a “registered bank” in Clause 3 (1) (f).

Prof Paddock said that the terms used in Clause 3(1) (f) had ordinary meanings. In essence the provision spoke about where the fund account of the body corporate was held.  He read out the suggestion made by Prof Van der Merwe. Most body corporates did not have a reserve fund and he suggested that provision was made for a reserve fund.

The Chairperson said that the minimum percentage set for the reserve fund could be set out in the Regulations. The Regulations would in any event come before the Committee for consideration. The Committee could advise the Minister on the issue.

Mr Botha said that the suggestion by Prof Van der Merwe used the term “reasonably sufficient”. He asked who would decide on what was reasonable.  He felt that the body corporate should decide on what was reasonable. If a building was new, it might not need as much funds to maintain as an old building.

Prof Paddock disagreed. He said that there were new buildings that had high maintenance costs. The determination of what would be a reasonable amount could not be placed in the hands of a body corporate.

Mr Bhoola was concerned that the use of the term “reasonably sufficient” left a loophole. He said that it was the indigent communities that would suffer the most.

The Chairperson said that a minimum percentage would be formulated and would appear in the Regulations.

Mr Steyn suggested that the percentage contribution was linked to the value of the property.

Mr Botha was satisfied that the minimum threshold was to appear in the Regulations but the question remained how the amount of the minimum threshold would be determined. He wondered how the Minister would determine the threshold if the value of the property was not known.

The Chairperson said that the Department could ascertain the minimum market value of the property.

Mr Steyn agreed that the Minister should not be expected to value a property. Hence the amount should be based on a percentage of the value of the property. The Minister could determine the percentage.

Mr Botha said that all property was valued by municipalities. He suggested that the municipal property valuation was used as a starting point.

Ms Lufundo pointed out that the reserve fund was intended for the maintenance of common property.

Prof Paddock responded that was not necessarily the case. A distinction needed to be made between sections and common property. It did not only cover common areas but other areas as well.  The determination of a “reasonable amount” was a laissez faire approach. The insurance value of a building was a more reliable indicator than the municipal value. The minimum amount could possibly be a percentage of the insured value of the building.

Mr Bhoola was not convinced that the insurance value was better as many body corporates already charged exorbitant levies. The municipal value would be better.

Ms Dlakule asked if the owners themselves could determine what the percentage should be.

Mr Steyn stated that a solution had already been articulated by the drafters. If the insured value was used then a percentage of it could be used for maintenance. The Regulations could specify the minimum percentage.
Mr Ngwenya continued with the subsections in Clause 3. It was agreed that Members would interject on subsections where issues needed to be discussed.

Mr Steyn asked that “competent authority” referred to in Clause 3(1) (l) was defined. He asked who was considered to be the competent authority.

The Chairperson agreed that a definition of “competent authority” was necessary.

Prof Paddock suggested that the wording was changed rather than including a definition of “competent authority”.

The Committee agreed to the suggestion.

Mr Botha said that many body corporates simply left buildings in a state of disrepair. He asked if body corporates could be forced to maintain buildings by including something to that effect in the Bill.

Prof Paddock said that the Bill already placed an obligation on body corporates to repair and maintain buildings. Forcing body corporates to maintain buildings would not be appropriate in the Bill.  He suggested that another authority could be tasked with ensuring that body corporates maintained buildings.

The Chairperson said that there were practical considerations. She agreed with Mr Botha that the Regulations had to include provision to force body corporates to repair or maintain buildings on a regular basis, for example every 2 or 5 years.  Prof Van der Merwe had said that the reserve fund was created for the purpose of repair and maintenance of the property. If the body corporate refused to use the funds in the reserve fund to maintain the building, the ombudsman could be approached to intervene.  She asked the drafters to include provision to protect the rights of the owners.

Mr Steyn respectfully disagreed with the Chairperson. He felt that every little thing should not be regulated. The establishment of a reserve fund closed any loopholes.  A set period for repairs or maintenance could not be set as every situation was different.

Mr Bhoola shared the Chairperson’s sentiments. He said that people were being taken advantage of by body corporates. Competent persons had to sit on the body corporates.

The Chairperson remained adamant that the drafters should come up with a formulation to force body corporates to maintain buildings.

Mr Ngwenya continued with the provisions of Clause 3(2).

Mr Steyn asked if a definition for “trustees of a body corporate” should be included in the Bill.

