Can sectional owners in arrears with levies use the debtor - protection provisions in the National Credit Act?

Attorney Andries Landman of Wynberg drew my attention to Tertius Maree's article in Die Burger's 'Deeltitelforum'. The article is entitled 'Credit Act Developments Cause Concern' (Verwikkelings met kredietwet wek kommer). Some time ago Andries identified the possible application of the National Credit Act ('NCA') as a potential problem in collecting arrear levies. He now highlights Tertius' view that the NCA does not apply to levy recoveries and Tertius' advice to trustees not to raise interest on arrear levies, at least until a court has given a clear ruling on the subject.

In his article Tertius confirms that sectional title owners who fall into arrears with levies now frequently hide behind the credit consumer protection provisions of the NCA. He states that the National Credit Regulator ('NCR') has recently issued a directive confirming that sectional title levies are indeed subject to the NCA and he forsees dire consequences for schemes where owner's levy debts are re-scheduled, sometimes over a number of years, in terms of section 86 of the NCA.

Tertius points out that in terms of the definition of an 'incidental credit agreement' the provisions of the NCA onlyapply if interest or penalties are collected on arrear levies. This means, he says, that trustees can and should avoid the extremely punitive provisions of the NCA by not charging any interest on arrear levies until a court order has confirmed that the NCR is wrong and that the provisions of the NCA do not apply to levies. In support of his view that the NCA does not apply to the recovery of arrear sectional title levies, Tertius argues in his article:

1. There is no 'agreement', arrangement or understanding between the body corporate and owners - Tertius does not think that the liability for levies arises as a result of an arrangement or understanding that qualifies as an "agreement" for the purposes of section 1 of the NCA. In the process of raising levies, he sees no agreement between the owner and the body corporate, but only a legal relationship resulting from the provisions of the Sectional Titles Act and the management rules. While it is true that the decision of trustees to raise levies is a unilateral legal act, a counter-argument could be that trustees must base levies on a budget agreed to by owners at the annual general meeting.

2. There is no arms-length relationship between an owner and the body corporate - While he sees the relationship between a credit provider and a credit consumer as being one 'at arms-length', Tertius sees the relationship between a unit owner and the body corporate as being of a different kind, because the body corporate is made up of all the owners.

3. The body corporate does not deliver goods or services to owners - Tertius does not believe that the body corporate delivers goods or services as such to the owners but argues that instead it fulfills functions set out in the Act and scheme rules.

4. The obligation to pay interest on arrear levies is not based on an agreement - In Tertius' view the obligation to pay interest on arrear levies is based not on any agreement but on the provisions of management rule 31 (6) activated by a trustee resolution.

The idea that a body corporate should not raise interest on overdue levies is not an attractive one, primarily because it means that there is no financial penalty associated with an owner's failure to comply with what must surely be regarded as his or her primary obligation to co-owners, the duty to pay his or her fair share of common expenses on due date.

I contacted the National Credit Regulator's office, explained my interest in the industry and was soon contacted by Annemarie Friedman, a Senior Legal Advisor. She explained that the NCR cannot issue formal opinions or directives, but she was prepared to issue a non-binding opinion on the issues. The opinion I received indicated that it was not intended for circulation. I respect that condition and therefore will incorporate into this article only my conclusions drawn after reading that opinion.

In dealing with the question of whether the recovery of sectional title levies payable by owners is governed by the NCA, the NCR will first ask whether or not there is in law a credit agreement or an incidental credit agreement between the parties. The principles it is likely to consider apply in this regard are:

(a) If there is no agreement to defer the payment date, there will be no credit agreement;

(b) If payment of the amount is deferred but no fee or interest is payable in respect of the amount that has been deferred, there will be no credit agreement;

(c) It will be considered to be an incidental credit agreement if it is an agreement in terms of which an account is tendered for goods and services that have been provided to the consumer, or are to be provided over a period of time on condition that a fee, charge or interest becomes payable if the amount charged is not paid before a certain date;

(d) The body corporate and the owner in arrears will be deemed to have made an incidental credit agreement after a certain lapse of time in terms of which interest or a late payment fee became payable when payment was overdue; and

(e) If the obligation to pay interest and collection charges arises by operation of law, it will not be considered an incidental credit agreement.

Accordingly, my view is that the best argument trustees can make to support the view that there is no credit agreement or incidental credit agreement between the body corporate they administer and owners in arrears is:

(i) there is no agreement to defer the payment date, so there is no credit agreement; and

(ii) section 37 of the Sectional Titles Act, 1986, in terms of which levies are payable, was made by Parliament and prescribed management rules 31(4), (4A), (5) and (6) contained in Annexure 8 to the regulations thereunder were made by the Minister, thus the owners' obligation to pay levies, interest and collection charges arises by operation of law and accordingly there is no incidental credit agreement.

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? I really don't know.

But I do know that if the protections afforded to credit consumers under the NCA are held to apply to property owners who are liable to contribute to the common expenses of a sectional title scheme, the managing agents and trustees who handle the day-to-day management of these schemes, as well as those who help to manage share-block schemes, homeowners associations and retirement developments, will - as a matter of urgency - have to learn how to deal with situations in which defaulting owners apply for debt review under section 86 of the NCA. Particularly in smaller schemes, non-payment of contributions by one or more owners can mean a cash-flow crisis that requires the trustees to raise special levies from the owners who are in good financial standing to raise the money necessary to pay scheme creditors.

While we wait for certainty, here is my non-accountant's "work-around" suggestion to avoid the problem.

Instead of focusing on interest or penalties as disincentives for late payment, how about substituting incentives for early payment?

The trustees could build a premium into the amount of the levies they declare (advance interest if you will) and then stipulate that the levies must be paid in installments and that those owners who make the scheduled payments on time will be entitled to substantial discounts, calculated at the same reasonable rate as interest has historically charged on late payments. If levies remain unpaid at year end, the trustees could then decide that conventional interest will be applied to any outstanding portion of the levy and accept that this might bring the debt within the ambit of the NCA.

Article by: By Prof. Graham Paddock -