By Siveshna PadayacheeIn this article Westville attorney Siveshna (also known as Sivannah) Padayachee takes us through the detail of two recent judgments in which she acted for the body corporate.

In a recent unreported judgment of the KwaZulu-Natal High Court in Pietermaritzburg, the matter of the Body Corporate of Frenoleen v Dlamini (case no. AR 611/09,11/ 03/2010), the question considered was whether or not levies due by an owner to a sectional title body corporate constitute an “incidental credit agreement” for the purposes of the National Credit Act 34 of 2005 (hereafter referred to as the “NCA”). Swain J and Vahed H.B. AJ held that “Levies charged by a Body Corporate to its members do not constitute an incidental agreement because the levies do not constitute an ‘account tendered for goods or services provided by the Body Corporate to the consumer’.’’The purpose of this article is to discuss this momentous court decision and to analyse the relevant provisions of the NCA and the Sectional Titles Act 95 of 1986 (“the Act”).

Prior to the above important decision, there was only speculation about whether the collection of levies by a Body Corporate could be categorised as an “incidental credit agreement”, as defined in the NCA.

In Tertius Maree’s article in De Rebus (December 2009), entitled “Sectional Title levies and the NCA,” he addressed the question whether or not the NCA applied to levies, and was of the view “that the NCA does not apply to levy obligations, whether as incidental credit agreements or otherwise and whether interest is raised on arrears or not”.

Professor Graham Paddock in his article in Paddocks Press entitled “Can Sectional Owners in arrears with levies use the debtor-protection provisions in the National Credit Act?” asked the question, ‘Will these arguments convince a High Court Judge to give a declaratory ruling to the effect that sectional title levy arrears are not the result of any type of credit agreement and that defaulting sectional owners are not entitled to the consumer protections under the NCA when a body corporate acts against them for recovery of overdue levies, interest and collection costs?’

Paddock in his article also drew attention to Maree’s article in Die Burger’s ‘Deeltitelforum’ where Maree commented on the definition of an incidental credit agreement and explained why there was no agreement between the owner and the body corporate with regards to raising of levies, but only a legal relationship resulting from the provisions of the Sectional Titles Act and the management rules.  Maree advised in his article in ‘Deeltitelforum’, that trustees should not charge interest on arrear levies until a court order had confirmed that the provisions of the NCA do not apply to levies.

The Frenoleen judgment is momentous because it answers the above questions and provides authority that can be relied upon confidently to state that the recovery of sectional title levies do no fall under the provisions of the NCA.

Facts Of The Frenoleen Case

The facts that came before the Appeal Court in the Frenoleen case were as follows:

The Plaintiff obtained default judgment against the Defendant for the recovery of arrear levies. In execution of the judgment, the Defendant came to know of the judgment and did not immediately institute an application for the rescission (the cancellation) of the judgment. The Defendant maintained that he had made several payments, which were not taken into account and accordingly disputed the amount claimed by the Plaintiff. The Plaintiff acknowledged and accepted that some of the Defendant’s payments were not taken into account because the Defendant did not properly reference these payments. Various reconciliations and breakdowns were given to the Defendant to demonstrate how the arrear levies had been calculated and to explain that despite his payments, the Defendant would still have been liable for arrear levies.

The high-water mark of the Defendant’s case was his allegation that he had repeatedly requested reconciliations, which were not provided to him, (which allegation was denied by the Plaintiff) and consequently that he was not indebted to the Plaintiff in part or at all and had paid and settled the amount claimed for levies.

The Defendant rejected the Plaintiff’s explanation and instituted his rescission application, which was opposed. The Defendant, in his replying affidavit, raised the issue of administration fees, legal monitoring fees, and interest; he specifically disputed these fees and interest and submitted that the administration fees and interest exceeded the maximum rate permissible in terms of the NCA. In addition, the Defendant stated that he was entitled to “abatement of the account and to rely on the legal exception of an error calculi in any agreement which constituted a credit agreement under the NCA.”

