Whether you are an owner, a trustee, a managing agent or an attorney, you will agree that levies are essential to the efficient running of sectional title schemes.

Often referred to as the "life-blood" of the body corporate, owners have to pay levies and trustees, managing agents and attorneys may have to collect them. Every person involved in a sectional scheme needs to understand how levies work, from the procedures to be followed when they are raised to the consequences of non-payment.

Why are levies raised?

Each body corporate is required in terms of section 37(1)(a) of the Sectional Titles Act of 1986 ("the Act") to establish an administrative fund sufficient, in the opinion of the body corporate, to cover its expenses. A body corporate's expenses include the repair, upkeep, control, management and administration of the common property (including reasonable provision for future maintenance and repairs), payment of taxes and other local authority charges for electricity, gas, water, fuel, sanitary and other services to the building/s and land, any premiums of insurance, and sufficient for the discharge of any duty or fulfillment of any other obligation of the body corporate.

Levies are raised to raise funds necessary to pay for these expenses and usually make up the bulk of the money credited to the body corporate's administrative fund.

How are levies raised?

The outgoing trustees estimate the body corporate's expected expenditure in the next financial year and this budget is considered at the annual general meeting ("AGM"). Once approved by owners, perhaps with alterations, the trustees meet again to divide the estimated expenditure between the owners and work out what amount each owner must pay as an ordinary levy, in what instalments the levy will be paid and what rate of interest will be charged on overdue levy payments. The trustees then notify each owner of the amounts due and each owner is then liable to pay such levies, normally in monthly instalments.

How is the quantum of each owner's levy contribution determined?

The approved budget of estimated expenditure is normally divided amongst owners in accordance with each owner's participation quota ("PQ"). The PQ is a fraction worked out by dividing the floor area of each owner's section as shown on the sectional plan by the total of all the floor areas of sections in the scheme. For example, if owner A's section has a floor area of 50sq m and the sum of all the sections floor areas is 1,000sq m, then owner A's PQ will be 0,0500 or 5% because 50 1000 = 0,05.

However, the PQ formula for levy liability is not absolute; it can be varied if the correct procedure is followed. Section 32(4) of the Act makes it is possible for the developer when opening the sectional title register, or later for the body corporate by special resolution, to make rules under section 35 by which the liability of the owners to make levy contributions is modified so as not to be based on the PQ formula.
But where an owner is adversely affected by the adoption of a rule in this regard, his written consent must be obtained. A rule of this nature could be adopted in a scheme where the owners specially resolve that owners of ground floor sections should not have to contribute towards lift maintenance costs, or where it is specially resolved that owners will pay an equal amount of levies, provided of course that those owners who are negatively affected give their written consent.

Special levies

In terms of prescribed management rule ("PMR") 31(4) the trustees may from time to time raise special levies for expenses which are necessary but were not budgeted for in the estimated expenditure approved at the last AGM. Trustees do not have the power to raise a special levy when a budgeted expense exceeds the approved estimate. They can only raise a special levy for unexpected expenses which were not included in the budget. These special levies may be payable in one lump sum or by such installments as the trustees think fit.

It is important to note that the trustees alone have the power to raise special levies for genuinely necessary and unbudgeted expenses. Many owners think that because they were not consulted by the trustees or did not vote in favour of a special levy, that it was invalidly raised. Not so! Trustees are under no obligation to consult owners in this regard and are entitled to raise special levies in accordance with the provisions of PMR 31(4).

When do levies and special levies become payable, who is liable to pay them and what happens when units change hands during a financial year?

In terms of section 37(2) levies are due and payable on the passing of a resolution to that effect by the trustees of the body corporate and may be recovered from the persons who were owners of units at the time when the resolution making the levies due and payable was passed. This means that the person who owned the unit when the levy became due and payable is the only person from whom the body corporate may legally recover the levy.

