Make sure of cover

Trustees of sectional title schemes should become more vigilant about the credentials of their managing agency, writes ANNA-MARIE SMITH

THE recent application for liquidation of the Cape managing agency, Sectional Title Administrators cc, is only one in what has been a series of managing agent industry failures throughout the country.

Although the trustees of sectional title schemes are able to check if their managing agents have successfully completed a course, such as the University of Cape Town’s Sectional Title Scheme Management course, UCT says there are a surprising number of managing agents who do not consider this registration necessary, nor do they deem it vital to check and ensure that their managing agent has implemented statutory insurance cover. The possible reason is maybe due to a general perception in the property industry that registration with the Estate Agents Affairs Board is not a requirement for levy collection activities.

But, says Bill Rawson, CEO of the Rawson Property Group in Cape Town: “Although Sectional Title Scheme Management companies are required to be registered as estate agents, consumers are offered total protection at all times against such fraud through the Estate Agency Affairs Board Act of 1976." He says that subject to administrative volumes at the board, should claims be made within the required three-month period, followed by the liquidation of the management company, consumers should receive payouts within six months.

He says that precautions against administrative complications in such cases can be taken by boards of trustees by appointing reputable law and accounting firms from the outset, to scrutinise the management companies’ credentials as well as flow of moneys on behalf of consumers. Rawson says that because the Estate Agency Affairs Board (EAAB) will immediately appoint their own professional legal and accounting teams to handle such a case, trustees should offer consumers protection by applying the same stringent measures.

Prof Graham Paddock, convener of the UCT course for managing agents, says: “The Sectional Title Administrators cc disaster has underscored the necessity for all managing agents to know and understand their legal obligations in regard to the management of schemes, including the detail of the National Association of Management Agents Code of Conduct.”

The most fundamental protection required by managed schemes is insurance against theft. Paddock says that the government requires that any person involved in the collection or receiving of sectional title or share block levies be registered as an estate agent with the EAAB. Such registration and the issue of a “fidelity fund certificate” ensure that any theft of trust money by that person is covered by the Fidelity Fund, operated by the EAAB. Schemes should ensure that the appointed managing agents and staff responsible for the handling of levies are registered estate agents, and that they are also in possession of a valid fidelity fund certificate. They should ensure that any of their money, which remains under the control of their managing agent, is in an account which complies with the EAAB’s requirements, so that these monies qualify as trust funds.

In the case of Sectional Title Administrators cc, the provisional liquidator has indicated to creditors that his initial investigations showed no evidence of theft, but approximately R6,8m has been misappropriated. The managing agency apparently operated separate bank accounts for each of its clients’ operating funds but transferred all excess funds to one account in the name of the managing agency. The provisional liquidator says no interest accrued on the one “savings” account, but as funds were returned to the operating accounts additional amounts were transferred on account of interest, and as a result a total of R6,8m was gradually misappropriated.

Although each case will present with individual details where managing agencies are liquidated, the common thread is that the well-understood best practices of managing agencies have not been observed .

The “best practices” of managing agencies, distilled by Prof Henk Delport, who acted for the National Association of Managing Agents in drafting a code of conduct, was accepted by the EAAB some years ago, but has not yet been implemented.

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