Buying a sectional title property
When purchasing a property, one assumes you own the structure and the surrounding erf within the walls that form the boundary. Make sure your property is full title or Sectional Title. To assure you ownership of a Sectional Title is secured by a title deed exactly the same as a normal house
described in a title deed, but the following is useful information and facts in regard to Sectional Title Units.
QUESTIONS THAT SHOULD BE ASKED BEFORE YOU BUY INTO A SECTIONAL TITLE SCHEME
When you become an owner in a sectional title scheme you automatically become a member of the body corporate, which consists of all the owners of the units in the sectional title scheme and the trustees appointed by the body corporate are responsible for the day-to-day management of the
sectional title scheme. This can ultimately affect what you can do with your property, how you can use and enjoy your property, and the demands that can be made on your finances.
In a perfect world, you would only buy in a sectional title scheme that was well run, financially sound, and had no major structural defects or maintenance problems and you would only buy the property once you had full knowledge of what you were letting yourself in for. Here are just some questions to ask before you buy into a sectional title scheme.
1. WHAT IS THE RULES OF THE SECTIONAL TITLE SCHEME?
The Sectional Titles Act defines the rights and responsibilities of the various parties who manages and lives in a sectional title scheme. These rights and responsibilities are also defined in the Prescribed Management Rules and the Prescribed Conduct Rules, which were issued under the Sectional Titles Act. The Prescribed Management Rules defines the rights and responsibilities of owners and the powers and functions of trustees, while the Prescribed Conduct Rules establish the norms and standards to govern how the residents will live together on the property.
Many body corporate’s do not make any amendments· to the Prescribed Management Rules, but most schemes have substantially added to or changed the Prescribed Conduct Rules. It is therefore important that you obtain a copy of the management and conduct rules before you buy into a
sectional title scheme, because these rules define the constraints that you will have to live with as an owner of sectional title unit.
2. WHAT AM I REALLY BUYING ON THE SECTIONAL TITLE PLAN?
When buying into sectional title, you will be the owner of a unit, which consists of a section and its undivided share in the common property.
A “section” is demarcated as such on a sectional plan and each section is defined by an imaginary line, called the median line, which runs through the middle of the walls, doors, windows, floor and ceiling that form the physical boundaries of that section. Sections are demarcated by solid lines. If the section includes an unenclosed area, such as a balcony or veranda, the division between the enclosed section and the open area will be demarcated with dashed lines. The only way to know for certain where a section starts, and ends is by inspecting the sectional title scheme plan. The sectional plan will also show if there are any registered exclusive use areas on the common property.
Accordingly, it is important to obtain a copy of the sectional title scheme plan before you buy into a sectional title scheme.
An “undivided share” means that no owner can claim ownership of a certain part of the common property. Your undivided share of the common property is determined by the size of the section that you own. This share, which is known as your participation quota, is calculated by dividing the floor area of the section (rounded off to the nearest square meters) by the total floor area of all the sections. The result will be expressed as a decimal fraction correct to four places. Your participation quota is important because it determines the following:
- The value of your vote at the general annual meetings of the body corporate;
- Your liability for levies (including special levies); and
- Your liability for body corporate debts.
3. DO I HAVE ANY RIGHTS TO EXCLUSIVE USE AREAS IN THE SECTIONAL TITLE SCHEME?
Exclusive use areas remain part of the common property, which means that the body corporate has the final say on what can and cannot be done on and with these areas. These exclusive use rights give an owner or a group of owners the right to use a part of the common property to the exclusion
of other sectional title scheme owners and residents and they entitle the body corporate to recover from the holder of the exclusive use area the costs associated with the upkeep of the area.
The first important thing you need to establish is what type of exclusive use right you will own.
1. A section 27 right is a registered right to an area of the common property that has been surveyed and is shown on the sectional plan. These registered exclusive use rights can be bonded, leased or made subject to servitude rights and can be enforced against another person by instituting legal proceedings. These rights are transferred or ceded by a notarial
deed and is usually created by the developer of the scheme.
