Understanding Sectional Title versus Own Title Ownership
- Introduction
Due to a number of reasons, including heightened security, affordability and a more communal way of life, sectional title living has been growing in popularity over the last decade or so. One can however not say that the one property type is more popular than the other, as the choice is always area and budget dependent. Sectional title is generally lower priced than own title – that is in sales price but not necessarily in per square meter price.
However, as popular as it may be, sectional title ownership remains highly misunderstood in terms of ownership responsibilities and legalities.
To fully understand the differences between sectional title and traditional own title (freehold) property ownership, it is important to define them and some of the legal terminology involved.
Own Title (freehold or full title) describes the transfer of full ownership rights when you own a property, which includes the buildings and improvements as well as the land it is built on. These kinds of properties include free-standing houses, cluster houses, residential property used for business purposes, and smallholdings. The owner accepts all rights and responsibilities and does not share this responsibility with anyone.
Sectional title on the other hand, describes separate ownership of units or sections within a complex or development. A Sectional Title Unit consists of a part of a building or a separate building on a piece of land that has been converted into a sectional title scheme. The owner’s ownership of the unit includes ownership of an undivided share in the common property. All the sections together with the common property comprise “the Scheme”. The section owners collectively own the common property and share all rights and responsibilities. Sectional title dwellings comprise mini subtype houses, semi-detached houses, townhouses, flats or apartments, and duet houses.
There are considerable differences with regards to investing in the two type of properties - the pros and cons to both forms of ownership:
- The benefits of sectional title ownership
- Security: Living in close proximity to your neighbours and in a more communal environment is perceived by many to be more secure than living on a freehold property. Added to this, most sectional title developments have excellent security around the perimeter and at the entrance of the development, which is all included in the monthly levies. With regards to freehold properties on the other hand, owners are entirely responsible for their own security – they need to pay to secure their own perimeter, and often for an armed response security company to patrol their area.
- A fixed monthly cost: Unlike own title properties, where the owners have to pay for their own home insurance and for the upkeep of the pavement, garden and exterior of their homes, owners of sectional title units pay a monthly levy instead. The levy includes the following costs – insurance premiums, maintenance of the common property, wages and salaries of cleaners, security and other staff involved in maintaining the common property, as well as any water and electricity required for the common property. As a result, owners of sectional title units only need to pay for their rates and taxes, the unit’s insurance, the contents of their home, their own private gardens and for their monthly electricity and water consumption. The cost of maintaining pools, tennis courts, communal park areas and clubhouses in the development is shared, which contrasts with freehold property, where the owner is responsible for all costs.
- Affordability and communal living: Generally speaking, a sectional title unit within a complex is more affordable than a own title house – as costs are shared. Also, on average, communities living in sectional title schemes boast close-knit communities and far greater interaction with their neighbours when compared to own title neighbourhoods.
- The benefits of own title ownership
- Independence: Unlike own title ownership, where the owner is in complete control and is financially responsible for the property in its entirety, when you invest in a sectional tile scheme you will own part of a scheme, meaning that the owner has invested in and is part of a small community. As a result, they will need to comply with the management rules and conduct rules as laid out by the Body Corporate.
- Majority rules: The rules and regulations of any particular complex may change and, unlike freehold property owners, sectional title investor or owners may not be happy with the changes, but won’t have the power to change them in an individual capacity.
- Simplicity: The legalities of sectional title ownership elude a great portion of home owners – there are issue pertaining to participation quotas, nominated values, exclusive areas and quorums.
- Lack of freedom: Owners of sectional title units do not have the freedom to make improvements to their property. Those who want to renovate, need to get approval from the Body Corporate before they can begin building.
- Liable for the debt of the Body Corporate: If you are investing in a sectional title scheme, you will be liable for the debt of the Body Corporate. As such, it is important to deduce if the scheme is being well managed and that the financial statements of the Body Corporate are all in order.
- Definitions For Sectional Title
4.1 Who Or What Is A Body Corporate?
Sectional title developments are governed by a Body Corporate (BC), which is the collective name given to all the owners of units within any particular complex. The BC is the legal entity who is responsible for the control, administration and management of the Scheme.
The BC is responsible for the scheme’s finances and receives funds from all section owners by means of levies which are used to pay for the expenses of the sectional title scheme. These expenses include maintenance, utility bills, services, etc. Levies are calculated according to the size of section a person owns and is usually determined by the members of the BC.