The Chairperson had suggested that a definition of “trustee” was included in the Bill. She asked why trustees of body corporates could not utilise the funds collected to train themselves as this would empower trustees.

Prof Paddock responded that the funds of the body corporate had to be carefully spent.

Mr Steyn noted that trustees changed every year. It was up to the owners to choose competent trustees. There had to be some discretion left to the owners of a building. The Committee had to be careful not to over-regulate.

Ms Dlakule said that if the body corporate appointed the trustees, the trustees could appoint a service provider to provide training.

Mr Bhoola felt that the inequalities of the past had to be addressed. Competent persons should be appointed as trustees. If trustees had the required skills the inherent problems could be alleviated.

The Chairperson remarked that the Bill should provide for the appointment of competent trustees.  She did not think that a reference to the ombudsman was necessary.

Mr Reinesh Maqiba, Deputy Director: Entities, Department of Human Settlements said that the body corporate had a choice between the ombudsman and any other service provider for training purposes.

The Chairperson said that the reserve fund of a body corporate should provide for the training of trustees. Many individuals were unaware of the issues relevant to sectional title properties and it would be limiting if training was only done by the ombudsman. The owners needed training as well.

Ms Dlakule remarked that the Members needed to be educated on the issues that were dealt with in the Bill. She felt that provision for training should be made out of the reserve fund of the body corporate.

Ms Lufundo asked what the purpose was of training owners if the trustees performed the necessary functions.

The Chairperson felt that owners needed basic training on sectional title properties. The issue was making funds available for training.

Ms Dlakule said that if training was to be given to trustees, then the trustees could train the owners.

Mr Steyn agreed that the poorest of the poor should benefit. However, if the cost of training was borne by the reserve fund, it would result in an increase in the levies. He asked if the owners could afford the increase in levies.  The Committee intended to legislate for training to be provided but the owners would have to foot the bill. He suggested that estate agents, who received huge commissions, should provide training to a new owner of a sectional title property upon the sale of the property.  Other avenues should be explored.

The Chairperson asked if Mr Steyn agreed that trustees needed training.

Mr Steyn responded that he did not agree that trustees necessarily had to be trained.  Persons chosen as trustees had to be knowledgeable to a certain extent. For example, in certain cases accountants were appointed as trustees for the buildings that they lived in.

Mr Botha pointed out that the higher the costs, the higher the rental charged to the tenant. Ultimately, the ordinary person would suffer financially.

Mr Ngwenya said that the issues raised by Members made sense. He agreed that costs would increase if provision was made for training. One of the key functions of the ombudsman in the Community Schemes Ombud Service Bill was to provide training. There was a cross reference between the two Bills.

The Chairperson said that a specific provision for training should be included in the Bill before the Committee.

Ms Dlakule referred to the recovery of contributions from owners by the body corporate by way of court action and asked if there was another alternative available.

Prof Paddock said that court action was not the only option.  The ombudsman was another option available and was a cheaper option.

The Chairperson said that the ombudsman should be the first choice to resolve issues.

Prof Paddock referred to Clause 3(4) and said that the word “ensuing” should be replaced by “current”.

The Chairperson suggested that the word “application” was deleted in Clause 3(5).

The Committee agreed to the suggestion.

Mr Steyn asked for an explanation of Clause 3(6).

Prof Paddock explained that the body corporate was not the owner of the property. The provision gave the body corporate the right to insure property that it did not own. In order to obtain insurance cover, it was necessary to establish the insurable interest. The provision allowed the body corporate a basis to enter into an insurance contract.

Mr Steyn understood that the body corporate was the guardian of the property and had a legal interest to insure buildings.
 
Afternoon session

Clause 4 - Powers of bodies corporate
The Chairperson asked why the opening line of the clause did not include mention of the regulations as well as the rules.

Mr A Steyn (DA) responded that the regulations were addressed in the definitions part of the Bill under the definition of “this Act” which automatically included the regulations.

The Chairperson requested that “agents” referred to in Clause 4(a) should be specified by the number of units they were appointed to be responsible for if those units numbered more than ten.

Prof Graham Paddock, consultant to the Department, responded if such specification were to be made, it would be included in the prescribed rules. The Sectional Titles Act of 1986 did not have a section on managing agents at all.

Ms N Mnisi (ANC) asked if she would be insured at a higher rate if she improved the interior setting of property she owned.

