Levy payment defaults can - and do - cripple sectional title schemes and home owner's associations

Some 50% of all members of Western Cape sectional title schemes and home owners’ associations are behind on their levy payments – and this can result in the entire scheme deteriorating, maintenance backlogs or, even worse, the scheme running out of funds and ending up in liquidation. So says Michael Bauer, the general manager of IHFM, one of the Cape’s leading sectional title management companies.

What is more, added Bauer, cash flow problems are usually far more serious on large than on small schemes.

“In today’s tough economic conditions,” said Bauer, “bodies corporate often find that inefficient levy collection has become the factor most likely to threaten their future and ability to pay their operating expenses. Despite this, many will continue to ignore the difficulties and focus on other aspects of the management task.”

One of the big mistakes made by the trustees and or their managing agents, said Bauer, is to budget for the year ahead (a step required by law) as if all members will pay their levies on time even when a quick review of the debtors shows that a high percentage of the members are regularly behind in their payments or have not paid at all.

In these situations, said Bauer, provision should always be made for the shortfall in order to ensure that the scheme has a satisfactory cash flow and is able to pay its bills. A provision should also be made for bad debts and legal fees bearing in mind that collection of debts will incur additional costs, which may or may not be recoverable.

“This, of course, means that the existing levy will almost certainly have to be increased and in many cases a special levy imposed – which can be hard on those who have been regular payers to date. The situation also calls for an immediate tightening up on debt collection and credit control procedures: attorneys should be appointed, demand letters sent out and court actions initiated as quickly as possible.”

Where the trustees of a sectional title scheme are unable to start a rescue bid, said Bauer, the solution may be to appoint an independent managing agent with the requisite experience.

It should, however, be realised, he said, that such specialist firms will almost never be prepared or able to raise an additional rescue loan for a scheme that is already in financial difficulties. The only option is to raise a special levy and to hound those in arrears on payments.

“It is true that many sectional title members are in straightened financial circumstances,” Bauer, “but our experience shows that the main reason for high levy arrears is that the body corporate has not acted with sufficient determination to prevent an accumulation of high debtors – many simply lack the will to do so.

“In these cases, it is usually wise to call in an experienced managing agent firm able to control debtors, supervise the debt collection processes, negotiate with your creditors and accurately report on the financial position of the scheme.

However, adds Bauer, it should be noted that the law moves slowly and that it may take a year or more to turn a scheme around.”

Article by: www.ihfm.co.za