At an Annual General Meeting of all the owners, Trustees are elected to act on behalf of the body corporate and to carry out the day to day running of the Scheme. In many instances and especially with bigger schemes, the Trustees utilize the services of a Managing Agent to assist them. Ultimately however, the control lies with owners who make decisions on the administration of the scheme at a general meeting.
4.2 What Is A Managing Agent?
A managing agent is often appointed to take care of the duties of a BC, which includes collecting the monthly levies, paying the scheme’s insurance premiums, arranging meetings, ensuring compliance with the Sectional Titles Act, and ensuring that the owners and tenants comply with the Body Corporate rules.
4.3 Are You The Registered Owner Of A Sectional Title Unit?
Yes, once transfer is registered in the Deeds Office the title holder is owner of the unit. A Title Deed is issued upon registration of transfer of the Sectional Title Unit, as proof of ownership. A Notarial Deed of Cession is issued in respect of certain exclusive use areas delineated on the registered sectional plan.
4.4 What Is Common Property?
This comprises of the areas which are owned and used by all owners, e.g. the grounds, driveways, roads, recreation facilities, corridors, entrance areas and exterior of the building and which are not sections
4.5 What Are Exclusive Use Areas?
Parts of the common property, e.g. a parking bay or garden area, may be set apart for the exclusive use by an owner of a section, in terms of the registered sectional plan or in terms of the scheme’s rules. Different legal consequences flow from these two types of exclusive use areas. Practically however, the rights that the owner has in respect of the exclusive use area, are the same.
4.6 What Are Levies?
Levies comprises all the anticipated costs of the running of the Scheme and usually includes:
- Rates and taxes payable to local authority by the Scheme if the units are not separately rated;
- Water;
- Electricity and repair costs relating to any electrical installation on the common property;
- Insurance in respect of buildings in the Scheme;
- Managing agent fees;
- Annual audit fees; and
- Security and maintenance costs.
One of the main functions of the Trustees is to determine a monthly levy for each Unit. The levy payable by any one owner is calculated with reference to the floor area of a given section, in relation to the total floor area of all the sections in the scheme. This is referred to as a section’s participation quota.
- Thus total annual budget divided by 12 = required monthly budget for the Scheme.
- Floor area of owner’s section divided by the total floor area for all sections x 100 = percentage of monthly budget payable by the owner.
4.7 What Are Conduct Rules?
Each Scheme has a set of Conduct Rules to regulate the conduct of owners in the Scheme such as rules regarding the keeping of pets, refuse removal, etc. It is possible for the Body Corporate, by special resolution (75% majority), to amend, substitute, add to or repeal the conduct or rules from time to time.
4.8 What Are Management Rules?
The Sectional Titles Schemes Management Act contains provisions regarding the management of the Scheme, e.g. how Trustees are elected, what the obligations of the Trustees are, what the voting procedure is at general meetings, and so forth. These provisions are referred to as Management Rules. It is also possible for the Body Corporate, by unanimous resolution, to amend, substitute, add to or repeal the Management Rules from time to time. Copies of the Management Rules that apply to any scheme can be obtained from the Community Schemes Ombud Service.
4.9 What Are The Duties Of An Owner Of A Sectional Title Unit?
An owner must:
- Permit any person authorised in writing by the BC, at all reasonable hours and on notice (except in the case of emergency, when no notice is required), to enter his/her section or exclusive use area for the purposes of inspecting it and maintaining,
repairing or renewing pipes, wires, cables and ducts existing in the section and which are capable of being used in connection with the enjoyment of any other section or common property or for the purposes of ensuring that the provisions of the Act and the rules are observed;
- Carry out all work that may be ordered by any competent public or local authority in respect of his/her section and pay all charges, expenses and assessments that may be payable in respect of his/ her section;
- Maintain his/her section in a state of good repair and, in respect of an exclusive use area, keep it in a clean and neat condition;
- Use and enjoy the common property in such a manner so as not unreasonably to interfere with the use and enjoyment thereof by other owners or other persons lawfully on the premises;
- Not use his/her section or exclusive area (or permit it to be used) in a manner or for purposes that will cause a nuisance to any occupier of a section;
- Notify the Body Corporate immediately of any change of ownership in his/her section and any mortgaging or other dealing in connection with his/her section;
- Ensure that the section is used for what it was intended, e.g. residential or business;
- Acquaint himself/herself with the content of the Management and Conduct Rules and abide thereby.
