Cash-flow Assurance as opposed to Levy Finance
The type of insurance referred to in the Sectional Titles Act and the prescribed management rules is “indemnity insurance”. The body corporate is obliged to insure the buildings and other improvements in the scheme against damage by fire and other prescribed risks. In addition, the body corporate can take out cover against other risks referred to in PMR 29. A special resolution of owners is required to authorise insurance against any other risks (beyond fire damage and those detailed in PMR 29) in terms of section 37(1)(g) of the Act. The basis of indemnity insurance is cover against possible loss, liability or expenses. In exchange for premiums the insurance company undertakes to compensate the body corporate for loss.
The Stilus ‘Levy Underwriting Security” product, in which Santam is the insurer, is a completely different type of insurance. At first glance it seems to be a new form of levy finance product, but in fact it is a form of “guarantee insurance”. Whereas a levy financier only lends refundable and interest-bearing money to the body corporate, Stilus undertakes to pay the amount of any unpaid levy; this is not a loan. The body corporate pays Stilus premiums and, when it claims and is paid the outstanding levies, gives Stilus the right to act in the body corporate’s name – but for Stilus’ account – against the defaulting owner to recover the capital, interest and costs.
The guarantee insurance cover is sold as an annual policy via insurance brokers and renews automatically each year unless the body corporate gives prior notice of cancellation. The premium amount is tied to the scheme’s building indemnity insurance. If Stilus determines that the scheme’s building indemnity insurance amount is less than the actual replacement value of the buildings, it may “average” the levy claim, effectively reducing the amount the body corporate is paid by the percentage that the scheme is considered to be under-insured for its buildings. Where “average” is not applied, the body corporate’s full income from that levy is guaranteed. Levies will be inflated by the premiums and any other costs associated with the insurance but from the date of payment of a claim, the capital, interest and collection costs will be recovered from the defaulting owner for Stilus’ account.
The product depends on the involvement of approved managing agents who will ensure that the body corporate has a legally recoverable claim and will be paid a share of the administrative fee each time a claim is made. When a claim is approved and paid, Stilus and its collecting attorneys will take over the collection of the claim. While the managing agent will be paid for their work in processing a claim, he or she will not be involved in the collection except to give administrative support.
The body corporate agrees to charge defaulting owners interest at a rate determined by Stilus, together with legal costs at the ‘attorney and client’ rate. The interest and charges will be for the benefit of Stilus and its collection attorneys. Because Stilus will sue the owner in the body corporate’s name, the managing agent and trustees are obliged to give whatever support and assistance Stilus requires in the litigation process. The burden of proving the “loss” will remain with the body corporate and it must, if required by Stilus, at its own expense obtain certificates supporting the claim from its auditors, managing agents and lawyers.
When a body corporate receives payment of a levy default claim, it is obliged to credit that payment to a ‘Stilus Claims Received’ ledger account rather than to the defaulting owner’s ledger account. It is vital to the contract that the owner’s debt to the body corporate must remain unpaid from a legal perspective. It is only on this basis that the body corporate can refuse to issue a levy clearance certificate and effectively hold the units as security for the claim.
For as long as Stilus and its collection attorneys are acting against any owner in the scheme the approved managing agent and the body corporate agree that no person may issue a levy clearance certificate for a unit in respect of which a claim has been made without written consent from Stilus. If a levy clearance is issued in breach of this provision, which continues to apply if the body corporate cancels the Stilus policy, all the capital amounts received from Stilus become repayable together with interest and all collection costs. The policy document originally prohibited clearances for any units in the scheme while any amounts were uncollected, but this provision has now been narrowed to apply only to the units owned by defaulting owners.
The policy documentation has also been adjusted to make it clear that when Stilus has investigated and paid a claim, it and Sanlam accept the risk that the body corporate might not succeed in the legal action against the defaulting debtor. So if any amount is found not to be legally recoverable, despite the due diligence carried out by Stilus in conjunction with the managing agent, the body corporate will not have to repay any part of the claim.
A question, which arises, is whether a body corporate has the right to refuse a levy clearance certificate when it has received the insurance payout for that levy. In this case, can the owner not argue that Santam has paid the debt? My view is that the courts will probably uphold the arrangement and consider that the owner’s debt remains unpaid.
The major issue that has arisen in regard to the Stilus product is: What level of authority is required for a body corporate to enter into this contract, i.e. can trustees take the decision or is a special resolution of owners required under section 37(1)(g) of the Act?
Section 37(1)(g) of the Act applies only to indemnity insurance and nothing in the Act caters for guarantee insurance. Obtaining this type of insurance is not one of the body corporate’s functions, but it does have the power in terms of section 38(j) to do “all things reasonably necessary for the … management and administration of the common property”. So when it is “reasonably necessary”, i.e. a scheme cannot reasonably take the risk of not receiving levies on due date and the Stilus levy guarantee contract is the most sensible type of financing available, a body corporate is entitled to enter into such a contract and the trustees would be entitled, in terms of section 39(1), to take the decision to do so.
Because the decision involves entering into a complex contract and increasing the body corporate’s overheads, I suggest that no trustee should take this decision without obtaining:
(a) Independent advice that the body corporate needs levy financing and that this is the best type available; and
(b) confirmation that the majority of owners agree that levy financing is necessary and approve the increase in scheme overheads.
Article reference: Paddocks Press: Volume 6, Issue 2, Page 4
This article is published under the Creative Commons Attribution license.