It is not unusual for well-managed sectional title bodies corporate to accumulate considerable amounts of money. Particularly where the owners comply with the requirements of the Sectional Titles Act,1986,  and budget on an accrual basis for the costs of future maintenance and repairs, they will set aside substantial amounts for future painting, re-surfacing, lift repairs and other expensive work to be done in future. An upmarket scheme may well accumulate four or five million rand in its reserve fund.

In these circumstances it becomes relevant that prescribed management rule 43 restricts the body corporate’s right to invest its surplus funds to investments in “savings or similar accounts” with a registered bank or building society (now a mutual bank) approved by the trustees. It is not unusual for trustees to simply ignore this provision, but this is not sensible. If you are the manager or a trustee in a scheme that has investable funds and you think that owners would approve of a wider range of more profitable investments, you should suggest that the rule be amended by way of a unanimous resolution. A subsidiary issue that arises where management rule 43 is amended is the level of risk that the trustees are authorised to take in making the  investment.

I have seen rules in which the trustees are authorised to invest in what they decide are medium and low risk instruments. However, the better returns will always be found with riskier investments, and what appears to the trustees to be a medium risk investment may, in hindsight, prove to have been a high risk. One can be sure that if the body corporate loses any money at all or does not get the full amount of the return it expected, the owners will be upset and will almost certainly want to hold the trustees liable.

There are two ways in which the trustees can be protected. The first is for the rule to specify the types of investment and perhaps even the names of the financial institutions with which the body corporate can invest. The second, which I consider preferable, is for the trustees to make proposals as to the investments and have the owners approve them by way of a direction given by majority vote at a general meeting. If there is to be any discretion exercised by the trustees, it would be sensible to require that they first take advice from a suitably qualified person.

Article reference: Paddocks Press: Volume 09, Issue 09, Page 1.

This article is published under the Creative Commons Attribution license.

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