The role of body corporates in sectional titles

Buyers in new sectional title developments need to know at what stage they will start sharing responsibility with the developer for the scheme’s security, maintenance, and insurance.

Responsibility between development and body corporate formation

“In theory, that should not happen until the first unit in the development is transferred to a new owner and a body corporate is formed,” says Andrew Schaefer, MD of leading property management company Trafalgar, “but in practice, buyers often take occupation of their new homes ahead of transfer.

“And many sale agreements do actually provide for new owners to share responsibility with the developer for the management and maintenance of the scheme from their date of occupation rather than the date of transfer, which means that they need to be prepared to immediately start playing an active role in running the scheme if they don’t want to risk financial loss.”

Additionally, he notes, some development companies will only remain actively involved for as long as they have unsold or unoccupied units in the complex, and there could be months between the occupation of the last unit and the first transfer, which is when the body corporate will officially be formed, and when trustees can be elected and a managing agent appointed.

“In such instances, owners will most likely need to fill the management gap themselves by making their own arrangements for things like security, access control and the upkeep of the common property. They will also need to make sure that the developer is paying the levies, insurance premiums, municipal charges and other amounts for which it is responsible.”

“If they don’t take the initiative in such circumstances, the overall condition of the property could quickly decline, resulting in a need to increase levies to put things right once the body corporate is formed. Such a move would, however, be highly likely to meet with resistance from at least some owners and thus create friction and discord in the body corporate right from the outset,” says Schaefer.

“It is also possible that the insurance premiums or municipal accounts would fall into arrears, with potentially dire consequences, or that the early occupiers in the scheme could be victims of crime because of a lack of proper security.”

To avoid this, he says, buyers in new sectional title schemes must check, at the time of purchase, exactly what their responsibilities as owners will be and just when these will begin. In addition, they should deal only with reputable development companies that are in the market for the long haul – and are prepared to assist in the proper running of the scheme until the body corporate can take charge.”

Management rules

In terms of the Prescribed Management Rules for sectional title schemes, the developer is responsible for organising the inaugural general meeting of the body corporate, which must be held within 60 days of the first transfer/s in the development taking place.

At this meeting, the developer is supposed to produce certain documents as part of the records of the body corporate, including:

• A clearance certificate from the local authority to prove that the property rates have been paid up to the date of formation.
• Confirmation from the scheme’s insurance company that the premiums are up to date.
• A copy of the sectional plan for the development.
• Statements of the levies collected and the amounts spent on the management of the complex from the date that the first unit was occupied until the formation of the body corporate, if the developer has indeed done this.
• An estimated body corporate budget for the relevant financial year.

The developer is also supposed to hand over any surplus funds it may have collected during the period between the first occupation and the first transfer. The Sectional Title Schemes Management Act states that the body corporate should, at this point, establish its own accounts and elect interested owners as trustees to assume fiduciary and operational responsibility for the scheme.

In terms of the Act, the developer will, however, remain a member of the body corporate and be liable for levies until every section in the scheme has been transferred. If a right of extension is reserved, the developer will remain liable for a “contribution” to the body corporate for that right, even when it no longer owns any of the built sections.

The insights provided are a good start in understanding the dynamics around the functionality of body corporates.

Writer: Meg Wilson