Although owners benefit from the payments to the levy stabilization fund over the years that they own a unit in the scheme, when the time comes for them or their deceased estate to contribute towards it there is often resistance to payment. People often try to structure the alienations of their units in such a way as to avoid having made a profit to which the body corporate can stake a part claim.
The unreported judgment in the case Allan John Robert Baker NO and Estate Late George Keith Evans v Farmersfield Village Body Corporate was delivered in 2007 and dealt with an application made by the executor of a deceased estate asking the court to declare that the estate was not liable to pay any contribution towards the scheme’s levy stabilization fund as the estate did not benefit from any profit in the course of alienating the units the deceased had owned. The deceased had structured the divestment of his estate so that the units he owned in a sectional title scheme would be left to his daughter subject to a lifelong usufruct in favour of his surviving spouse.
The rule imposing the obligation on owners to contribute towards the levy stabilization fund was drafted as follows:
“Upon alienation of a unit by an owner (other than alienation of the unit to his or her spouse on the death of the owner) the owner shall pay as a special levy to the body corporate an amount equal to 25% of the profit on the alienation of the unit. For the purpose of this rule the word ‘profit’ shall mean the difference between the price paid by the owner when acquiring the unit and the nett value on alienation. The ‘nett value’ shall be the greater of the selling price or market value less any agent’s commission payable.”
There was no dispute that the units had been alienated and that accordingly the estate was obliged to pay a special levy to the body corporate of 25% of the difference between the acquisition price paid by the deceased and the nett value on the date of alienation. The dispute revolved around how the nett value was to be determined in the circumstances.
The executor argued that the nett value is the market value of the right being transferred, being ownership of the units subject to the right of usufruct. He argued that the usufruct was a substantial detraction from the right of ownership inherited by the deceased’s daughter and the market value of this right was less than the acquisition price paid by the deceased. Therefore, he argued, there was no profit on alienation of the units and thus no special levy payable by the estate to the body corporate’s levy stabilization fund.
The body corporate argued that the market value relates to the units as a whole and the fact that the daughter’s ownership was subject to her mother’s right of usufruct over the units was not a relevant consideration in determining the units’ market value.
The judge in interpreting the rule found that it was badly drafted and that many anomalous situations could result from various interpretations where contributions to the body corporate’s levy stabilization fund could be avoided. He came to the conclusion that the correct interpretation of the rule was that the nett value was the nett value of the whole property being alienated.
The judge also looked at the purpose of the rule and found that his interpretation was strengthened on this basis. The purpose was to require an owner who alienates a unit to pay the body corporate 25% of the appreciation in the value of the unit in question, subject only to the spousal exemption.
It was held that even though the deceased had chosen to split up the rights to be transferred to other parties, this did not detract from the fact that profit had taken place in his hands. The judge found that the deceased estate was only entitled to 75% of the profit and that it must pay the other 25% of the profit over to the body corporate in accordance with the levy stabilization fund rule.
Let this case educate you if you are considering buying into a sectional title scheme with such a rule. Before you acquire a unit in such a scheme examine the wording of the rule carefully and take its wording into account in making your decision as to how to hold the property. If you are married, see if there is a spousal exemption and consider whether it may make economic sense to jointly register the property in both of your names. In any case, be warned that structuring the distribution of your estate may not help you avoid a contribution to the levy stabilization fund.
It is interesting to note that in the above case it was not argued that the rule was an unreasonable infringement of an owner’s right to take the fruits of his property. Section 35(3) of the Sectional Titles Act 95 of 1986 requires that for a rule to be enforceable it must be reasonable and therefore it could have been argued that the rule was unenforceable based on unreasonableness. Another point which was not raised was whether this restriction on owners’ ownership rights was suitably placed in the management rules of the scheme. It could have been argued that the correct place for such a serious infringement of a sectional title owner’s ownership rights would have been the title deed conditions applicable to units.
Article reference: Volume 4, Issue 10, Page 4.
This article is published under the Creative Commons Attribution license.