Rental diversions where landlords are in arrears with levies?
An interesting provision in the standard "Community Statement" prescribed under the Commonhold legislation (England and Wales' version of sectional titles) is that the association can secure the "diversion of rent" from the tenant of a defaulting unit owner to the association to settle the levy arrears. The question was recently asked whether it would be possible to introduce such a provision into the rules of a sectional title scheme in South Africa.
I do not think that scheme rules are the right place for this type of provision. In my view this type of arrangement could be made, but as the law stands at the moment it would have to be inserted into the title deed conditions applicable to all units in the scheme because it is an inroad into an owner's right to take some of the "fruits" (i.e., the rental income) from his or her property. In this respect, this type of provision seems to me to be a new type of urban servitude that would need to be registered. But in practice this is unlikely to occur, because few developers would include in the title conditions a provision that would make the units less attractive to investor buyers, and an established body corporate is unlikely to get the unanimous agreement from all owners and bondholders necessary to insert such a provision into the title deed conditions.
Should this type of provision be considered an unwarranted interference in the private contractual arrangements between landlords and tenants? I guess that the banks who finance sectional title investor landlords would not be too thrilled if their landlord clients were unable to pay the bond instalments because the rent had been diverted to cover unpaid levies. But I suggest that from a cash-flow perspective, the non-commercial interests of the body corporate and the other owners who do pay their levies should take precedence over the commercial interests of mortgage lenders. Banks have the expertise to assess the risk they take in their lending contracts and can refuse to lend to those they consider might not pay regularly, whereas the body corporate has no right to refuse to spend money for owners who are credit risks. It automatically gets all new owners as members and must pay out monies on behalf of all owners, whatever their ability or willingness to pay levies.
This type of provision is attractive from a scheme management perspective because it allows the body corporate access to a stream of cash flow that can be applied to the proved debt, thus avoiding the substantial delays and legal costs involved in recovering a judgment by way of attaching and forcing the sale of the landlord's movable and immovable property.
The follow-up question is whether this type of arrangement could be included in the Community Scheme Ombud Service Bill currently working its way through Parliament; in other words, to be included in a statute so as to be applicable to all community schemes. In my view, such a provision could be included in the Bill. In practice, the adjudicator would first have to find that the landlord/owner or occupier owes the association money and is entitled to periodic payments of rental from a particular tenant. Then in appropriate circumstances he or she could order this "rental diversion" as part of the award.
The award would require a named tenant in a community scheme to pay to the association (and not to his or her landlord) all or part of the rentals payable under a particular lease agreement from a particular date and until a specified amount of rental has been "diverted". When such an award is made, the tenant would be obliged to make the payments and prevented from deducting any amounts, so as to secure the full effect of the order. The payments made by the tenant would discharge the tenant's liability to the landlord in terms of the lease and the association would be obliged to credit amounts received from the tenant to the account of the landlord. The provision could be worded on the following lines:
"an order requiring a specified tenant in a community scheme to pay to the association and not to his or her landlord all or part of the rentals payable under a lease agreement from a specified date and until a specified amount due by the landlord to the association has been paid; provided that in terms of such an order:
(i) the tenant must make the payments specified and may not rely on any right of deduction, set-off or counterclaim that he or she has against the landlord to reduce the amount to be paid to the association;
(ii) payments made by the tenant to the association discharge the tenant's liability to the landlord in terms of the lease, and
(iii) the association must credit amounts received from the tenant to the account of the landlord."
Professor Graham Paddock is an authority on sectional title law and practice. He is one of the Course Conveners of the University of Cape Town (Law@Work) Sectional Title Scheme Management course. The next course will start on 6 December 2010. Late registrations will be accepted. Please contact Kate: email@example.com or see www.paddocks.co.za.
Article by: Prof Graham Paddock - www.paddocks.co.za