2. A section 27 A exclusive use right is created in terms of the scheme’s rules, either the Prescribed Management Rules or the Conduct Rules. Exclusive use rights created by Prescribed Management Rules are more secure than those created by Conduct Rules. The rights created by the rules are not real rights in immovable property and will not appear on the sectional title scheme plan, although it should be shown on a scale plan that is included with the rules that created the exclusive use area. The rights are automatically transferred when the owner of the unit on which the right has been conferred sells his unit.
The second important thing you need to check is your monthly contribution to the exclusive use area.
You will be required to pay a contribution to the body corporate to offset the expenses associated with maintaining the exclusive use area, which include the provision of utilities and the cost of insurance. Exclusive use contributions collected from owners should only be used to repair and
maintain their exclusive use areas, but in many cases are treated like normal levies and end up paying for expenses associated with all the common property.
It is important to find out how the body corporate determines the contribution to an exclusive use area, whether all holders of exclusive use rights pay the same amount, even if their Exclusive use areas include substantially different amenities, and whether or not the contribution covers every expense associated with that exclusive use area.
Responsibility and liability for exclusive use areas is often dealt with in the rules, particularly if the exclusive use rights were created by the rules. The rules may make an owner directly responsible and liable for his or her exclusive use area or an owner may be responsible for maintaining the area while still paying a contribution to the body corporate. It is therefore important to check the rules to see what it says about the exclusive use areas of a sectional title scheme.
4. WHAT AM I REALLY PAYING FOR WHEN I BUY INOA SECTIONAL TITLE SCHEME?
A sectional title unit owner must pay a monthly levy to the body corporate to cover the expenses relating to the common property. The levy amount is based on an estimate of the incomes and expenses for the financial year which is adopted by the body corporate at the annual general meeting. Accordingly, it is important to find out exactly what the monthly levy is of the sectional title unit that you want to buy.
The body corporate is responsible for all expenses associated with the common property, except for those areas of the common property where owners have been granted exclusive use rights.
The fact that you never use a facility in the sectional title scheme is irrelevant; if it’s on the common property, you along with all the other owners are liable for its maintenance and repair, in proportion
to your participation quota.
If you are serious about buying into a sectional title scheme you should ask to be shown around the entire property and take the opportunity to take note of the facilities and the overall condition of the common property of the sectional title scheme. If you have already obtained a copy of the sectional plan, you will be able to ask informed questions about the ownership status of garages, storerooms and “private” gardens.
One way to find out if a scheme has persistent maintenance and repair problems is to obtain a copy of the trustees’ annual report. This report is one of the documents that must be sent to all members of the body corporate before the annual general meeting The law does not specify the level of disclosure required in these reports, but it is highly likely that they will reveal if a scheme has ongoing major repair problems, or if it is likely that a significant amount of money will have to be spent on maintenance in the near future. A lot can change in a sectional title scheme during a year, so you should also ask for copies of the minutes of at least the two most recent trustees’ meetings.
If you can’t see pre-paid meters, do not simply assume that the property will have meters to measure the electricity or water consumed in each section. In the absence of meters, a formula set out in the rules, your share of the costs of utilities will be determined by your participation quota, not your
consumption. It is thus important to find out beforehand how the account for electricity or water is calculated in the sectional title scheme you want to buy into.
5. WHAT WILL I BE PAYING ADDITIONAL TO THE LEVY ON SPECIAL LEVIES?
When a unit changes hands, the new owner becomes liable for a pro-rata payment of the ordinary levy from the date on which the unit is transferred.
In the case of an outstanding special levy liability it depends on who the registered owner was on the date the trustees passed the resolution to impose the special levy. If the seller was the registered owner, he is liable to settle the entire special levy, even though it might have been payable in instalments over a number of months. The seller and the buyer could agree that the buyer will take over the remaining special levy instalments, but the body corporate will have to be party to this agreement. If the buyer is the registered owner on the date on which the resolution is passed, he is
liable for the special levy.
