Sectional title corner – Can trustees budget for a deficit?
In my sectional title complex, which is a mixed-use development, i.e. commercial and residential, the trustees budgeted for a deficit in the 2015/16 financial year. The developer, who owns the commercial portion and a large number of residential units, dominates the board of trustees and has pretty much been doing as he liked to date.
The development was established in 2009. For the first two years there was a 0% increase in levies, followed by two years of 20%, then 0%, 10% and now (2016/17) a whopping 65% increase. This is partly because for the 2015/16 financial year, they budgeted for a deficit in the residential portion of R1,5m. This deficit now has to be recovered plus the minimum reserve as required by the new Act. In addition, because of the commercial component, the body corporate is VAT registered, presumably so that the commercial section can reclaim their VAT. This, naturally, increases the levy for the residential portion, by an additional 14% every month since most of the private owners are not VAT registered.
My question to you is this:
Is it legal for the trustees to budget for a deficit? If not illegal, then is it at least morally acceptable? Could this be used to claim that they have not performed their fiduciary duty? In essence, new owners, like myself, who bought during the 2015/16 year, are paying off the debt of past owners. What can be done in this regard?
I have also determined that the annual general meeting (AGM) that was held to approve the 65% increase, was not quorate, as the developer used his large number of units to declare a quorum with 3 proxies (also illegal). I did not get a notice to the AGM and the managing agents confirmed that they sent it to the wrong e-mail address. I have since made them aware of Management rule 19(2)(b) and they have acknowledged that the AGM has been declared invalid and will hold a new AGM.
Should they revert back to the “old” levy (before the illegal AGM) until after the new AGM approved a new levy, and should the excess amounts paid to date be refunded to members?
Your response will be highly appreciated. Thank you in anticipation – Arron
Hi Arron, this is a sensitive one as it is a mixed scheme and the developer seems to have been involved for some time. I would need to see what the actual documents pertaining to purchases and occupation read.
One would also need to look at what the rate of registration was from inception and then trace the debt from there and the parties liable. Without the full history and supporting documentation I can only presume what may have occurred.
I advise that you request all the documentation that makes up the debt, and see if it is all in the name of the body corporate OR the developer. You must ask for the actual documents, with full history, and not just balances on a spread sheet or final statement.
Being a commercial and residential scheme there may be problems with the council bills; one needs to check stand numbers, and calculations on the billing as there should be a commercial meter and residential meter.
In new developments one often has to put a provision for municipal services raised against units but not paid over to council. The account can remain on the developer’s name for some time if no one changes it at council.
The billing could be incorrect for years, and be billed as per the original services, on the original stand, and not for the commercial and residential services. Once this is all sorted it can result in a huge debit from council, and if a provision/accrual was not done from the inception of the scheme, this will result in a deficit.
You are welcome to contact us should they have the documentation pertaining to the scheme, occupation and the debt. Once we have this we can accurately advise and/or refer you to a sectional title lawyer for comment and/or assistance.
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Answered by Petra Lewis, portfolio manager at Belmont Property Management