Distressed Sectional Title Schemes and Urban Decay: A Call for Legislative Reform to Protect Housing Stock in South Africa

By Prof. Graham Paddock

1. Introduction/Abstract

Sectional title schemes, which provide communal ownership in multi-unit buildings, are a cornerstone of urban housing in South Africa. They offer affordability, secure tenure, and shared responsibility for maintenance of the common property. Yet when these schemes fall into severe financial distress, the consequences can be dire: unpaid levies fuel crippling debt, utilities are suspended, essential upkeep is neglected, and entire buildings can descend into disrepair. The resulting urban decay not only undermines the welfare of individual owners but also erodes public safety and municipal rates bases, compounding socio-economic problems.

This paper revisits the Sectional Titles Schemes Management Act, 2011 (Act No. 8 of 2011) (“STSMA”), focusing on section 17, which governs the termination of sectional title schemes. While section 17 currently covers physical destruction or unanimous termination, it provides no direct mechanism to address financial insolvency or partial building failures. Drawing on subsequent consultations, this paper proposes expanded legislative reforms to section 17 to accommodate a structured, “liquidation-like” or rescue-based approach, thereby safeguarding private housing stock and staving off the blight of urban decay.

2. Understanding the Problem of Distressed Schemes

a) Financial Collapse and Unlimited Liability

Unlike standard companies, sectional title bodies corporate (bodies corporate) lack limited liability for their owners. When a sectional title development scheme (scheme) accrues huge debts—often due to unpaid levies—there is no statutory “cap” on each owner’s liability. This can drive even dutiful payers towards insolvency. Bodies corporate are non-profit in nature, relying on levies to cover communal expenses. Faced with overwhelming debts and little or no income, they fall into a financial spiral.

b) Lack of a Rescue or Liquidation Regime

Companies, in terms of the Companies Act, 2008, can undergo business rescue proceedings or liquidation. By contrast, a sectional title body corporate finds no equivalent structured mechanism under the STSMA. Although a court can declare a building “destroyed” on just and equitable grounds, this does not comprehensively address the financial distress scenario or provide an orderly system to rank claims and distribute proceeds.

c) Urban Decay: Broader Impact

Abandoned or poorly maintained buildings significantly devalue neighbouring properties, reduce the municipal rates base, and pose public health and safety risks. Failing schemes often attract criminal elements. Owners, fearing additional special levies or foreclosure, sometimes abandon their units, accelerating decay and localised socio-economic decline.

3. Comparing the STSMA with Company Insolvency Procedures

a) Companies Act vs. STSMA

Companies may be run for profit (unless registered as a non-profit company). Directors have broad powers. A corporate rescue or liquidation pathway allows for formal stays on creditor actions, ranking of claims, and potential reorganisation. Bodies Corporate: Formed purely to manage and administer common property in the owners’ collective interest. Trustees typically have limited decision-making powers (subject to rules), and there is no legislated rescue procedure.

b) Limited Liability vs. Unlimited Levy Obligations

Shareholders in a company enjoy limited liability. If the company becomes insolvent, creditors generally cannot reach shareholders’ personal assets beyond their shareholdings. Sectional owners, by contrast, remain liable for any shortfall the body corporate cannot meet. A single owner’s default often raises the burden on compliant owners—potentially leading to further defaults.

c) Implications for Reform

While it is impractical to copy corporate business rescue verbatim, key principles—such as a temporary moratorium, the appointment of an independent liquidator-like official, and a ranking of creditors—can be adapted to the sectional title context.

4. Main Elements of the Proposed Legislative Reform

It has become evident that section 17 of the STSMA should be significantly revised to address financial distress, partial or total building failure, and the equitable settlement of debts. Below are the key additions that recent discussions confirm are necessary:

a) Financial Distress as Deemed Destruction

Besides physical destruction and unanimous resolutions, a scheme may be deemed destroyed if it is in “serious financial distress”: unable to pay debts as they fall due, and an administrator under section 16 certifies that no viable rescue is possible.

b) Broad Powers for the Community Schemes Ombud Service (CSOS)

Owners, bondholders, or creditors can apply to CSOS if a scheme meets the criteria for “deemed destruction.” CSOS can investigate and grant orders to terminate the scheme fully or partially, or require reconstruction if recovery is feasible. A new or existing administrator may be upgraded to the role of liquidator, empowered to sell assets, pay creditors, and distribute any surplus.

c) Suspension of Clearance Certificates and Moratorium on Key Transactions

Once an application is filed under section 17, the body corporate must halt the issuing of levy clearance certificates required for unit transfers (per section 15B of the Sectional Titles Act, 95 of 1986), unless specifically authorised by CSOS or a court. Local authorities, upon notice, also withhold rates clearance to discourage “escaping owners” from transferring their units to judgment-proof entities during the crisis. The body corporate may not dispose of significant assets or take on new loans without CSOS or court approval.

d) Liability Safeguards for Owners and Creditors

Owners who attempt to transfer units during the application period remain jointly and severally liable for any special levies or debts if the sale was not authorised by CSOS or the court. This measure aims to ensure that creditworthy owners cannot dump liabilities onto “shell companies” and exit the scheme. Clear ranking of claims ensures that secured creditors, local authorities, and other statutory bodies receive preference, followed by concurrent creditors, with remaining proceeds going to owners proportionate to their participation quotas.

e) Interim and Final Administration

If the scheme’s financial management is deeply compromised, CSOS or a court can appoint an interim administrator to safeguard assets pending final decisions. Ultimately, a full or partial termination can yield an orderly wind-up (akin to liquidation) so that all stakeholders—including municipalities, lenders, and owners—are treated fairly.