4.10 Can A Unit Be Extended, Consolidated And / Or Subdivided?
Yes, but only after:
- The approval of the Body Corporate;
- The approval of the Local Authority;
- A sectional plan of subdivision / extension / consolidation has been drawn by a land surveyor and approved by the Surveyor General;
- An application to the Deeds Office to register the extension / subdivision / consolidation has been made; and
- Consent of bondholder.
- Points Of Potential Conflict
5.1 Parking In A Sectional Title Scheme
5.1.1 Who may park where?
The owner or occupier of a section must not (except in the case of an emergency) without the written consent of the trustee of the scheme park a vehicle, allow a vehicle to stand or permit a visitor to park or stand a vehicle on any part of the common property other than a parking bay allocated to that unit or a parking bay allocated for visitors’ parking.
5.1.2 Who is responsible for the maintenance of these parking spaces?
The owner of the right to exclusive use will have the responsibility to maintain the parking bay allocated to him in a good state. Should the owner of the right refuse or fail to do so despite written notice to him, the body corporate may effect the necessary maintenance or repairs and claim the cost from that specific owner where the failure threatens the stability of the common property, safety of a building or materially prejudices the interest of the body corporate. In the case of an emergency no such notice needs to be given. The body corporate may also request the owner of the right, whether or not such right is registered or conferred by the rules, to make additional contributions to the fund for administrating that part of the common property.
5.1.3 Who decides which parts of the scheme will be allocated for parking bays?
- New development:
When the developer registers the Scheme in the Deeds Office, the sectional plan have to refer to the reservation of the exclusive use areas on the common property and he/she then cedes the right to the buyer / owner with a unilateral notarial deed. If no reservation was made by the developer and the body corporate has not been established the registrar may issue a certificate of real right to exclusive use.
- Existing sectional title scheme:
The BC management or conduct rules confer rights of exclusive use (of parking bays) according to a layout plan which it clearly indicates the locality of the exclusive use areas (e.g. parking bays) and the purposes for which such areas may be used and include a schedule indicating to which owner such an area is allocated to. Like most decisions in a sectional title scheme a resolution should be passed by the body corporate to give effect to this process. Should a resolution be obtained the amended rules must be lodged together with the prescribed application form with the Sectional Title Ombud, who will check the rules and approve them.
5.2 Improvements To A Sectional Title Scheme
The trustees of a body corporate may decide to add an improvement to the scheme’s common property, or to remove it. Different rules apply, depending on whether the improvement is considered to be “luxurious” (for example a swimming pool) or “non-luxurious” (for example a security gate).
Luxurious improvements may only be effected if they are authorised by a unanimous resolution of all owners.
On the other hand, in order to effect a non-luxurious improvement, the trustees must give at least 30 days’ notice to all owners of the intended improvement, detailing the costs, financing, need and desirability thereof. If a special general meeting is then requested by the owners, a special resolution must be passed to authorise the intended non-luxurious improvement. If no meeting is requested, the trustees may proceed.
- New Sectional Title Legislation - levy increases
New legislation affecting the sectional title environment came into effect recently, namely the Sectional Titles Schemes Management Act 8 of 2011 (“STSMA”) and the Community Schemes Ombud Service Act 9 of 2011 (“CSOSA”), with both pieces of legislation potentially having an impact on sectional title levies.
6.1 Sectional Titles Schemes Management Act (STSMA)
The STSMA requires a body corporate to establish and maintain two funds, namely 1.) an administrative fund, and 2.) a reserve fund.
The administrative fund must be used to fund the estimated annual operating expenses of the body corporate for the particular financial year. Such expenses will include maintenance, repair, management and administration of the common property, and rates, taxes and other municipal charges and insurance premiums relating to the sectional buildings or land. The reserve fund in turn must primarily be used to cover the (unexpected) costs of future maintenance and repairs of the common property.
The STSMA regulations prescribe specific formulas that a body corporate must use to determine the minimum contribution to the reserve fund. There are three categories:
Category 1 - If the amount of money in the reserve fund, at the end of the previous financial year, is less than 25% of the total contributions to the administrative fund for that previous financial year, the contribution to the reserve fund must be at least 15% of the total budgeted contribution to the administrative fund.
