In the Paddocks consulting department, we are often asked the same questions relating to the changes in sectional title administration and management, as introduced by the Sectional Titles Schemes Management Act 8 of 2011 (“the STSMA”). This series of articles will be taking a closer look at the most popular questions we are receiving from the sectional title industry, more specifically from managing agents and trustees.
Requirement for a reserve fund
Let us first take a look at the the requirement for a reserve fund in a sectional title scheme. In terms of section 3(1)(b) of the STSMA, one of the functions of the body corporate is “to establish and maintain a reserve fund in such amounts as are reasonably sufficient to cover the cost of future maintenance and repair of common property but not less than such amounts as may be prescribed by the Minister”.
This requirement to establish and maintain a reserve fund is in addition to the continued function to establish and maintain an administrative fund, which is reasonably sufficient to cover the estimated annual operating costs of the body corporate.
Minimum amounts for the reserve fund
Regulation 2 of the Sectional Titles Schemes Management Regulations (the “STSMR”) sets out the minimum amounts for the reserve fund. Please take note that these amounts are the minimum amounts required by the Minister, and may not reflect at all what is required in your scheme. Therefore, it is important for each scheme to comply with Prescribed Management Rule (“PMR”) 22 of Annexure 1 of the STSMR, which provides that a body corporate must prepare a written maintenance, repair and replacement plan (“MR&R plan”) for the common property. The MR&R plan will be dealt with in Part 2 of this series of articles, which will aid the body corporate in determining the amounts required for their reserve fund. In fact, PMR 24(2) provides that the reserve fund must be used for the implementation of the MR&R plan of the body corporate.
Regulation 2 of the STSMR, provides that the minimum amount of the annual contribution to the reserve fund, for a financial year being budgeted for, must be determined in terms of one of the following three categories.
Category 1 – Minimum amounts
Scenario: The amount of money in the reserve fund, at the end of the previous financial year, is less than 25% of the total contributions to the administrative fund for that previous financial year.
Minimum requirement: The budgeted contribution to the reserve fund must be at least 15% of the total budgeted contribution to the administrative fund.
Category 2 – Minimum amounts
Scenario: The amount of money in the reserve fund, at the end of the previous financial year, is equal to, or greater than, 100% of the total contributions to the administrative fund for that previous financial year.
Minimum requirement: There is no minimum contribution to the reserve fund.
Category 3 – Minimum amounts
Scenario: The amount of money in the reserve fund, at the end of the previous financial year, is more than 25%, but less than 100%, of the total contributions to the administrative fund for that previous financial year.
Minimum requirement: The budgeted contribution to the reserve fund, must be at least, the amount budgeted to be spent from the administrative fund, on repairs and maintenance to the common property, in the financial year being budgeted for.
Amounts paid into the reserve fund
According to PMR 24(3), the following amounts must be paid into the reserve fund:
(a) Levies: any part of the annual levies designated as being for the purpose of reserves, or the maintenance, repair and replacement plan;
(b) Insurance: any amounts received under an insurance policy in respect of damage or destruction of property, for which the body corporate is responsible;
(c) Interest: any interest earned on the investment of the money in the reserve fund;
(d) Other: any other amounts as determined by the body corporate.
All other body corporate income must be paid into the administrative fund.
Amounts which may be paid out of the reserve fund
PMR 24(5) further provides that the following amounts may be paid out of the reserve fund:
(a) Trustee resolution / MR&R plan: amounts at any time in accordance with trustee resolutions and the approved MR&R plan; or
(b) Urgent maintenance, repair or replacement: if the trustees resolve that such a payment is necessary for the purpose of an urgent maintenance, repair or replacement expense, which purpose includes, without limitation:
(i) Court / Adjudicator Order: to comply with an order of a court or an adjudicator;
(ii) Ensure safety / prevent loss or damage: to repair, maintain or replace any property for which the body corporate is responsible where there are reasonable grounds to believe that an immediate expenditure is necessary to ensure safety or prevent significant loss or damage to persons or property;
(iii) Reasonably foreseen repairs: to repair any property for which the body corporate is responsible where the need for the repairs could not have been reasonably foreseen in preparing the MR&R plan; or
(iv) Insurance: to enable the body corporate to obtain adequate insurance for property that the body corporate is required to insure;
The above being noted on the proviso that the trustees must report to the members on any such expenditure as soon as possible after it is made.
Expenditure under PMR 24(5)(b) must further not exceed the amount necessary for the purpose for which it is expended, or any limitation imposed by the body corporate on expenditure, and must comply with any restrictions imposed or directions given by members.
As can be seen from this article, the determination of the amounts for the prescribed reserve fund in the scheme is quite complicated and is by far one of the most popular questions we, as consultants, are asked. Therefore, we suggest that should you have any queries relating to this topic, or want to find out about our Sectional title Bridging short course, where the changes to our industry will be explained, contact us at firstname.lastname@example.org or on 021 686 3950.
Article reference: Paddocks Press: Volume 11, Issue 10, Page 02.
Zerlinda van der Merwe is an admitted Attorney of the High Court, specialist Sectional Title Attorney (BA, LLB, LLM), Zerlinda brings a wealth of experience and forms part of the Paddocks Private Consulting Division.
This article is published under the Creative Commons Attribution license.