By Jennifer Paddock
Jennifer_PaddockIn terms of section 39(1) of the Sectional Titles Act, 1986 (“the Act”),
“The functions and powers of the body corporate shall, subject to the provisions of this Act, the rules and any restriction imposed or direction given at a general meeting of the owners of sections, be performed and exercised by the trustees of the body corporate holding office in terms of the rules.”

Like any other ‘artificial person’ the body corporate has no physical existence, so this provision authorises the trustees, whoever they may be from time to time, and acting as a group, to exercise the functions and powers specified in the Act. But this provision also allows the owners, acting as a group, to place restrictions on the trustees’ discretion in exercising the body corporate’s powers or performing its functions, or to give them specific directions as to how they should do so.

What does section 39(1) allow owners to do?
The owners, by majority vote at a general meeting, are entitled to place restrictions on or to direct the actions of the trustees. An example of a restriction would be a decision of owners that the trustees may not spend or borrow more than a specified amount without first consulting and obtaining the approval of the body corporate. A direction by owners may be a decision instructing the trustees to display copies of the draft minutes of their meetings on a secured notice board in the building foyer, as soon as they have been prepared.

Section 39(1)
is seen as providing the owners in a scheme with a substantial amount of power and ultimately, confirming that the trustees are not the ‘masters’ of the body corporate, but that they are obliged to act on the basis of the owners’ instructions (provided of course that these instructions are legal and not contrary to the Act or the scheme’s rules).
Formalities in respect of section 39(1) restrictions and directions
Restrictions and directions can only be imposed by a majority decision of owners at a general meeting. These decisions must be minuted and kept in the body corporate’s minute book in order to form a permanent record [(PMR 34)].
In terms of PMR 56(g) the giving of directions or the imposing of restrictions referred to in section 39(1) of the Act is a compulsory item of business that must be transacted at each annual general meeting (“AGM”). This does not mean that directions and restrictions can only be given or imposed at AGMs, in terms of section 39(1) they can be given or imposed at any general meeting. PMR 56(g) however requires that the issue of possible directions and restrictions is considered by the owners at each AGM.
Monetary restrictions
The imposition of monetary restrictions by the owners on the trustees in sectional title schemes is fairly common. The rationale behind these impositions could be anything from a real history of body corporate fund mismanagement to cautious owners who believe that the trustees need to be supervised when they spend substantial amounts of body corporate money.
Owners can set a ‘blanket’ limit on the trustees’ spending powers. For example, restricting them from spending more than R10 000 per month on any one item or project without prior approval from the body corporate, or they can apply the restriction specifically to a particular item, for example that the trustees may not spend more than R20 000 on landscaping the gardens. A financial restriction could also be phrased in relative terms. For example, that the trustees may not exceed the approved budget amount for specified items by more than 50% without the approval of owners given by majority vote at a general meeting. The exact wording of the resolution containing the restriction or direction is very important, so as to achieve the desired effect.
How long do monetary restrictions last?
A question often asked when a monetary restriction has been imposed by owners in a scheme is whether its effect lasts only until the next AGM or indefinitely, until it is reversed. It has been argued, based on the wording of section 39(1) of the Act which refers to the “trustees… holding office in terms of the rules”, that monetary restrictions apply only to the trustees upon whom they are imposed and because PMR 6 states that the trustees “shall hold office until the next succeeding annual general meeting”, the restriction only lasts until then. However, it can also be argued that in the context of section 39(1) the phrase ‘holding office in terms of the rules’ is merely descriptive of the trustees, and does not serve to limit the duration of any monetary restriction.
In our view, it would be difficult to successfully argue that monetary restrictions in terms of section 39(1) last in perpetuity where they are not worded, so as to be of limited duration. These restrictions are made and therefore must be seen in the context of a budget that has been approved by owners for a particular year. In a society like South Africa, where monetary inflation is an established feature of the financial landscape, it would be absurd to say that a monetary restriction imposed upon a group of trustees in 1985 applies unaltered in 2010. Therefore, in our view, the better argument is that a monetary restriction given in general terms only lasts until the end of the next AGM, not because of the wording of section 39(1), but because it is given in a particular financial context and is based on a particular budget which is replaced at the next AGM, when the owners again have an opportunity to impose monetary restrictions on the trustees.
Can an owner restriction or direction require a special or unanimous resolution?
A question often asked in relation to the owners’ power to give directions to or place restrictions on the trustees is whether or not this power includes the ability to increase consensus levels as required by the Act. For example, in terms of section 38(i) read with section 39(1) of the Act the trustees are able, by simple majority decision, to let a portion of the common property for less than ten years to an owner in the scheme. Could the owners give a direction to the trustees that provides that they shall not do so without a special resolution of the body corporate? In terms of section 39(1), the functions and powers of the body corporate must be performed and exercised by the trustees, subject to any direction given by the owners.
One has to draw a distinction between the actions of the trustees in carrying out some function or power of the body corporate and the terms of a condition that the owners can impose before they do so. While authorising the letting of the common property for less than ten years to an owner only requires a majority decision of the trustees, there is nothing stopping the owners from restricting the trustees’ power to make such a majority decision by imposing a direction that they shall not do so unless and, until there has been a prior decision made by special resolution of owners approving the terms of the lease.Article reference: Volume 5, Issue 1, Page 3.

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