The scope and consequences of Sectional Title Trustees’ Fiduciary Duties
By Professor Graham Paddock
What is the scope of a sectional title trustee’s fiduciary duty, and what liabilities might attach to scheme executives—whether they are volunteer owners or appointed professionals?
This article addresses that central question by considering several subsidiary questions, drawing on the provisions of the Sectional Titles Schemes Management Act 8 of 2011 (STSMA), its prescribed management rules (PMRs), and the Community Schemes Ombud Service Act of 2011 (CSOSA) and its regulations.
1. To Whom Is the Fiduciary Duty Owed?
STSMA section 8(1) makes it clear that every trustee stands in a fiduciary relationship to the body corporate. This implies that the primary legal duty is owed to the body corporate as a collective entity—not directly to individual owners.
However, this does not exclude derivative responsibility where the body corporate suffers loss and an individual owner is incidentally affected. In such cases, it is the body corporate that has the claim in law, though an owner may have standing to compel action via CSOS or court enforcement mechanisms.
2. What Conduct Constitutes Breach of Fiduciary Duty?
STSMA section 8(2) expands on this fiduciary duty by stating that a trustee must:
- Act honestly and in good faith,
- Exercise powers only in the interest of the body corporate,
- Avoid any material conflict of interest,
- Not benefit economically from their position,
- Disclose any personal interest in contracts to other trustees.
Trustees who fail to meet their maintenance duties—such as failing to establish a reserve fund, implement a 10-year maintenance plan, or carry out essential repairs—may be in breach of fiduciary duty if the inaction causes financial loss, regulatory non-compliance, or depreciation of common property value.
CSOS General Regulation 14 reinforces that scheme executives must exercise due diligence, inform themselves adequately, and act independently in decision-making.
In addition, several other prescribed management rules operationalise specific fiduciary responsibilities:
- PMR 6(3) prohibits a trustee with a direct or indirect personal interest in a matter from participating in its consideration or decision. Breaching this is a clear conflict of interest under STSMA s8(2)(b), and may result in personal liability under s8(3).
- PMR 6(4) lists disqualifying events (e.g. insolvency, fraud convictions, disqualification as a company director). A person continuing to act despite disqualification may cause decisions to be voidable, and expose themselves to claims.
- PMR 9 sets out the procedural obligations of trustees, including applying funds according to approved budgets and maintaining proper minutes. Consistent disregard of these obligations may indicate reckless or negligent governance.
- PMR 18 assigns specific duties to the chairperson of the trustees to manage meetings fairly, regulate orderly debate, and refrain from influencing voting while chairing. Breaches here, especially where bias or procedural abuse occurs, may also amount to breaches of fiduciary duty.
3. What Are the Legal Consequences of Breach?
Section 8(3) of the STSMA provides that a trustee who breaches their fiduciary duty is liable to the body corporate for:
- Any loss suffered as a result, or
- Any economic benefit improperly received.
This liability may arise regardless of intention—negligent conduct, conflict of interest, or omission may suffice.
Importantly, under section 8(4), the only duty that may not be excused by unanimous member consent is the obligation to act in the interest of the body corporate. All other fiduciary duties may be condoned, but only by fully informed, written approval from all members.
4. Are Trustees Personally Liable Without Fidelity Insurance?
CSOS Regulation 15 mandates that every community scheme must hold fidelity insurance to cover the risk of theft or fraud by any person who controls scheme money—including trustees. The minimum cover must equal the value of investments and reserves plus 25% of the current operational budget.
If a scheme does not hold the required fidelity cover, and scheme money is lost due to fraud or dishonesty by a trustee or other insurable person, the trustee(s) responsible may face personal liability, especially if they failed to ensure that the mandatory insurance was in place.
There is no statutory immunity for trustees who omit to procure fidelity insurance. In such cases, they may be jointly and severally liable to the body corporate for the uninsured loss.
5. How Does This Apply to Executive Managing Agents?
Executive Managing Agents (EMAs), appointed under PMR 28(1) and (2), step into the shoes of trustees. However, their duties are even more stringent:
- They are held to a professional standard of skill and care.
- They owe a fiduciary obligation to every member of the body corporate—not just the collective.
- They must report to all members every four months and inspect the common property at least every six months.
This dual responsibility—to both the body corporate and the members individually—means EMAs may be exposed to broader liability. In particular, failure to meet obligations, or neglect of repairs, may result in personal liability for financial loss, and may also trigger claims based on professional negligence.
6. What Practical Guidance Emerges?
- Volunteer trustees are provided with a degree of protection. PMR 8(4) mandates that the body corporate indemnify trustees against losses arising from actions taken in the course of their official duties that do not breach fiduciary obligations and PMR 23(7) requires the body corporate to take out fidelity insurance to cover losses incurred as a result of any act of fraud or dishonesty committed by a trustee. Despite these protections, volunteer trustees should approach their roles with care and seek training. They should not assume that lack of remuneration shields them from liability.
- Professional agents and EMAs must understand they are held to a higher standard. They need professional indemnity insurance and must not ignore fiduciary principles.
- All scheme executives should ensure that fidelity insurance is in place and up to date. Failure to do so may expose them personally.
- Bodies corporate should consider securing indemnity insurance to cover trustees, particularly if some of them deal only with certain areas of management and are not involved in others.
Conclusion
The fiduciary duties of trustees and executive managing agents are not ornamental—they have real legal consequences. The CSOS will have jurisdiction under CSOSA section 39(5)(a) to order a managing agent to comply with an obligation if that is included in their contract of appointment, any applicable code of conduct or authorisation. While courts will probably be slow to penalise inadvertent error, they are unlikely to tolerate negligence, conflict of interest, or self-dealing. Good governance is not only about managing property—it is about managing power, risk and responsibility with integrity.
Article reference: Paddocks Press: Volume 20, Issue 06
This article is published under the Creative Commons Attribution license.
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