Prof Paddock replied that should the member wish for her property to be insured at a higher value, then that could be arranged pending a formal request from her to her insurance company. This request would come at an additional cost to the owner of the property and that cost would not be paid off by the body corporate.

Mr T Botha (COPE) asked if he bought property via a loan from a bank, whether the bank would then automatically insure that property until the mortgage on that property was paid off.

Prof Paddock replied that banks did not automatically insure property. He added that when a person bought a Sectional Title property, a bank merely verified that there was sufficient insurance covering such a property upon purchase.

Mr Steyn said that Clause 13 of the Bill dealt specifically with insurance by owners and would cover whatever internal renovations or upgrading Ms Mnisi sought to carry out.

Mr R Bhoola (MF) said that it was important for people to protect their investments and that information was vital in the area of insurance.

Mr J Matshoba (ANC) sought clarity on Clause 4(e) which referred to the body corporate borrowing money to assist in the carrying out of its functions.

Ms D Dlakude (ANC) echoed Mr Matshoba’s question and asked if the body corporate borrowed money and interest charges were incurred, whether those charges would fall under the owner of the property’s responsibility?

Mr Bhoola added that it seemed that if money was allowed to be borrowed by the body corporate, there could be adverse legal implications and potential for financial problems as well.

The Chairperson queried why the borrowing money function could not be relocated to Clause 6 of the Bill on  trustees of the body corporate.

Prof Paddock responded that relocating that function to Clause 6 would worsen the existing situation under the Act. Borrowing without proper consideration had been a problem in South Africa and he advocated that the Committee consider adding the words “if so determined by special resolution” to Clause 4(e). This would then necessitate due processes before money was borrowed by the body corporate.

Mr Botha commented that he was still uncomfortable about allowing the body corporate to borrow money. It seemed as if the provision would create situations where financial mismanagement could arise and borrowing could go unchecked.

Ms Dlakude commented that it might be practicable to allow a new body corporate that did not have enough funds in their reserves to borrow money.

Mr Steyn said that he was comfortable with the provision as he thought the term ‘body corporate’ included owners of property. Adding in the term mentioned by Prof Paddock would be useful in that it would tighten up circumstances under which borrowing could be done. This would specify that borrowing could only be done under special circumstances.

Mr Ngwenya explained that under Clause 5 (Additional powers of bodies corporate) the function of borrowing money was one which the body corporate may exercise. The provisions did not make the function mandatory but provided for it when it was deemed necessary to borrow money.

Ms Dlakude suggested that the wording leading up to Clause 4(e) be altered to reflect that the borrowing of money was not a mandatory power/function but one which could only be exercised under specific conditions. She suggested this be done by using the word “may” instead of “to” in the sentence.

Prof Paddock responded that the wording had to be clear in the clause in order to clarify the powers and responsibilities of the body corporate.

Mr Matshoba said that the wording in the clause on borrowing made it seem like the body corporate was empowered to borrow money of its own volition without necessarily taking consideration of the situation prior to doing so.

Ms Dlakude sought further clarity on the clause dealing with borrowing money.

Adv Mlile Kraba, Parliamentary and Cabinet Liaison: Department of Human Settlements, said that the wording should be altered through the use of “may” as opposed to “to” as suggested by Ms Dlakude. This would make it clear that the ability to borrow money was dependent on situations and conditions. This provision was covered by Clause 4(i) which made it necessary for the body corporate to act in a manner which was in keeping with doing “all things reasonably necessary for the enforcement of the rules and for the control, management and administration of the common property.”

Mr Steyn said that it was important that the term “by special resolution” should be added in order to make it clear that the body corporate could only act if a situation necessitated action and if the move was approved by a controlling majority of the owners of a property.

Mr Steyn queried whether Clause 4(h) gave the body corporate and by implication the trustees the right to lease part of a common property to an individual. This raised the question of whether the provision should not also include a special resolution provision outlining conditions under which such leasing could be done.

Prof Paddock responded that the provision on leasing a common property could be granted by the trustees of a common property as long as the lease was under a period of ten years and once the lease extended beyond ten years then a unanimous vote by the trustees would be needed to grant such a lease. This would be cross referenced to Clause 5(1)(a) of the Bill relating to the powers of the body corporate.

Clause 4 was agreed to.

Clause 5 - Additional powers of bodies corporate
The Chairperson addressed the issue of what constituted a majority vote in Clause 5(1)(a) which was 75 % of the owners of a particular property. This would be the percentage that would constitute a majority when votes on special resolutions had to be taken.

