By Neil de Goede

Neil de GoedeLevy defaulters and their legal representatives often contest the liability to pay compound interest (interest upon interest) on arrear levies. They dispute their liability on the basis that compound interest can only be raised where agreement between the parties or statutory provision to that effect exist.

The High Court has now given the body corporate and levy debtors an unequivocal answer in its ruling in Mandy David Mitchell v Die Beheerliggaam RNS Mansions (Case No.: 34386/08, North Gauteng High Court, Pretoria, delivered 4 June 2010).

In Mitchell, the Applicant had purchased a unit in the Respondent’s scheme at a sale in execution. There were substantial arrear levies in respect of the unit to which compound interest had been added and for which the Applicant, as purchaser, was liable. One of the Applicant’s arguments was that a body corporate is not entitled to charge compound interest on arrear levies for the reasons set out in the opening paragraph above.

Proceeding on the Applicant’s assumption that “there must be something in the Act which specifically provides for the payment of such [compound] interest”, the court referred to management rules 31(5) and 31(6) (at this stage, one should note that the court proceeded on the assumption for the sake of furthering the Applicant’s argument; the court did not necessarily regard the assumption as being correct).

Rule 31(5) states that:

“An owner shall be liable for and pay all legal costs, including costs as between attorney and client, collection commission, expenses and charges incurred by the body corporate in obtaining the recovery of arrear levies, or any other arrear amounts due and owing by such owner to the body corporate, or in enforcing compliance with these rules, the conduct rules or the Act.”

Survival manual
Rule 31(6) states that:

“The trustees shall be entitled to charge interest on arrear amounts at such rate as they may from time to time determine.”

(Court’s emphasis)

The court assigned the normal meaning to the words “arrear” (outstanding) and “amounts”. “Arrear amounts” was therefore held to be a broader term than “arrear levies”.

Given that “arrear amounts” is a broader term than “arrear levies” and that Rule 31(6) allows interest to be charged on “arrear amounts”, the court held that the Act allows interest to be charged on interest. In other words, since “arrear amounts” must include unpaid interest on arrear levies and interest may be charged on arrear amounts, compound interest may be charged in terms of the Act.

What is perhaps most interesting about the judgment is the court’s conclusions regarding the fiduciary duties of trustees. Obiter, the court was of the view that trustees would possibly fall short of their duties if they did not resolve to levy compound interest on arrears, since compound interest would be earned on invested levies at a commercial bank.

In order to ensure that bodies corporate are able to substantiate their claim for compound interest, it is advised that the trustees should resolve to the levying of compound interest in writing.

Trustees should be careful not to raise the interest rate too high; courts will not uphold an interest rate deemed to be usurious. Interest at a rate of 15.5% per annum, such interest to be capitalised monthly in arrear, is recommended.

Lastly, the sectional title scheme community should be pleased to note that the Pietermaritzburg High Court ruling with regard to the inapplicability of the National Credit Act to levy claims in T.S. Dlamini v Body Corporate of Frenoleen (AR611/09, delivered 11 March 2010) found favour and was followed in the Mitchell v Die Beheerliggaam RNS Mansions judgment.

Article reference: Paddocks Press: Volume 5, Issue 9, Page 2

Neil de Goede graduated with an LLB from the University of Kwazulu-Natal in 2008. In 2009 he joined Lomas-Walker Attorneys in Westville, Durban as a candidate attorney, where he has been a part of the sectional title and litigation team since.

This article is published under the Creative Commons Attribution license.