A Sectional Title Scheme cannot be properly managed by the trustees unless all the owners make regular and prompt payment of levies. The non-payment of levies is one of the main reasons why some body corporates in South Africa find themselves in financial distress.
In a fairly recent High Court decision the court held that it was the trustees duty to ensure that the liabilities of the body corporate did not exceed its assets resulting in it (the body corporate) not being able to discharge its day-to-day liabilities to service providers and other creditors.
Sectional title owners and prospective purchasers of sectional title property should be aware that if the body corporate is unable to discharge its liabilities towards creditors, then the owners can be held personally liable for the debts of the body corporate, calculated in proportion to the participation quota of each owner’s section. Although the body corporate is a legal entity the members do not enjoy the same protection against the claims of creditors as do the shareholders of a company or members of a CC.
Furthermore, prospective purchasers in particular should be aware that creditors claims against the body corporate are not restricted to existing owners. If, for example, the Municipality has taken judgement against the body corporate for non-payment of rates and taxes and a purchaser buys a unit in that scheme, he or she may find themselves liable to pay for the rates owing by the previous owner in respect of their unit.
It also appears from recent High Court judgements that a body corporate cannot be liquidated. This means firstly that sectional title owners cannot “clear the slate” as far as the debts of the body corporate are concerned by liquidating the body corporate; and secondly that creditors of a bankrupt body corporate will have no option other than to claim payment from the individual owner.
I am not suggesting that people should be deterred from buying into Sectional Title Schemes. On the contrary “townhouse living” and other forms of sectional title ownership in South Africa have become a very popular way of life for many South Africans and there are a great number of highly successful, financially stable and well run schemes.
However, prospective purchasers should investigate the finances of the body corporate before buying to ensure that the scheme is properly managed and financially stable. A copy of the latest financial statements of the scheme should be obtained.When a purchaser is registering a bond over a sectional title property it is almost always a condition of the approval of the bond that the bank be supplied with a copy of the financial statements prior to registration of the bond.