Sectional title corner – Does the reserve fund HAVE to be hiked by 10%?
Hi, I refer to the amendment to the Sectional Title Schemes Management Act as follows (as sent to us by our managing agent):
“Body corporate is to establish and maintain a separate MINIMUM RESERVE FUND. An amount of 10% of the monthly levy contributions must be allocated to the reserve fund for future expenditure determined by a Maintenance, Repair and Replacement plan.
“It is also now a prerequisite for any body corporate to raise levies towards this Reserve Fund, which calculations and formulas are determined in terms of the act. Note that these will be effective as of March 2017 and applicable on your accounts as a compulsory charge.”
Does the above mean that our body corporate can automatically increase our levy by 10% without prior consultation from unit owners? If the current levies we pay can cover the minimum reserve fund, should the body corporate increase levies? We already had a 10% increase at the beginning of our financial year in July 2016, but our levies were increased again by 10% effective March 2017. Why is it a compulsory charge?
The information you received is only partially correct. You must have a reserve fund yes, but nowhere does it say that it must be 10% of the monthly levy.
There is a formula for calculating the contribution to the reserve fund in PMR 22 (for this you must have a proper Maintenance Plan in place).
22 (2) The annual contribution to the reserve fund for the maintenance, repair or replacement of each of the major capital items must be determined according to the following formula: [(estimated cost minus past contribution) divided by expected life].
And there are also minimum contributions set in Regulation 2
- For the purposes of section 3(1)(b) of the Act, the minimum amount of the annual contribution to the reserve fund for a financial year being budgeted for, other than the financial year budgeted for at the first general meeting referred to in section 2(8) of the Act, must be determined as follows:
(a) If the amount of money in the reserve fund at the end of the previous financial year is less than 25 per cent of the total contributions to the administrative fund for that previous financial year, the budgeted contribution to the reserve fund must be at least 15 per cent of the total budgeted contribution to the administrative fund;
(b) if the amount of money in the reserve fund at the end of the previous financial year is equal to or greater than 100 per cent of the total contributions to the administrative fund for that previous financial year, there is no minimum contribution to the reserve fund; and
(c) if the amount of money in the reserve fund at the end of the previous financial year is more than 25 per cent but less than 100 per cent of the total contributions to the administrative fund for that previous financial year, the budgeted contribution to the reserve fund must 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.
This is inevitably going to lead to bigger levy increases, especially in complexes which do not have reserve funds already.
The act also states that the trustees have the right to increase the levies (without having to consult the owners) by a maximum of 10% at the end of the financial year:
21(3) The body corporate may, on the authority of a written trustee resolution—
(b) increase the contributions due by the members by a maximum of 10 per cent at the end of a financial year to take account of the anticipated increased liabilities of the body corporate, which increase will remain effective until members receive notice of the contributions due by them for the next financial year; provided that the trustees must give members notice of such increased contributions by notice in terms of rule 25, with such changes as are required by the context;
For further increases during the year a general meeting needs to be called and a new budget approved.
Obviously, if there is sufficient reserve funds this extra levy (Reserve Fund Levy) does not need to be raised.
The reason for the levy is because not all complexes make provision for future maintenance and keep their levies as low as possible to keep the owners happy; but this results in complexes having to raise special levies every time maintenance is needed (like painting the complex). The act is trying to prevent special levies. It is not, however, saying that you cannot raise special levies, just that it is trying to prevent them.
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Who Karien Coetzee?
Karien Coetzee is the national property management consultant at property management company, Trafalgar. She holds qualifications in sectional title schemes management and homeowners association management.