Category 2 - If the amount of money in the reserve fund, at the end of the previous financial year, is equal to, or greater than, 100% of the total contributions to the administrative fund for that previous financial year, then there is no minimum contribution to the reserve fund. There is thus enough “reserves” for future maintenance.
Category 3 - This is when the amount of money in the reserve fund, at the end of the previous financial year, is more than 25%, but less than 100% of the total contributions to the administrative fund for the previous financial year. The budgeted contribution to the reserve fund must then be at least the amount budgeted to be spent from the administrative fund, on repairs and maintenance to the common property, in the financial year being budgeted for.
If your Sectional Title Scheme does not have any reserve fund in place, you fall under category 1 and your levies are likely to increase in order for the body corporate to implement the practice of a reserve fund.
In general, there is no limit to what the levies can be increased to, but the management rules do determine that the body corporate may, on the authority of a written trustee resolution, increase the contributions due by the members by a maximum of 10% at the end of a financial year to take account of the anticipated increased liabilities of the body corporate.
6.2 Community Schemes Ombud Service Act (the Ombud Service)
The second piece of legislation - CSOSA – is intended to establish the Community Schemes Ombud Service (“the Ombud Service”) and to provide for a dispute resolution mechanism to resolve disputes in community schemes (sectional title schemes, home owners associations, housing schemes for retired persons, etc) and to ensure their good governance.
Every community scheme must in each calendar year, on a quarterly basis pay to the Ombud Service a compulsory levy, subject to discounts or waivers as may be prescribed. The compulsory contribution is calculated according to the following formula:
The lesser of R40, or 2% of the amount by which the monthly levy charged by the Scheme exceeds R500 i.e. (your levy minus R500) x 2% up to a maximum of R40.
Based on the above pieces of legislation now in place, there is a realistic chance that your levies may or have already increased in order to allow your sectional title scheme to start recovering contributions from you and the other units, in order to pay the levy to the Ombud Service and establish a reserve fund for the scheme. How much your levies may increase, will differ from one scheme to the next. But nonetheless, prepare yourself for the possibility of a higher than usual levy increase in 2017.
7. General Tips – What To Check With Sectional Title Before Buying:
7.1. Ask to see the most recent BC's audited financial statements – to determine the cash flow (how does the monthly income compare with expenditures). Ask how many of the scheme’s members are behind (or not) with their levy payments. Find out what are the success rate of collecting such arrears - and also what reserves the body corporate has. Find out if the BC is in arrears – i.e. if all services are paid up to date by the BC and if all service providers are regularly paid;
7.2. Study the conduct rules – as some schemes have clauses which ban pets, others are very definitely not child friendly and some limit access to communal areas. These and other restrictions can spoil the occupant’s enjoyment of the sectional title unit.
7.3. Is the scheme self-managed or does it have a managing agent with a fidelity fund certificate from the Estate Agents Affair Board and who is registered with the National Association Of Managing Agents
7.4. Get proof of the current insurance position on the complex and the insured value of the unit you want to buy. How many insurance claims have been made during the past year? Is the insurance policy in accordance with the statutory requirements?
7.5. Get a copy of the most recent levy account from the owner to establish what monthly charges you will need to budget for;
7.6. Ensure that you get see the sectional title deed or a stamped exclusive use schedule or diagram, as the seller may not have the actual right to what he/she is using (store room / parking bay / garage) and may only be renting it;
7.7 Ensure that you know what the general standard of the common property in the complex is:
7.7.1 Building maintenance (condition of paint / any visible disrepair / cracks or leaning walls);
7.7.2 Condition of roads, walkways and stairways (uneven surfaces / crumbling tar / dirty railings),
7.7.3 Condition of roofs, gutters and facia.
7.7.4 Are there waterproofing guarantee in place (does the service provider still exist) and when last has it been reconditioned?
7.7.5 Is the lift maintenance agreement in place and the lift inspection up to date? Maintenance of old lifts due to wear & tear is expensive and replacing it might be necessary;
7.7.6 Garden upkeep and the condition of the swimming pool
7.7.7 Level of security and its efficiency. Are the wires of the electric fence straight or sagging? Is there back-up arrangements in place for power outages? How is access to the complex managed and are there any visible vulnerabilities?
7.7.8 Is the swimming pool, children play area and/or leisure amenities clean and in a good working order?
7.8 If there is an open ground in the complex, check on the sectional title plan and ask management, especially if it is a new complex, whether the developer has rights to extend as this can be very disruptive.