Sectional Title Owners Beware: Your Body Corporate Must Have Adequate Reserves

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Recent legislation has been passed which obliges trustees of sectional title schemes to set up a reserve for repairs, maintenance and asset replacement of the common property. This is in addition to the current administration requirement to cover future operating expenses.

If you are involved with bodies corporate you need to pause and consider this legislation – it could hit your pocket and will take time to understand as it places increasing onus on trustees and by extension all stakeholders.

How will it affect me?

The new common property reserve fund will depend on the size of the scheme’s common property assets – for example, if there are items like lifts, large buildings etc then your exposure will be greater.

The higher the body corporate’s cash position and/or investments the lower the financial exposure you will have.

To illustrate this, look at the body corporate’s annual financial statements and see what cash and/or investments they have.  If the cash/investment is enough to cover a full year’s expenditure, your financial exposure should be low as the trustees on the body corporate will be able to create the reserve by using the current cash/investments.

How is the reserve fund determined?

The Act lays down requirements for the reserve fund – the minimum amount is 15% of last years’ payments to the administration fund (sectional title schemes have been required for some time to have a fund for operating costs called the administration fund).

In terms of the reserve fund, the trustees must draw up a detailed plan to be presented at the Annual General Meeting (AGM). This needs to show, inter alia, each capital item and forecast future repairs and replacement of the capital item for the next ten years.

As an example take a lift and assume its economic life is twenty years and the replacement cost is R1 million and the lift is ten years old. Annual maintenance is R10,000. Then the trustees will need to provide R10,000 (annual maintenance) plus R100,000 (ten years to replacement) = R110,000 per annum to the reserve fund.

This plan is then approved at the meeting.

This is clearly a substantial undertaking – make sure you understand how this will work.

Other matters

  • The reserve funds are to have separate bank accounts
  • Financial statements of bodies corporate are to be audited
  • No proxy may represent more than two owners
  • Fidelity and public liability insurance needs to be taken out
  • Valuations of the scheme are to be done every three years
  • In general meetings motions are carried by majority vote. The majority is based on the participation quota of each member i.e. voting is by value
  • A new Ombud Service, which applies not just to sectional title schemes but also to all “Community Schemes” including Home Owners Associations and the like, has been set up to provide a dispute resolution process for anyone affected by a dispute in the scheme
  • All new schemes and rule changes are to be vetted by the Ombud Service. A new set of prescribed rules for bodies corporate came into effect in October last year. They replace existing rules and new and existing bodies corporate need to implement these new rules. The only exception is where bodies corporate have customised rules for their body corporate and these rules do not conflict with the new rules.

There have been significant changes to the governing of bodies corporate. Speak to your accountant if in doubt as it may require additional funding by you.

Remember that whilst you may need to pay now to set up the reserve, in the longer term this will even out and will substantially reduce the need to raise special levies.