The court a quo that had granted the original judgment held that the Defendant did not have a bona fide defence and that the various other defences raised by the Defendant in his replying affidavit were ‘not applicable to Sectional Title matters.’ Accordingly the Defendant’s application was dismissed with costs.

The Defendant appealed the court a quo’s decision.

No legal argument was made at the appeal hearing regarding the applicability of the NCA to levy collections. The advocates representing Dlamini and the Body Corporate of Frenoleen only raised the issue of the NCA in their respective Heads of Argument. However, because the issues of the application of the NCA and the collection of levies not being an incidental credit agreement were argued in the Court a quo and dealt with in its judgment, the Appeal Court also considered these issues.

The Judgment

The Court held at paragraph 11 of the judgment:

1. “A Body Corporate does not supply goods or services to its members, nor does it advance money, or credit to its members;
2. Levies charged by a Body Corporate to its members, do not constitute an incidental agreement because the levies do not constitute an ‘account tendered for goods or services provided by the Body Corporate to the consumer’,
3. Levies are not payable by members of a Body Corporate to an agreement, as defined in the Act, but are payable by virtue of the provisions of the Sectional Titles Act, 95 of 1986.”

The Court was also satisfied that the Defendant had failed to establish a substantial defence to the Plaintiff’s claim and dismissed his appeal with costs.

The Legal Argument In The Court A Quo

I argued this decision in the court a quo (the Durban Magistrates’ Court) and in my argument I relied on the following: –

1. The collection of levies is stipulated in terms of the Act and is not a “credit transaction”;
2. The body corporate is simply recovering budgeted expenses which it has to outlay (eg. rates, insurance, electricity, water, maintenance etc) as required by Section 37(1) of the Act;
3. The defendant is not a “consumer”;
4. The body corporate is not a “credit provider”;
5. The relationship between an owner and the body corporate is governed in terms of the Act and its regulations, and this legal relationship cannot be categorised as an “agreement”;
6. The duty of an owner to pay interest is in terms of management rule 31 (6) and does not arise from any agreement concluded between the body corporate and an owner.

In terms of Section 37(1) of the Act, a body corporate of a sectional titles scheme, is required to perform the functions entrusted to it under the Act. This includes the establishment of a fund for administrative expenses to provide for inter alia, the upkeep, control, management and administration of the common property (Section 37(1)(a)).

In terms of Section 37(2) of the Act, any contributions (levies) in terms of section 37(1), shall be due and payable on the passing of a resolution to that effect by the trustees of the body corporate, and may be recovered by the body corporate by action in any court of competent jurisdiction from the persons who where the owners of units at the time when such contributions became due.

Therefore in order for the sectional title scheme to survive it is essential that each owner pay levies and/or special levies to meet the day-to-day maintenance and estimated running costs of the scheme.

Levies due to a body corporate are dealt with in Section 47 of the Act read with Management Rules 30 and 31(1) of Annexure 8 to the Regulations of the Act. Management Rule 31(6) provides that the trustees are entitled to charge interest on arrear amounts on such rates as they may determine from time to time and Management Rule 31(5) provides that “An owner shall be liable for and pay all legal costs, including costs as between attorney and client, collection commission, expenses and other charges incurred by the body corporate in obtaining the recovery of arrear levies, or any other arrear amounts due and owing by such owner to the body corporate, or in enforcing compliance with these rules, the conduct rules or the Act.”

In summary, sectional title owners are statutorily liable for levies and their liability for levies is not based on an “incidental credit agreement”. A levy contribution is not a “credit agreement” and a Body Corporate is not a “credit provider” and owners of units are not “consumers”, all phrases as defined in the NCA. Furthermore, there is no agreement as such that is concluded between the body corporate and the owner.