A body corporate’s income from levies is supposed to be enough, not just for its operating expenses during the financial year, but also to enable it to build up a reserve fund for contingencies. The reality is that not many body corporate’s set aside funds that will be adequate for major future expenses; in fact, the monthly levy may cover only the predictable day-to-day operating expenses.
Special levies are supposed to be imposed only for unforeseen expenses that require immediate attention, but many trustees raise a special levy to pay for all major repairs and maintenance, because the ordinary levies are kept artificially low and budgets do not provide for a reserve fund.
In addition to the trustees’ report and the minutes of the latest trustees’ meetings, the body corporate’s most recent annual financial statements will enlighten you about your likely future liability.
If the scheme consists of 10 or more units, the financial statements must be prepared by an auditor.
The budget for the current financial year will probably be included with the financial statements. The financial statements and the budget will disclose what provision the body corporate has made and is making for future expenses.
The annual financial statements will tell among other things, the following:
- Did the body corporate collect all its income from levies, special levies and any areas of the common property that it rented out? An under-recovery of levy income is a warning sign that
the scheme may have a problem with arrear levies for certain owners
- Has the body corporate taken out any loans? This may be a sign that, because of poor budgeting or unrealistically low levies over many years, the body corporate has had to borrow money to pay for essential expenses.
- Does the body corporate owe money to its creditors, such as service providers and the municipality?
6. WHAT ALTERATIONS CAN I MAKE TO MY SECTIONAL TITLE SECTION?
You can extensively remodel the interior of your section without seeking the approval of the body corporate, but it is a violation of Prescribed Management Rules to carry out any alterations that will impair the structural integrity of the building.
If you want to enclose the patio or veranda, the level of consent will depend on whether the area forms part of your section or the common property (which includes exclusive use areas). You are not allowed to make improvements to, or erect a permanent structure on, an exclusive use area
without the approval of the trustees. Even if it does form part of your section, you will have to obtain the permission of the trustees, because according to the Prescribed Management Rules owners may
not do anything to their sections that is likely to prejudice the harmonious appearance of the building.
If the trustees grant permission, they will set the conditions for what the enclosure may look like. The “harmonious appearance” rule also means you cannot change the style or colour of exterior doors or windows without the trustees’ permission. You may not make even minor changes or affix anything to the common property without the consent of the trustees. This will affect whether you are able to install an awning, satellite dish or air-conditioning unit.
If the area forms part of the common property, enclosing it will amount to increasing the floor area of your section. The body corporate has to a take a special resolution to allow a section to be extended.
You will also have to submit a sectional plan of extension to the surveyor-general for approval. The participation quota of the scheme will have to be adjusted to take into account the extension. If the extension will result in the floor area of the section being increased by more than 10 percent, all
bondholders of sections will have to grant their consent.
7. WILL THE SECTIONAL TITLE SCHEME BE EXTEDED IN THE FUTURE?
A buyer should be informed whether the developer registered a right to extend to the scheme in 10-or 20-years’ time period. Disclosure of the developer’s right to extension should be contained in the Deed of Sale of the sectional title unit.
Adding to a scheme can substantially change the look and feel of a development not to mention the value of your investment. Developing a scheme further can also have financial implications that may not necessarily be in your favour. Although extending the scheme may increase the pool of levy-paying owners, the new phase may require more maintenance and repairs which may mean an increase in the levies of the sectional title scheme.
8. WHO IS THE MANAGING AGENT AND DO THEY HAVE SUFFICIENT FIDELITY COVER?
It’s likely that the trustees outsourced the management of the scheme to a managing agent, which means that other parties have access to the body corporate’s bank accounts.
A managing agent that collects and/or receives levies is deemed to be an estate agent, and as such, must be a member of the Estate Agency Affairs Board (“EAAB”). In fact, it is unlawful for someone who is not an EAAB member to collect a scheme’s money. EAAB membership means that the body corporate’s funds must be held in a trust account which will be protected by the EAAB fidelity fund.
