By Anton Kelly
 
Anton KellyThe establishment of share block companies was a common development methodology for blocks of flats during the 1970s and 80s, even though the Sectional Titles Act was operational.

Although many share block schemes have been converted to sectional title, there are still a number operating, particularly on the KwaZulu Natal south coast. As a community scheme, a share block company will be subject to, but will also benefit from, the Community Schemes Ombud Service and the development methodology is still of general interest.
What are the essential differences between share block and sectional title from an owner point of view and what needs to be done to convert a share block scheme to a sectional title scheme?
 
Difference between share block and sectional title
There are two main differences between share block and sectional title from an owner’s point of view. One is tenure, that is, what is actually owned and the other regards management of the scheme.
 
In a share block scheme an individual owns a block of shares in the company. This block of shares is allocated to a specific part or parts of the building, the apartment, parking bay, garden and so on. Owning the block of shares entitles the individual to the permanent and exclusive use of those parts of the building. But it is the company, not the individual, that owns the immovable property, the land, buildings and improvements.UCT Sectional Title Scheme Management course
In a sectional titles scheme, the individual owns a unit, which is deemed immovable property. That unit consists of the section – usually an apartment or townhouse but which could also include a garage or parking facility in the building – and an undivided share in the common property. Ownership of a share of the common property leads neatly to the question of management of the scheme.
In a share block company, the directors are responsible for the management of the company. They are bound by the terms of the Share Blocks Control Act as well as the Companies Act but they, generally without needing to consult the shareholders, take all the management decisions. Section owners, on the other hand, are automatically members of the body corporate of the scheme, which is the governing body. So sectional title owners have a direct say in how their scheme is run. They make policy decisions at the annual general meeting and they are entitled to give directives and to place restrictions on the activities of the trustees, the executives elected to make the day to day management decisions for the scheme.
The conversion process
The share block scheme may be converted to sectional title. The process for the conversion is built into schedules attached to the Share Blocks Control Act. First the company must draft the documents necessary to illustrate to its members what the sectional plan will look like and what rules will apply. The rules must include various elements from the company’s memorandum of incorporation (memorandum and articles of association). The decision to prepare the documents may be taken by the directors or by 30% of owners. For the final decision to convert, after the documents have been inspected, at least half the owners must support the resolution and if the property is bonded the holder of the bond must agree.
Then the company must tell all shareholders, interested parties and any tenants in the apartments of the decision and call for objections. The company must then inform the Companies and Intellectual Properties Commission when all objections have been settled and the bondholder has been satisfied.
Then the sectional title register for the scheme can be opened. At this stage the company owns all the units in the scheme and the individuals who own the blocks of shares can take transfer of the sectional units, although there is no obligation for them to do so. The share block holders thus convert their shares in the company to ownership of immovable property. In the sectional title context, the share block company is the representative of all its members who still occupy apartments on the basis of their shareholding and contract with the share block company.

From an owner’s point of view, the main advantage of converting is that they become owners of immovable property rather than of shares in a company. They then have all the advantages of property ownership, particularly to mortgage it under a home loan and thus get access to relatively inexpensive capital, and they can participate directly in the management of their asset via their membership of the body corporate.

 
 
Article reference: Paddocks Press: Volume 8, Issue 4, Page 1

Anton Kelly is the course instructor of the University of Cape Town (Law@Work) Sectional Title Scheme Management short course. Next course starts, 7 June 2013. For more information please contact Emma on 021 447 4130 or emma@paddocks.co.za.