Another Persuasive Judgment – The Park Avenue Gardens Case

In a Durban Magistrate’s Court decision in the matter of the Body Corporate of Park Avenue Gardens v Bricknell (case no. 2180/2008; 16/02/2009), where I appeared for the body corporate, the Defendant raised a point in limine and alleged that the Plaintiff’s claim for levies was a “situation whereby the National Credit Act 34 of 2005 applies and that the agreement between the Body Corporate and the owners is an ‘incidental credit agreement’.” Accordingly it was argued that the Plaintiff’s claim was premature since it did not comply with Section 129 of the National Credit Act.

Section 129 of the NCA provides a mandatory procedure applicable to credit providers in incidental credit agreements, being the debt enforcement procedure in terms of part C of chapter 6 of the NCA. This requires that legal proceedings to enforce an agreement may not commence before a consumer has been given notice of default that includes a proposal that the consumer refer the credit agreement to various bodies in order to agree on a plan to bring the payments due under the agreement up to date.

The point in limine was argued and the court held that the recovery of levies is not an incidental credit agreement and dismissed the special plea with costs.

Although this case was decided in a lower court and does not carry judicial weight, the principles extracted from the judgment are relevant.

It was the Defendant’s contention that it did not matter whether the obligation to render such services (services included the upkeep of the common property, providing water, lights and other services) flowed from the Act or not – the moment the body corporate rendered an account for levies, whether in advance or in arrears, there is a credit agreement because this transaction amounts to a credit agreement the provisions of Section 129 of the NCA need to be complied with.

In the Park Avenue Gardens case, the definition of an incidental credit agreement was analysed.  In the case of an incidental credit agreement, despite the fact that all the requirements for a valid contract have been fulfilled, an incidental credit agreement is deemed to be concluded 20 business days after:

1. the date the late fee or interest is levied, or
2. the date a pre-determined higher price for full settlement of the

account first becomes applicable, unless fully paid by the consumer before that date.Accordingly, an incidental credit agreement is, in essence, an agreement in terms of which an account is tendered for goods or services which have been provided and either a fee or interest becomes payable if payment for the goods/services is not made within a determined time, or a lower price is applicable if the account is paid before a determined time.The provisions of the Act do not require a body corporate or a managing agent to provide monthly accounts. Management Rule 31(3) provides that:

“within fourteen days after each annual general meeting the trustees shall advise each owner in writing of the amount payable by him or her in respect of the estimate referred to in sub rule (2), whereupon such amount shall become payable in instalments, as determined by the trustees”.

The court refused to accept the defendant’s contentions and analysed the purpose of the promulgation of the NCA as contained in section 3. The Court concluded that the intention of the legislature was “to promote and advance the social and economic welfare of South Africans, promote a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry and to protect consumers… Upholding the Defendant’s position would not amount to fairness among Body Corporate members who share the same status of a consumer as he does. Such decisions would frustrate the whole institution of Sectional Title Schemes, rendering them dysfunctional, unsustainable, inefficient, and ineffective. The irresponsible members of the Body Corporate would easily render the institution bankrupt and easily render the living conditions into a health hazard, as none other members would be willing to sustain the scheme at their own expense while others live freely without carrying the equal burden of responsibilities flowing from their joint liability to pay their municipal rates and other creditors the members jointly agreed on.”

Conclusion

In respect of the recovery of arrear levies from defaulting owners, there is no need for the body corporate or its attorney to comply with the provisions of Section 129 of the NCA since this statute is not applicable to levy collections. In addition, when an owner applies to be placed under debt review in terms of the provisions of the NCA and includes the Body Corporate as one of his creditors, such application should be opposed, for all the reasons mentioned above.

The clarity provided by the judgments discussed above is indeed welcome.

Siveshna Padayachee (B.PROC LLB), Attorney and partner at Lomas-Walker Attorneys.

(Copies of these two judgments can be downloaded from the Library section at Sectional Titles Online – www.sto.co.za.)