5. Addressing Stakeholder Concerns

a) Owners

Fears could include losing homes or facing unlimited levies. The proposed amendments attempt  to protect owners from a chaotic collapse by ensuring an orderly mechanism to terminate or partially rescue a scheme, reducing the risk that their units become uninhabitable or worthless.

b) Local Authorities

Concern might include cash-flow shortages due to non-payment of rates and services, leading to significant municipal debts. The suggested amendment would include a structured wind-up with a ranked claims procedure that  improves their chances of recovering at least part of outstanding debts. The moratorium prevents last-minute transfers that skirt these obligations.

c) Financial Institutions and Bondholders

Bondholders should worry about the devaluation of their security if a scheme deteriorates. What is proposed includes a clear statutory route to terminate or partially liquidate a scheme that ensures transparent asset realisation. Bondholders retain their security interests, and the process is overseen by CSOS or the court.

d) Managing Agents

Some agents may fear losing revenue from arrears management. Others might see an opportunity to act as liquidators or part-time CSOS adjudicators for unrelated schemes, given their sectional title scheme management expertise. Credible managing agents stand to gain by offering specialist services during the termination or rescue and the hope of keeping the business thereafter, as the proposed reforms foster effective action in a stable, professional environment.

e) Department of Human Settlements and National Government

Government may be concerned about worsening urban decay that undermines national housing strategies, with no swift statutory tools to halt a scheme’s collapse. An amended section 17 could foster more resilient management of communal residential properties. By mitigating collapse, it aligns with broader government objectives of sustainable urban housing and renewal.

f) Community Schemes Ombud Service (CSOS)

CSOS may be concerned about an additional workload and complex liquidation-like proceedings. Although new responsibilities would arise under the proposed amendments, these can be offset by targeted funding, training, and legislative clarity. Properly executed, a robust process reduces the volume of unstructured disputes and fosters greater respect for CSOS’s adjudicative role.

6. Significance of Non-Profit Character and Restricted Powers of Trustees

Unlike profit-making companies with wide managerial discretion and the ability to distribute dividends, bodies corporate must act solely in the collective interest of owners, using levies only for upkeep, insurance, and basic services. Trustee powers are comparatively restricted; the STSM Act restricts them from making major financial decisions, including the setting of budgets which bind trustees, and requires authorising owner resolutions.

This non-profit foundation for sectional title bodies corporate supports the idea of a special form of insolvency or rescue regime for sectional title: Moratorium provisions, extended liability for owners, and controlling further debt are more readily accepted in a communal, non-profit context. The goal is not to salvage a commercial enterprise but to prevent further harm to residents, protect creditors’ rights, manage the ultimate fate of the building responsibly and get the property restored or replaced and operating to serve the public good.

7. Proposed Textual Revisions to Section 17

Recent discussions have generated a substantial redraft of section 17. Key points include:

1. Extended Definition of “Deemed Destruction”
   • Includes hopeless financial distress, certified by an administrator or demonstrated by arrears to municipalities and other creditors.
2. Suspension of Certain Powers During Proceedings
   • Automatic halt on issuing levy clearance certificates and property transfers without CSOS or court approval, preventing “escape” from liability.
3. Prohibition on Asset Disposal and New Loans
   • The body corporate cannot sell major assets or contract new debts unless essential for building preservation and specifically authorised.
4. Joint and Several Liability for Departing Owners
   • Owners who attempt to transfer units in violation of the moratorium remain secondarily or jointly liable for special levies and outstanding debts.
5. Interim Administration and Liquidation
   • CSOS or a court may appoint an interim administrator to stabilise affairs pending final orders, or a liquidator if termination is approved.
6. Ranking of Claims
   • Mirrors key insolvency principles: secured creditors first, then municipalities and statutory preferent creditors, then concurrent creditors, and ultimately any surplus to owners.

These proposals align with international best practices on community housing insolvency while respecting the unique nature of sectional title bodies corporate as owner-driven, non-profit entities.

8. Conclusion

Distressed sectional title schemes represent a looming risk to South Africa’s private housing sector, threatening owners’ property rights, municipal finances, and broader urban rejuvenation efforts. The current legislative gap in section 17 of the STSMA leaves financially insolvent or decaying schemes without a formal rescue or wind-up mechanism—leading to building abandonment, crime, and a spiraling reduction in property values.

Adopting amended section 17 provisions—with a streamlined process for partial or full termination based on financial distress, an automatic moratorium on transfers, a strict hierarchy for creditor claims, and robust CSOS oversight—would protect both owners and creditors while stemming urban decay. These reforms need not replicate corporate rescue wholesale; rather, they must suit the communal, non-profit mandate of sectional title bodies corporate. By responding to the crisis early and orderly, communities can salvage or gracefully terminate failing schemes, preserving the value, safety, and dignity of South Africa’s urban housing stock.

References and Further Reading

• Sectional Titles Schemes Management Act 8 of 2011
• Companies Act 71 of 2008
• Community Schemes Ombud Service Act 9 of 2011
• Department of Human Settlements. (Policy papers on urban renewal and distressed housing).
• Legal academics and practitioners specialising in sectional title law, insolvency, and community scheme governance.

Article reference: Paddocks Press: Volume 20, Issue 02

This article is published under the Creative Commons Attribution license.

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