The disadvantage of the EAAB fidelity fund is that a claim can proceed only once the people who stole the money have been sequestrated. Therefore, you should make sure that the managing agent has taken out its own fidelity insurance that covers every employee who handles the sectional title scheme’s money.
You should also check whether the managing agency operates a “bucket account”, which means the funds of all the schemes the agency manages are in one account, instead of each body corporate having a separate bank account in its own name. A dedicated account makes it much easier for the
trustees to keep a check on inflows and outflows of the money of the scheme. With a bucket account, the trustees depend on reports from the managing agent as to the body corporate’s financial affairs.
You should find out what measures the trustees have put in place to exercise control and supervision of the body corporate’s money.
Trustees and employees of the body corporate can also steal scheme money. Most sectional title insurance policies include cover against fraud and theft by trustees and scheme employees, but the limit is usually quite low (about R50 000). The trustees should put indemnity insurance on the agenda
of the annual general meeting, but it is the responsibility of the body corporate to decide whether or not to take out such insurance and, if it does, the extent of that cover.
9. IS THE PROPERTY INSURED SUFFICIENTLY?
The Sectional Titles Act requires a body corporate to take out an insurance policy that covers the buildings to their full replacement and not market value. This policy, which will cover the risks commonly associated with a residential property, applies to the entire property, not just the common
areas. Before the Annual General Meeting, there should be sent a schedule setting out the replacement values of each section.
In too many cases, the trustees simply increase the level of insurance in line with inflation each year and over time, this can result in the property being under- or over-insured.
If the scheme consists of more than about 1 O units, the property should be valued by a professional valuer every two to three years. Insurance premiums are included in the monthly levy. Unless the body corporate has amended the relevant management rule, owners are liable for the excess on claims for damages to their sections. The body corporate’s insurance policy will not cover household contents.
10. WILL THE SECTIONAL TITLE SCHEME REALLY SUIT MY LIFESTYLE?
It is really important to assess whether the sectional title scheme will really suit your lifestyle and whether you can live with the three main sources of conflict in sectional title schemes namely the three p’s which consist of pets, parking and people.
- Pets. A body corporate’s policy on keeping pets’ dogs, will be set out in its conduct rules. It is not unusual for the body corporate to make keeping a dog conditional on obtaining the trustees’ written permission and to place restrictions on the types of dog that can be brought onto the property. If you see animals on the property, don’t assume that the scheme is pet friendly. A body corporate may have created a “no dogs” rule, but the rule could include a “grandfather clause” to enable residents who owned dogs before the rule was registered to keep them until their animals die.
- Parking. It is unlikely that a sectional title scheme will ever have enough parking bays to accommodate the vehicles of every resident. Trustees are under no obligation to find or create parking if there is a shortage. The onus rests on you to ascertain whether there will be sufficient parking for your household’s vehicles. It is incorrectly assumed that if a scheme
has visitors’ parking, these “spare” bays can be allocated to residents. Providing visitors’ parking is a town planning requirement, and each municipality has a formula that determines the number of bays a scheme must set aside for visitors’ cars. It would be unlawful for the trustees to allocate these bays to residents, although it is not unusual for trustees to allow residents to park there during “off-peak” times if the bays are not occupied by visitors’ vehicles.
- People. All sectional title schemes are governed by the same laws and regulations, but the character and living environment of each scheme depends on the type of people who live there. The higher the ratio of resident-owners to tenants, the greater the probability that the scheme will be well run and conflict kept to a minimum. The profile of the residents in a scheme is often determined by where it is located and its facilities. A building near a university campus is likely to attract students; an upmarket scheme out in the suburbs will probably have an older age profile. If a scheme has a swimming pool or recreational facilities, you will probably be the odd one out if you insist on peace and quiet on Saturday and Sunday afternoons.
In summary, there are legislation regulating the rights of a Sectional Title owner and we trust this information is helpful in making an informative decision. Fell free to contact our offices for an appointment if you have any further enquires.