By Neil de Goede

Neil de GoedeRule 64(a) in Annexure 8 (the Prescribed Management Rules) made under the Regulations to the Sectional Titles Act 95 of 1986 is a powerful weapon in a sectional title body corporate’s arsenal. It creates an incentive to ensure that an arrear levy account is brought completely up to date prior to a general meeting where voting is to take place.

Rule 64(a) states:

“Except in cases where a special resolution or unanimous resolution is required under the Act, an owner shall not be entitled to vote at any general meeting if any contributions payable by him in respect of his section and his undivided share in the common property have not been duly paid.”

The word “contributions” in the rule has been underlined for emphasis for reasons that will appear below.

On 14 September 2010, the Kwazulu-Natal High Court, Durban handed down judgment in the matter of Herald Investments Share Block (Pty) Ltd and Others v Dr U.A. Meer and Others (case numbers 2907/10 and 9768/10). Chronic levy defaulters may soon proclaim the Herald Investments judgment to be an invaluable ally as it has limited the application of Rule 64(a).

The court in Herald Investments held that the word “contributions”, as used in the Sectional Titles Act, does not include compound interest charged on arrear levies. The court looked at the use of the word “contributions” in Rules 30, 31 and 45 to glean its meaning. Since none of these rules refer to interest, the court held that rule 64(a) could not be invoked if a defaulting owner had paid the capital amount of his arrear levies, but not the compound interest that had accrued thereon.

In its reasoning, the court stated that depriving an owner of his vote is a “stringent sanction” and Rule 64(a) should therefore be interpreted narrowly and should not be given a “construction going beyond its clear language.” The court therefore recognised the punitive nature of Rule 64(a).

Another rule of a punitive nature that was recently the subject of a judicial pronouncement is Prescribed Management Rule 31(6). Readers are referred to the September 2010 edition of Paddocks Press and the article entitled “MD Mitchell v Die Beheerliggaam RNS Mansions – Simplifying a compounded issue“.

In the RNS Mansions case, the North Gauteng High Court held that compound interest is payable in terms of the Sectional Titles Act. The court went further and held that trustees must charge compound interest on arrear levies as their fiduciary duty to the body corporate obliges them to do so. Trustees would be remiss if they failed to charge compound interest, as invested levies could earn compound interest at a financial institution.

So trustees now find themselves in the position where they are required by their fiduciary duty to raise compound interest on arrear levies in terms of Rule 31(6), but they are prevented from using Rule 64(a) as a “Sword of Damocles” in collecting payment of the arrear compound interest. It therefore follows that the only way the body corporate can collect the arrear compound interest is by the expensive, time-consuming and often-divisive process of handing the account over to attorneys. This presents more than the obvious hardships normally suffered by bodies corporate, which generally are by their nature cost sensitive.

If one uses the position of the body corporate of Belmont Arcade (the scheme in question in the Herald Investments judgment), the danger of allowing compound interest defaulters to vote can be deduced from the facts. In Herald Investments, the participation quota (“PQ”) of the body corporate was divided among commercial and residential unit owners. The commercial owners refused or failed to pay the arrear compound interest on their accounts and held more than 50% of the PQ.

In a dark and sinister (but entirely plausible) world, the commercial owners with their majority PQ would be able to elect trustees from their own ranks. With a majority in the general meeting and in the elected trustees, the commercial owners would rest easy, knowing that their arrear compound interest accounts would not be handed over by the trustees for collection. What would this mean for the minority who wish to ensure that the body corporate’s interests come first by collecting the arrear compound interest? A high court application for the appointment of an administrator would seem to be the only solution. In the real world, high court litigation is expensive, especially to a handful of owners who do not have the backing of the body corporate’s coffers.

In terms of the interpretation of Rule 64(a) in the Herald Investments case, any unpaid interest, be it compound or simple, as well as unpaid administration and penalty fees, does not bring the rule into operation. Given the issues of fairness and necessity at play in matters relating to bodies corporate as well as the interests of the various owners, the court should perhaps have sought an interpretation of “contributions” that precludes compound interest defaulters from voting in terms of Rule 64(a). More could perhaps have been made of the fact that “contributions” is not categorically defined in the Act or that Management Rules 30, 31 and 45 do not define the makeup of contributions. A mechanism for the inclusion of “interest” in “contributions” could thus have been created.

Perhaps there is also merit in the argument that interest is a foregone conclusion on “arrear amounts” as it is described in Management Rules 31(5) and (6). To separate interest from “contributions”, which must surely fall under “arrear amounts”, is therefore artificial. Finally, it could be argued that the exclusion of overdue interest in the application of Management Rule 64(a) is an absurdity and could not have been the intention of the legislature.

Be that as it may, the judgment in the Herald Investments case is now the law relating to the application of Rule 64(a) as it stands. At the next opportunity the legislature should amend the Act or the rule or the Courts should change their interpretation of the relevant provisions to ensure that Management Rule 64(a) is an arrow in the body corporate’s quiver available for use against owners who have not paid accrued interest on their levies.

Article reference: Paddocks Press: Volume 5, Issue 12, Page 2

Neil is a Westville candidate attorney who specialises in sectional titles levy collecions, working with Siveshna Padayachee of Lomas-Walker Attorneys.

This article is published under the Creative Commons Attribution license.