Why your levy may increase by 15%/year
Sectional title owners could see their levy costs increase by 15% per year for the next few years. This is due to last week’s gazetted Sectional Titles Schemes Management Act requiring schemes to have a reserve fund equal to at least 25% of the scheme’s total annual levy budget.
“Since the majority of schemes do not at this stage have a reserve fund at all, most owners will now be facing a levy increase of 15% a year until the reserve fund is properly established – on top of any annual increase required to cover the rising costs of running the scheme,” says Andrew Schaefer, MD of property management company, Trafalgar.
According to regulation 2 of the act, if the reserve fund is less than 25% at the start of any new financial year, the owners in the scheme must add 15% to their total levy budget for the next year as a contribution to their reserve fund.
Once the reserve fund has reached 25% of the annual levy budget, provision has been made for lower contributions, but owners can still expect their levies to be higher until the reserve fund is at least equal to 100% of the scheme’s total levy budget, says Schaefer.
After this, the scheme may decide for itself what its annual contributions should be in order to maintain the fund at this level.
He notes that although the STSM Act was passed in 2011, its Regulations and Annexures were only finalised earlier this year and it was only signed into law this month. The new Act replaces Sections 37 to 48 of the longstanding Sectional Titles Act of 1986, while the Prescribed Management Rules and Conduct Rules included in that legislation have now become annexures of the new Act.
What else has changed?
- A requirement in terms of Prescribed Management Rule (PMR) 22 that trustees prepare a detailed written plan for the use of the reserve fund, and report back to owners annually on the implementation of this plan. The plan itself must list all major capital items on the common property that are expected to require maintenance, repairs or replacement over the next 10 years and must specify when these actions are likely to be necessary and what the cost is likely to be. In most cases this plan will have to be prepared by an outside consultant with the necessary expertise, so there will be a cost involved for owners.
- A requirement in terms of PMR 23 that a replacement valuation of all buildings and improvements in the scheme is professionally done every three years and that the scheme’s insurance is adjusted accordingly.
- Requirements in terms of PMR 26 that separate records and bank accounts are kept for the scheme’s administrative (levy) fund and the reserve fund; that separate budgets are prepared for the two funds and that the administrative fund must be independently audited at the end of every financial year by a person who has not had anything to do with the management of the scheme’s accounts during the year.
- A provision that owners may be charged interest on any overdue amount payable to the body corporate (such as arrear levies) up to the maximum rate of interest payable under the National Credit Act, which is currently 35,4% per year.
Doing things differently
No person attending a meeting may hold more than two proxies for other owners. – “It is also important to note that all proposed amendments to either the Conduct Rules or PMRs of any scheme must now be approved by the office of the Community Schemes Ombud (even if the scheme owners took a unanimous decision to change them),” says Schaefer. “Any changes will also not be enforceable until the Ombud has issued a certificate of approval.”
Owners of a sectional title scheme may appoint (by special resolution) an Executive Managing Agent to take over all the functions and powers of the trustees. – “Such a person would obviously need to be qualified and registered managing agent with the expertise and resources to run the scheme on a full-time basis, and there would once again be a cost involved. However, given the enormous demands that the new legislation places on trustees – who are usually amateurs only able to serve part-time – we expect this option to gain increasingly popularity, especially in very large schemes.”