By Prof Graham Paddock
“Carrot and Stick Approach” is a term used to refer to a policy of both offering a reward and threatening a punishment to persuade a person to behave in a certain way.
In sectional title schemes and homeowners’ associations it is usual for owners who pay their levies after due date to be liable for interest at a rate set by the trustees and other penalties, such as the suspension of voting rights for ordinary resolutions. What is not usual, in South Africa, is for the scheme to offer owners a positive incentive to pay their levies before due date. If the interest and loss of voting rights is the “Stick”, then the offer of a discount for early payment would be the “Carrot”.
The incentive of a discount for early payment is perfectly permissible and is used extensively in other jurisdictions, with the extent of the incentive often being set at a rate of 5 to 10 percent, although it can be up to 20 percent, which means that owners can achieve substantial savings by ensuring that they pay their levies early.
One of the first questions asked in this regard is how, from a financial perspective, the body corporate or homeowners’ association can afford to allow for discounts. The answer is that it must be budgeted for as a contingent expense, with the extent of the likely discounts being taken into account in setting the total amount the scheme needs to collect. If this sounds awfully complicated relax, it is not and in fact modern software used to manage sectional title bodies corporate and homeowners’ associations performs these calculations automatically.
If late levy payment is a problem in your scheme and you think that a positive incentive to prompt payment could reduce your levy arrears to acceptable proportions, give the issue of budgeting for early levy payment discounts serious consideration. It is certainly a very much more sensible commercial approach than having the body corporate or home owners’ association borrow money from a levy financier to make up the levy shortfall and cover its expenses.
Article reference: Volume 9, Issue 1, Page 1
Adjunct Professor Graham Paddock is the Director Mystrata South Africa (www.mystrata.com)
This article is published under the Creative Commons Attribution license.