Prof Paddock agreed that when a special resolution vote had to be taken, the number of owners / trustees, who voted for what would constitute a unanimous decision, would have to be considerably high.

Mr Botha asked whether Clause 5(1)(a) applied if a property was still owned by a developer.

Prof Paddock replied that it would not as there would be no body corporate. The body corporate only came into being where there was more than one owner of a property.

Mr Botha asked if a developer would be allowed to apply for building an extension to a property.

Prof Paddock replied that a developer would be permitted to do so in provisions provided in the Deeds Registries Act of 1937 and Sectional Titles Act of 1986.

Ms Dlakude asked what role the body corporate played in looking after a property.

Prof Paddock replied that the body corporate existed merely to ensure that the property was intact. However, the people who occupied a property had the responsibility to look after that property.

The Chairperson asked what role the body corporate played where the owner of a property was overseas and how the Committee could ensure that people tasked with work were doing their jobs.

Ms Bongiwe Lufundo, Principal State Law Advisor, replied that that was a personal issue between the owner and the tenant and the Committee could not play a role in that relationship.

The Chairperson disagreed because her view was that sometimes tenants were abused and exploited. There had to be a regulatory function to prevent exploitation of tenants.

Mr Botha said that once you became an owner of a property and rented out that property, the responsibility then fell to you and the tenant occupying the property to ensure that there was no exploitation or abuse of that relationship.

The Chairperson refused to accept that explanation and said that the Committee had a role to play in ensuring that the body corporate did not exploit tenants.

Mr Steyn said that tenants had the option of taking owners to the Rental Tribunal where internal issues involving the unit being rented were involved. For external matters, that was the responsibility of the body corporate. This was addressed in the proposed maintenance fund which was to be set up.

The Chairperson said that the legislation should ensure that the owners of property must be responsible for their property and maintenance of it even if they were abroad.

Prof Paddock said that that was stipulated in the Bill but not specifically.

The Chairperson wanted it clearly stipulated in the Bill with specific language addressing the issue.

Ms A Mashishi (ANC) asked which format a tenant could address issues pertaining to poor service from the owner of a property.

Prof Paddock replied that the Rental Tribunal existed for such disputes.

The Chairperson was adamant that a clause addressing the issue of owners looking after their property and looking after their tenants, was necessary and should be included in the Bill.

Mr Botha said that the Bill had such a provision.

Mr Bhoola said that the issue was addressed later in the Bill. He asked if people would be happy to reside in a block of flats where the overwhelming majority of owners did not reside in the country where those flats were located.

Prof Paddock replied that in practice such things never occurred because 75% of the owners either had to be present or represented to ensure that decisions about the property, affecting the tenants of that property, were taken.  

Mr Bhoola asked whether Prof Paddock was referring to proxy representation.

Prof Paddock answered that there could be proxy representation.

Mr Steyn tried to further explain to the Chairperson that there were enough provisions in the Bill to deal with disputes arising between the owners of property and tenants.

Ms Mashishi added that there was provision for tenants to sue the body corporate.

The Chairperson maintained her stance on the issue.

Mr Botha asked whether it was possible to alter the word “must” in Clause 5(1)(b) to “may” so that it was not necessarily a mandatory requirement.

Ms Lufundo said that the wording had been changed in the proposed amendments to the Bill.

Mr Ngwenya suggested that the words “body corporate” in Clause 5(1)(b) be changed to “owners of the property”.

The Chairperson agreed.

Clause 5 was agreed to.

Clause 6 - Trustees of the body corporate
Ms Dlakude queried Clause 6(1) which did not state when or where the trustees of the body corporate were appointed.

Prof Cornie Van Der Merwe, from Stellenbosch University acting as a consultant to the Department, said that it was regulated in the rules which were in Clause 9. The trustees were appointed from the first general meeting and the owners of a property decided how many trustees they wanted to have and then those trustees would have to be elected.

Ms Dlakude said that that explanation ought to be included in Clause 6(1) because it was not addressed.

Prof Van Der Merwe replied that the rules provided the foundation for trustees to be appointed.

The Chairperson said that wording should also be included in the clause stipulating the duration of the term of a trustee and the rotational nature of their appointments.

Prof Paddock said that traditionally that issue was addressed in the rules. This was done in order to keep the rules flexible so that they could be adjusted according to the type of property or scheme which they sought to address.

