“My body corporate has warned that due to recent changes in the sectional title legislation we should be expecting higher than normal levy increases. I live on a tight budget and this news has me very worried. Is it true that my levies will increase or is the body corporate just making this up?”
New legislation affecting the sectional title environment came into effect recently, namely the Sectional Titles Schemes Management Act 8 of 2011 (“STSMA”) and the Community Schemes Ombud Service Act 9 of 2011 (“CSOSA”), with both pieces of legislation potentially having an impact on sectional title levies.
The STSMA requires a body corporate to establish and maintain two funds, namely 1.) an administrative fund, and 2.) a reserve fund.
The administrative fund must be used to fund the estimated annual operating expenses of the body corporate for the particular financial year. Such expenses will include maintenance, repair, management and administration of the common property, and rates, taxes and other municipal charges and insurance premiums relating to the sectional buildings or land. The reserve fund in turn must primarily be used to cover the (unexpected) costs of future maintenance and repairs of the common property.
The STSMA regulations prescribe specific formulas that a body corporate must use to determine the minimum contribution to the reserve fund. There are three categories:
Category 1 – If the amount of money in the reserve fund, at the end of the previous financial year, is less than 25% of the total contributions to the administrative fund for that previous financial year, the contribution to the reserve fund must be at least 15% of the total budgeted contribution to the administrative fund.
Category 2 – If the amount of money in the reserve fund, at the end of the previous financial year, is equal to, or greater than, 100% of the total contributions to the administrative fund for that previous financial year, then there is no minimum contribution to the reserve fund. There is thus enough “reserves” for future maintenance.
Category 3 – This is when the amount of money in the reserve fund, at the end of the previous financial year, is more than 25%, but less than 100% of the total contributions to the administrative fund for the previous financial year. The budgeted contribution to the reserve fund must then be at least the amount budgeted to be spent from the administrative fund, on repairs and maintenance to the common property, in the financial year being budgeted for.
If your Sectional Title Scheme does not have any reserve fund in place, you fall under category 1 and your levies are likely to increase in order for the body corporate to implement the practice of a reserve fund.
In general, there is no limit to what the levies can be increased to, but the management rules do determine that the body corporate may, on the authority of a written trustee resolution, increase the contributions due by the members by a maximum of 10% at the end of a financial year to take account of the anticipated increased liabilities of the body corporate.
The second piece of legislation – CSOSA – is intended to establish the Community Schemes Ombud Service (“the Ombud Service”) and to provide for a dispute resolution mechanism to resolve disputes in community schemes (sectional title schemes, home owners associations, housing schemes for retired persons, etc) and to ensure their good governance.
Every community scheme must in each calendar year, on a quarterly basis pay to the Ombud Service a compulsory levy, subject to discounts or waivers as may be prescribed. The compulsory contribution is calculated according to the following formula:
The lesser of R40, or 2% of the amount by which the monthly levy charged by the Scheme exceeds R500 i.e. (your levy minus R500) x 2% up to a maximum of R40.
Based on the above pieces of legislation now in place, there is a realistic chance that your levies may increase in order to allow your sectional title scheme to start recovering contributions from you and the other units, in order to pay the levy to the Ombud Service and establish a reserve fund for the scheme. How much your levies may increase, will differ from one scheme to the next. But nonetheless, prepare yourself for the possibility of a higher than usual levy increase this year.
This article first appeared on the Phatshoane Henney Attorneys February 2017 2016 newsletter.