The purpose of this article is to highlight common issues that arise in such transactions, particularly mistakes that Purchasers make by not being informed or by not seeking professional legal advice prior to entering into such a transaction.
The cost of a few hours of advice to conclude a transaction with the assistance of an attorney is nominal and a wise investment when compared to the costs of resolving issues should they arise once the Purchaser has become the dissatisfied registered owner of a Sectional Title Property.
The relevant issues are not exclusive to residential property and also arise in the purchase of a Sectional Title Unit for a business property, whether it be for owner occupation or to be let as an investment.
The responsibilities of the Body Corporate
A Sectional Title Scheme is governed by a Body Corporate. All owners in a scheme automatically become members of the Body Corporate. The Body Corporate oversees the harmonious occupation of all owners and occupiers and manages Common Property funded by the owners’ levy contributions. Common Property is comprised of those portions of the scheme that an owner does not solely own and includes portions of the scheme to which an owner has exclusive use, a common example thereof being a parking bay. In simple terms if a flat is purchased, the flat is owned but the paved access areas, foyer and corridors utilised to access the flat are owned jointly by all owners as Common Property.
Financial Obligations
It is essential to examine the financial statements of a Body Corporate before purchasing. A financially weak Body Corporate can result in an owner having to bear levy increases after transfer, and more importantly could require owners to contribute special levies for the proper functioning of the Body Corporate.
If you are not financially literate, our suggestion is that you have an accountant or a financially experienced party review the most recent audited financial statement of the Body Corporate, and subsequent management accounts, to assess the financial position of the Body Corporate. A Body Corporate with dated financial statements should be more carefully scrutinised.
An experienced eye will quickly determine the Body Corporate’s success in collecting levies from owners, the monthly operating costs of the Body Corporate and the available resources of the Body Corporate to meet short and medium term obligations.
It is also advisable to ascertain when last significant maintenance aspects were addressed, such as the painting of the building, when such maintenance is likely to fall due again and the present ability and future plans of the Body Corporate to be in a position to bear these costs. You can then assess the likely probability and even extent of levy increases and future special levies.
Lift Maintenance
Sectional Schemes with lifts often have higher maintenance costs and therefore not only higher levies, but also a greater risk of special levies to renovate or replace outdated lifts. In such an instance an inquiry could be made as to the age and state of repair of the lifts and a purchaser can ask to review the lift maintenance and repair records.
Parking bay allocations
Parking in Sectional Schemes is also often a controversial, contentious and confusing issue.
There are various ways in which parking bays can be allocated. Most often, parking is an exclusive use right for which the owner has a Notarial Cession as proof of holding this right. Alternatively an exclusive use right can be allocated by way of the Rules of the scheme. On rare occasions parking bays are surveyed as sections in the Sectional Scheme.
A Purchaser should satisfy themselves that the parking rights they are acquiring are firstly physically identifiable within the scheme, secondly clearly reflected and recorded in the Agreement of Sale or Offer to Purchase and thirdly verify the existence of the parking right by viewing either the registered Rules of the scheme or the relevant Notarial Cession in the Seller’s name.
Parking bays forming part of the common property with no exclusive use rights may only be available on a first come first serve basis, or alternatively a lease basis. Leases are not always transferable to Purchasers. Lack of exclusive guaranteed parking is material to most owners or tenants. A Purchaser should be satisfied that parking, and any other exclusive use area like a garden or store, will be their registered exclusive use right.
Ongoing Costs
The Purchasers should satisfy themselves as to the ongoing costs of Sectional Title Ownership which are usually Rates payable to the local authority and Levies payable to the Body Corporate. In the City of Cape Town all sectional title properties attract rates.
Purchasers should understand what is included in the levy cost. Are services such as electricity and water metered separately? Purchasers should compare the monthly levy costs with other similar schemes offering similar amenities, such as a swimming pool, lifts and security, to establish a comparable levy on a square meter basis. If it is determined that the levy is materially higher than in a comparable scheme, same may be as a result of an inefficient Body Corporate. If not, the Body Corporate’s financial statements should reflect existing and or growing reserves to fund future expenditure.
Right of Extension
A complex but uncommon issue is that of a Right to Extend the Scheme. Certain schemes may have a right reserved, most often in favour of the developer, for additional building(s) to be constructed. If an Agreement of Sale is silent or discloses that there is no Right to Extend when in fact there is one, a Purchaser has a right to resile from the Agreement – i.e. walk away from the transaction with no consequences.
An Agreement of Sale which records that there is a Right to Extend prevents a Purchaser from escaping the transaction. In such circumstances before signing a Purchaser should understand exactly what the Right to Extend permits the holder thereof to execute by way of further construction. A Purchaser should ascertain if an extension of the scheme will detract from the value of the property purchased or if an extension may detract from the use and enjoyment of the property, both during a prolonged construction period and thereafter.
Conclusion
While purchasing Sectional Title property may seem like a daunting task, an educated buyer having undertaken a proper due diligence enquiry in respect of both the property being purchased and the relevant Body Corporate can, with professional assistance, be well informed and mitigate the risk of issues arising after registration of transfer.
Should you be considering purchasing in a Sectional Title Scheme, contact our Property Law department to assist you in ensuring that any potential problems that may arise are addressed before signing an Offer to Purchase.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
C & A Friedlander Inc.