This can become a contentious issue when, for example, a special levy is raised and becomes due and payable after an owner has sold his unit but before the transfer of ownership has taken place. As soon as the unit has been transferred from the seller to the purchaser the seller may believe that he is not liable to pay the special levy because he is no longer the owner of the unit.

But because the seller was the owner at the time the special levy was raised and became due and payable, the body corporate is legally entitled to recover that special levy only from the seller and has no legal entitlement to recover the special levy from the purchaser as the new owner. Similarly, if the day after transfer has occurred a special levy is raised for something that occurred "before the purchaser's time" – the purchaser as the owner at the time the special levy was raised and became due and payable – is liable to pay the special levy.

To avoid disputes arising regarding levy liability, the seller may assign his levy liability obligations to the purchaser with effect from the date of transfer. Strictly speaking, the seller and the purchaser are not able to conclude such an agreement on their own. The body corporate must accept the benefits of such an agreement, releasing the seller from his statutory obligation and acquiring a contractual right to recover the outstanding levies from the purchaser. This can be achieved by way of a "tripartite agreement" entered into by the seller, purchaser and body corporate.

Can an owner ever legally withhold a levy payment?

If an owner believes for some reason that the body corporate owes him money, he may also believe that he is fully entitled to withhold his levy payments, to "set-off" the debt he believes is owed to him.

Imagine this scenario: an owner has had water leaking into his section and the leak is clearly emanating from a defect in the common property. The owner has asked the body corporate on numerous occasions to repair the defect, yet after two months the body corporate still has not done so. The frustrated owner resorts to employing a contractor to repair the common property defect and foots the bill which comes to R2k. His levies are R1k per month so he decides that he will not pay levies for two months to set-off the money he believes is owed to him by the body corporate.

Although this action may sound reasonable it is not legally justified. One is only entitled to set-off a "liquid debt" once a matter has been adjudicated by an arbitrator or a judge. Therefore, an owner cannot simply decide to set-off what he considers to be the amount of his claim against the body corporate by withholding his levy payments without the matter being adjudicated. He must continue to pay his levies and can attempt to recover the money spent on repairing the common property defect through the legal channels of litigation or declaring a dispute under PMR 71 by taking the body corporate to arbitration.

Can I ever re-claim levies that I have paid to the body corporate?

PMR 45 states that owners are not entitled to a refund of contributions lawfully levied upon them and duly paid by them. Therefore, unless the owners can prove that a part or the whole of a contribution levied upon them was unlawful, they are not entitled to recover or be refunded any levies that they have paid to the body corporate.

What sanctions do I face if I don't pay my levies?

The prescribed management rules set out a "sanction" for owners who default in their levy payments.

PMR 64 provides that if any contributions payable by an owner in respect of his section or the common property have not been duly paid, that owner shall not be entitled to vote at any general meeting. However, this "no vote" sanction is only applicable to general resolutions and therefore a defaulting owner is still entitled to attend trustee and body corporate meetings, to speak and to vote for any special or unanimous resolutions. Furthermore, if a defaulting owner's bondholder has made its interest known to the body corporate it may vote on behalf of the owner for general resolutions by exercising the proxy in the mortgage bond. It is clear that this sanction is ineffective and does not act as a deterrent to owners considering not paying their levies.

An owner who continually defaults in his levy payments is effectively being subsidised by the other members of the body corporate who conscientiously pay their levies. This is not an equitable situation and the trustees, managing agent or the scheme's attorney will most likely issue summons against a regular defaulter.

If an owner believes that he is entitled to withhold his levy then he should declare a dispute with the body corporate under PMR 71. If an owner is in default for any other reason, he will have to defend himself in litigation procedures instituted by the body corporate to recover the arrears and will almost certainly find that he has to pay the outstanding levies, as well as interest and legal costs. – Jennifer Paddock

Jennifer Paddock is a lawyer at Paddock, a specialist sectional title firm (www.paddocks.co.za).

www.property24.co.za

11/07/2008