Sectional Title Trustees have serious responsibilities - especially when preparing for the annual general meeting

One of the problems that can face South Africa’s sectional title schemes is that, while they have to be under the control of a group of trustees (as laid down in the Sectional Title Act and Prescribed Management Rules), it often happens that these people, elected by the owners, have little or no previous experience on the detailed rules and regulations of sectional title schemes. This lack of expertise, says Michael Bauer, General Manager of IHFM (Pty) Ltd, a firm which has been specialising in sectional title management and management of home owners’ associations since 2004 and which manages 14 schemes with some 800 units in all, can cause serious problems for all involved and can threaten the viability of a scheme.

“In many instances,” said Bauer, “those who accept positions as trustees have been leading figures in some other field, but they have had almost no exposure to the Sectional Title Act and Prescribed Management Rules.

“This,” he said, “is a serious concern because their responsibilities are wide and, although they are unpaid volunteers, they can be held personally responsible for damages if it is shown that they were grossly negligent.”

Bauer said that the Prescribed Management Rules (PMR) for trustees, in terms of the Act, place particular importance on the correct setting up and running of the Annual General Meeting and it is essential that trustees should be aware of what is required by law for an AGM.

The AGM must be held no later than four months after the completion of the financial year, said Bauer. In addition, fourteen days written notice has to be given to all owners and other interested parties (usually bondholders) of the intended meeting and trustees are responsible for ensuring that they receive, in advance of the meeting,:

  • the scheme’s insurance schedule,
  • the financial budget for the year ahead,
  • audited financial statements of the year past,
  • a review by the trustees of all the affairs of the body corporate over the past financial year. Certain other important matters have also to be covered.

The relevant Prescribed Management Rule makes it clear, said Bauer, that no business can be conducted unless the meeting is attended by the prescribed quorum (i.e. the prescribed number of members, who, however, can be represented by a proxy).

If this quorum is not achieved within half an hour of its scheduled start time, the meeting has to be adjourned to the same day and time in the following week. At such a meeting decisions can be taken with or without the prescribed quorum.

At the AGM the Prescribed Management Rule stipulates that a variety of matters have to be attended to, said Bauer. Included on the list are the inspection of the financial statements, a schedule of the replacement values of the scheme, a carefully worked out estimate of the income and expenditure for the year ahead, the appointment of an auditor or accounting officer, the election of trustees for the year ahead and the confirmation of an independent auditor or accounting officer.

“Very often,” said Bauer, “trustees find themselves focussing on the ‘physical’ problems of the scheme – how efficiently or inefficiently the lifts, the electricity, the security and such matters are working – but it has to be stressed that the procedural as well as financial aspects are all-important and should take precedence over all else.”

It is estimated that some 25% of SA sectional title schemes, he said, have in recent years fallen behind on their levy collections and/or their municipal rates and taxes and services payments. This can, in a worst case scenario, result in all municipal services to a scheme being cut off and in the eventual bankruptcy of the scheme – with members’ units then worth a fraction of their previous cost.

As trustees of the larger schemes do not have the time or expertise to attend to the day to day management, said Bauer, most such schemes appoint a managing agent – such as IHFM – to whom they delegate the responsibility of the day to day running of the scheme.

“The selection of a managing agent is crucial, said Bauer, for most of the above matters and the running of the scheme. However it is the trustees’ duty to keep close track of the managing agents’ actions throughout the year, to see that minutes are kept of all meetings and to ensure that the agent is acting legally and ethically at all times.

“It can happen,” says Bauer, “that managing agents become inefficient because, in their desire to grow their business, they take on more than they can cope with. In a few instances,” he added, “managing agents have been able to siphon off funds to their own accounts – hence the need to appoint a reliable, independent auditor. In these situations, the trustees should act decisively.”

All managing agents, he added, as is the case with IHFM, should be in the possession of a Fidelty Fund Certificate of the Estate Agency Affairs Board (EAAB) and should be members of the National Association of Managing Agents (NAMA) which has a detailed Code of Ethics.

“Although this is not a comprehensive review of trustees’ obligations, it will, I hope, give an idea of how important their role is – and I hope, too, that it will show how a good managing agent can assist them to make a scheme secure and financially sound with appreciating property values,” said Bauer.

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