By Prof Graham Paddock

Prof Graham Paddock
Reduction in the Prescribed Rate of Interest  – Effect on Sectional Title Levy Arrears 

From 1 August 2014 the “official” rate of interest on overdue debts will be reduced from 15,5% to 9% per annum.

Prescribed management rule (“PMR”) 31(6) allows the trustees to charge interest on arrear amounts due to a body corporate at such rate as they may determine from time to time. But there is no part of the Sectional Titles Act, 1986 or any prescribed management rule that sets the rate of interest the trustees can charge on such overdue amounts.

Section 1(1) of the Prescribed Rate of Interest Act, 1975 (“the PRI Act”) provides that if a debt bears interest and the rate at which the interest is to be calculated is not governed by any other law or by an agreement, a trade custom or in any other manner, such rate must be calculated at the prescribed rate which is set by the Minister under section 1(2) of that Act. This prescribed rate of interest has now been reset from 15,5% to 9% per annum.

In the case Body Corporate Lynwood Gardens vs Mureli Yegi and others the court examined the statement that the interest on arrear amounts may not exceed the rate set by the Minister under the PRI Act. Here the owners agreed at an annual general meeting to instruct the trustees to set a rate of 10% per month under PMR 31(6). The court upheld the obligation to pay the interest at this very high rate (120% per year before the effect of monthly compounding) because it said that this obligation was created by an agreement between the sectional title owners. For that reason the PRI Act did not apply. If the trustees alone had determined the interest rate under PMR 31(6) and other owners had not been a party to the agreement, then the lower rate determined by the Minister under the PRI Act would have applied.

In summary, from 1 August 2014 the “default” rate of interest that applies to arrear amounts due and payable by owners to a body corporate reduces to 9% per annum. However, if the sectional owners have taken a decision that a higher rate of interest will apply and the trustees have implemented this by another decision under PMR 31(6), the higher interest rate will be recoverable. This however presumes that the interest rate is reasonable in the circumstances and that the sectional owner cannot claim that it is in fact an unreasonably excessive penalty that must be reduced under section 3 of the Conventional Penalties Act, 1962 because it is out of proportion to the prejudice suffered by the body corporate as a result of the failure to pay timeously. Finally, trustees should bear in mind the “in duplum” rule, which provides that interest on a debt can never exceed the original capital amount. When the accrued interest reaches the amount of the capital (which it will do quite quickly at a rate such as 10% per month) it then stops running and the body corporate is not entitled to any more interest on that claim.

Article reference: Volume 9, Issue 7, Page 1

Adjunct Professor Graham Paddock is the Senior Partner at Paddocks and the Director of Mystrata South Africa

This article is published under the Creative Commons Attribution license