Special Levies

SECTIONAL TITLE SPECIAL LEVIES 1986 ACT vs 2011 ACT
 

As you might be aware, Body Corporates of Sectional Title Complexes are permitted, if financial circumstances require, to raise special once-off levies.  This is normally done if urgent repairs or refurbishment is required and where the Body Corporate’s savings are either non-existent or insufficient to cover the anticipated cost.  The special levies were catered for in the Sectional Titles Act of 1986 (the Old Act) and are now catered for in a new act called the Sectional Title Schemes Management Act, 2011 (the New Act).  Although this act was created in 2011, it has only now, in October of 2016, become effective.

The New Act caters for special levies in Section 3 (3) and provides that:

“Any special contribution becomes due on the passing of a resolution in this regard by the trustees of the body corporate levying such contribution and may be recovered by the body corporate by an application to an ombud from the persons who were owners of units at the time when such resolution was passed”.

There is nothing remarkable about the above and it is similar to the provisions of the Old Act save that one may now apply to the ombud to recover these funds whilst previously, this would be done by way of court action. How this is to be done in practise remains to be seen once the regulations have been published. If things ended here, there would be no further need for this commentary, but they don’t.  The section in the New Act goes on to say:

“Provided that upon the change of ownership of a unit the successor in title becomes liable for the pro-rata payment of such contributions from the date of change of such ownership.”

Our interpretation of the above section is that it will only apply if the special levy is payable over a fixed period of monthly instalments.  This is often, but not always, the case.  In circumstances where the special levy is payable in one lump sum immediately, it would not be possible to calculate a “pro-rata” portion as such a calculation is only possible if a beginning and an end date is known.  It is also our opinion that the Body Corporate is not merely entitled to apply the pro-rata principle but in fact obliged to do so if the monthly instalment arrangement applies.  Whether this latter opinion is correct or not, remains to be seen as the section is not entirely clear in this regard.  There is, in other words, a school of thought which argues that the Body Corporate is entitled, but not necessarily obliged, to apply the pro-rata principle.

Therefore and by way of example let us assume that a sectional title unit is sold on say the 1st November 2016 and a special levy of R30 000.00 is raised on the 2nd November 2016 which is payable over 12 monthly instalments commencing on the 1st December 2016.  Let us assume further that the transfer to the purchaser is registered on the 1st February 2017 and that the purchaser was obliged and did accordingly take occupation on the 1st February 2017.

It is our opinion that the “proviso” in Section 3(3) means that the Body Corporate is only entitled to recover 2/12 of the levy from the seller and the balance of 10/12 from the purchaser.  In other words it is our view that the Body Corporate cannot, as a condition for issue of a Levies Clearance Certificate for transfer, insist that the whole levy be paid which, until now, has been the practice based on the Old Act.  In other words, Body Corporates who might have allowed the seller to pay the special levy off in instalments were obliged to withdraw the instalment right and insist on full payment as the Body Corporate had no power to recover that levy from the purchaser after transfer. The New Act changes this of course.

Having said the above, we need to make it clear that the abovementioned provision in the New Act regulates the relationship between the Body Corporate on the one hand and the seller and the purchaser on the other hand.  It does not regulate the relationship between the seller and the purchaser.  That relationship is regulated by the terms of the sale agreement concluded between them.  The terms of the sale agreement can accordingly change the effect of Section 3(3) and shift the burden of the instalment based special levy in one direction or another.  That does not mean that the Body Corporate will be affected by this shift in burden.  This shift will only affect the obligations of the seller and/or the purchaser to one another.  The Body Corporate will continue to have the same rights as provided for in the section. 

Most sale agreements address the matter of levies in some or other fashion and accordingly special levies also.  Some sale agreements stipulate that the purchaser becomes liable for all levies from date of occupation of the property (if occupation occurs before transfer) and some sale agreement stipulate for such obligation to vest when transfer occurs.  In terms of our example, as stated above, let us assume that the sale agreement stipulated that the purchaser is only liable for levies raised after the date of transfer.  In terms of the Old Act and using the same example, we would have advised the seller that even though the levy could be paid off in twelve instalments, it became a lawful obligation to pay on the 2nd November 2016 and accordingly falls in its entirety on the shoulders of the seller.  This advice would have been consistent with the behaviour of the Body Corporate which would have insisted upon full payment of the whole special levy as a condition of issue of a levies clearance for transfer. (In this regard see the previous paragraph). The seller would accordingly be obliged to pay the entire levy to the Body Corporate even though the Body Corporate has the right to recover part of it from the purchaser. 

In the light of Section 3(3) the above result is not likely to be particularly welcomed by the seller.  The seller will, in other words, argue that if the Act allows and obliges the Body Corporate to recover the special levy pro rata, it is unfair and improper for the sale agreement to oblige him to pay the whole amount.  The seller will accordingly turn his guns onto the person who prepared the sale agreement, in other words, in most cases, the estate agent.
We would accordingly recommend that the levies clause in standard Sectional Title sale agreements be reviewed and that a new sentence be inserted reading as follows:

“Notwithstanding anything to the contrary stipulated for in this sale agreement, it is agreed between the parties that if a special levy is pro-rated by the Body Corporate as contemplated in Section 3(3) of the Sectional Title Schemes Management Act, 2011 the Purchaser will be liable for such portion which is payable after date of registration of transfer and the Seller liable for such portion for periods prior thereto.”

Estate agents should of course be alert to the existence of special levies which are being paid off in monthly instalments and should inform purchasers of the obligation which they will inherit.  Purchasers should of course be alert to the same danger and make sure that proper enquiries are made about this issue before they purchase.  In this regard we trust that it is clear that if the purchaser does not wish to inherit the obligation to continue with payments of the special levy and if the purchaser expects the seller to settle the entire levy amount, that issue should be addressed in the sale agreement and our recommended clause, as stated above, appropriately amended.