Sect. title for dummies
| The rise in popularity of sectional title ownership over
the last two decades is a testament to the fact that sectional title ownership
is fast becoming the preferred home ownership option for both resident
owners and buy-to-let investors. Modern lifestyle demands the ability
to enjoy the benefits of facilities such as good security, gymnasiums,
communal pools and the like. However, individual ownership of these benefits
proves costly both in terms of time and money due to the corresponding
maintenance obligations attached to such amenities. In sectional title
ownership, these benefits can be enjoyed whilst the maintenance and financing
of such amenities is shared by all owners of the scheme.
Despite its advantages, sectional title ownership is notoriously considered more complex than conventional title ownership and for good reason. Buying into a sectional title scheme is a commitment by the new owner to form part of a community which is governed by legislation and rules and which has financial and administrative obligations which must be met. As an investor it is important for you to know exactly what you are buying, what your management obligations will be, what costs you will be responsible for after transfer and what rules you will be bound by before putting pen to paper. In sectional title ownership, ignorance is not bliss because what you don't know can hurt you.
What exactly are you buying?
You will often hear people speaking of buying a 'flat', an 'apartment' or a 'townhouse' when referring to what they buy in sectional title schemes, yet technically all of these terms do not describe what they are in fact buying. When you buy into a sectional title scheme you are buying a composite thing called a 'unit'. A unit consists of a section together with a share in the common property. A section is an area which you own exclusively (such as a townhouse or apartment) to the median line of the walls, floors and ceilings. The common property is an area which you will co-own with all other section owners and includes all areas of the scheme which are not included in the sections such as driveways, entrance foyers, stairs, lifts, gardens, swimming pools and so on.
As a buyer, you may also benefit from exclusive use rights allocated to your section which allow you to use a portion of the common property to the exclusion of all other owners, for example a parking bay. Exclusive use rights may be allocated to a section by either being formally registered on the sectional plans of the scheme (in terms of section 27 of the Sectional Titles Act 95 of 1986) or more informally by passing a rule which gives the owner of a section the right to use such an area (in terms of section 27A of the Act). If you have been allocated exclusive use rights in terms of section 27 or section 27A it is important to understand that although you have the right to use an area of the common property exclusively, that does not mean that you exclusively own that area. It remains part of the common property and is therefore still owned by all the owners of sections, however no other owner has the right to use it besides you.
Before signing a sectional title deed of sale it is important for you to obtain and analyse a copy of the registered sectional plan of the scheme. Ask yourself the following questions: is the extent of the section described in the deed of sale the same extent shown on the sectional plan? Are any and all exclusive use areas allocated to me in the deed of sale allocated to the section which I am buying on the sectional plan? Asking these questions will help to prevent the all too often experienced headache when a unit owner finds out after transfer has taken place that what he thought he was buying (in terms of his deed of sale) is not in fact allocated to him on the registered sectional plan. Ask the estate agent, managing agent or seller for a copy of the registered sectional plan. Alternatively, find the sectional plan you are looking for on Sectional Titles Online (www.sto.co.za).
Your participation in the management of the scheme
Buying a unit in a sectional title scheme comes with automatic membership to the governing body of the scheme, called the body corporate. Membership is mandatory so even if you are a buy-to-let owner you, as owner, are the member of the body corporate and not your tenant. The body corporate is an association of owners which exists to run the scheme from a financial and administrative point of view and maintain the common property. Owners elect a board of trustees to carry out the body corporate obligations at every Annual General Meeting (AGM) and in many schemes the trustees contract with a managing agent to assist them in this regard.
What costs will you be responsible for?
All costs related to your section, which you own exclusively, are for your own account. Remember that you only own your section to the median line of its floors, walls and ceilings and therefore the foundations, outer skin and roof of the building are common property and are therefore not your exclusive financial responsibility. All costs related to the common property, which is co owned by all owners, as well as all payments for the general running of the scheme are paid by the body corporate from its levy fund. These costs include insurance of the buildings to their full replacement value, maintenance and repair of the common property, wages of staff employed by the body corporate and so on. The body corporate estimates its expected expenditure each year, takes this budget to the AGM for approval and once approved, divides the estimated expenditure between the owners (generally in accordance with each owner's participation quota a calculation which determines the fraction of each owner's contribution in relation to their floor area) to work out each owner's ordinary levy. Each owner is then liable to pay such contribution, generally in monthly instalments.
If a necessary expense arises during the course of the year for which the body corporate did not budget, the trustees are entitled to raise a special levy. The trustees can decide whether the special levy is to be paid in one lump sum or in instalments and owners have no choice but to pay it. Owners whose levies are in arrears will be unable to vote on general resolutions at general meetings and will also be charged interest on these arrear amounts. The trustees are entitled to institute levy collection procedures in the Magistrates Court to recover the outstanding amounts from such owners.
As a prospective buyer, it is vital that you find out not only what ordinary levies you will be responsible for (ask to see a copy of the seller's levy statements) but also to ascertain whether there are any anticipated special levies on the horizon. You can find this out by asking the trustees or the managing agent. You can also inspect the common property carefully to establish if there are any obvious defects which are going to require expensive repairs or maintenance work. A substantial special levy, for example to replace a lift in the building, could have you reaching far deeper into your pockets than you ever expected because once you're an owner you have to pay special levies raised. Do everything you can to find out about special levies before putting pen to paper and then at least you have the choice of investing despite the risk of extra expense.
Other expenses for your account are rates (which by mid-2008 will be payable directly to municipalities by all sectional owners), water and electricity (these are sometimes included in your levies depending on whether the scheme has implemented separate water and electricity meters or not), maintenance of geysers serving your section (whether or not they are situated on common property) and contributions towards maintenance of your exclusive use areas.
Article by: www.paddocks.co.za