Mr Bhoola asked if the rules made provision for a vote of no confidence where large numbers of people had become disaffected with the body corporate.

Prof Paddock replied that the rules did not make such provision but it allowed for 25% of owners/bond holders who felt disaffected by the conduct of trustees, could decide to ask for a general meeting. At that general meeting, trustees could be removed if adequate notice of such a meeting was given.

Mr Steyn sought clarity on why the trustees were being acknowledged as the owners of the property in Clause 6 as opposed to the body corporate.

Prof Paddock replied that he guessed that people on the ground needed to sign on behalf of the body corporate should the body corporate be unable to tend to specific issues. They needed representation and the trustees embodied that representation.

Mr Steyn suggested that it should be specified that the trustees merely represented the body corporate and had signing powers on its behalf.

Mr Steyn suggested that the provision in question be checked by the State Law Adviser.

Mr Bhoola agreed with Mr Steyn.

The Clause was agreed to.

Clause 7 - Fiduciary position of trustees
The Committee agreed to this Clause.

Clause 8 - Proceedings on behalf of the bodies corporate
Prof Paddock suggested that “The Court” in Clause 8(3) be altered to “The Chief Ombud”. 

Mr Steyn suggested that since “The Court” in Clause 8(3) was being altered to “The Chief Ombud” then that change should be standardised throughout Clause 8.

The Chairperson said that the Department should make the necessary changes in the document which it would present to the Committee in the next meeting. The Department should also include when the body corporate could approach the Court.

Ms Dlakude suggested that the body corporate should be granted the right to approach either the court or the Chief Ombud.

The Chairperson agreed with Ms Dlakude and said that the provision should be clearer.

Mr Bhoola agreed with the Chairperson as the Chief Ombud would be “more incorporative of the poor person’s view” rather than the court. The Chief Ombud should be the first step before a body corporate went to a court of law.

The Clause was agreed to.

Clause 9 - Rules
Ms Dlakude asked where the rules would be transferred to as they were currently under the Deeds Registries Act of 1937.

Prof Paddock replied that the rules would fall under the purview of the Chief Ombud.

The Chairperson asked when the Committee was going to get a look at the rules.

Mr Steyn replied that the Chairperson was referring to the regulations which would be made by the Minister.

Mr Steyn said that Clause 9(6) governing the rules set out by the body corporate should be clearer.

Prof Paddock agreed with Mr Steyn and said that his recommendation was strongly supported.

Mr Bhoola said the provision should be clearer.

Mr Steyn queried what circumstances created conditions for the body corporate to create rules.

Prof Paddock responded that the body corporate could only create rules via special resolution or unanimous resolution. Only the body corporate could make rules and they had to be approved by the Chief Ombud.

Mr Bhoola said the rules would cover the problems the Committee sought to address.

Mr Steyn sought clarity on Clause 9(9) with specific focus on the expiration of dates in the clause.

Prof Paddock replied that these rules would be replacing the Schedule 1 rules which had been applicable under the Sectional Titles Act of 1987.

The Chairperson said that the Sectional Titles Act would no longer be relevant after this Bill was passed in direct relation to Clause 9(12).

Prof Paddock replied that pre-existing rules from the old Act would have to be brought forward and considered in the Bill for future reference and the aforementioned provision made that possible so it was necessary.

Ms Lufundo agreed that the rules would exist on a transitional basis until the Minister had brought those rules forward into the new Act, once it was promulgated.

Prof Paddock said that the details of how the rules would be brought forward were yet to be decided.

Mr Steyn suggested that “made” in Clause 9(11) be deleted.

The Chairperson approved.

Mr Ngwenya suggested that the word “deemed” be removed from Clause 9(12).

The Chairperson approved.

Clause 9 was agreed to by the Committee.

Clause 10 - Effect of quotas and variation therefore
Mr Steyn proposed that “prior written consent” be added to Clause 10(2)(b).

The Chairperson approved.

The Clause was agreed to.

Clause 11 - Expropriation of common property
Mr Steyn advocated that a time period be placed on the distribution of remuneration monies as covered by Clause 11(2).

The Department took on the comment and the period would be discussed at the next meeting.

The Clause was agreed to.

Clause 12 - Duties of owners
The Clause would be further discussed at the next meeting of the Committee dealing with this Bill.

The meeting was adjourned.