By Prof. Graham Paddock

A long time ago, Tertius Maree proposed a ‘grading system’ to rate sectional title schemes according to the efficiency of their management, and particularly their financial management (MCS Courier 6-9 – August 2005). His view was that sectional title property values, especially in older schemes, are directly related to the quality of scheme management. He was not the only one. In a 2013 Paddocks Press article entitled “Effective management is the backbone of a good scheme”, Sayed Iqbal Mohamed of the Organisation of Civic Rights discussed the “spiral of decline” in schemes and urged more realistic budgets and compliance with statutory requirements.

The Sectional Titles Management Act of 2011 (“STSM Act”) requires bodies corporate to approve a maintenance, repair and replacement plan and to use it to calculate the reserve funds they need for common property work. They also require that the body corporate accounts be audited, so owners, prospective purchasers and bondholders can see professionally checked information on the body corporate’s finances generally and their reserves in particular. All the requirements for the implementation of Tertius’ idea are in place. The final link in the chain is that the Community Scheme Ombud Service Act of 2011 (“CSOS Act”) requires bodies corporate to submit their annual financial statements for inspection each calendar year, and the CSOS is obliged to promote their good governance.

To analyse the situation, a CSOS official might start by answering the following questions:

1. Are the administrative fund levies sufficient to cover the body corporate’s estimated expenses?
2. When was the last MR&R plan approved and does it seem appropriate?
3. Are the reserve fund levies sufficient to cover accruing common property maintenance costs?
4. Have the last two AGMs been held in the first half of each financial year?

and then issue the scheme with a grading.

Neither the STSM Act nor the CSOS Act imposes any penalty for a body corporate’s failure to maintain adequate reserve funds. Noting that the requirement for minimum reserve fund amounts might cause financial burdens for bodies corporate, paragraph 3.3 of the Chief Ombud’s Circular 1 of 2017 suggests that bodies corporate that are unable to budget for the prescribed minimum amounts should approach the CSOS with a plan setting out how they intend to reach the target amount and request approval. However, nothing in the STSM Act authorises the CSOS to waive the minimum reserve fund requirements set out in Regulation 2 under the STSM Act.

As it appears that the CSOS receives more money in community scheme levies than it can spend, perhaps this would be a sensible project that would increase schemes’ financial transparency and provide useful consumer protection. It is certainly within the CSOS’ mandate and a way in which the CSOS could make a worthwhile contribution to improving scheme governance.

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Graham Paddock is a specialist community schemes attorney, notary and conveyancer. He has been advising clients and teaching students for over 40 years, and was an adjunct professor at UCT for 10 years.

Article reference: Paddocks Press: Volume 18, Issue 1.

This article is published under the Creative Commons Attribution license.

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