Investors urged to take care in dealing with sectional title office and industrial schemes 
Nick Wilson

 
With rising interest in sectional-title office and industrial schemes, investors and owner-occupiers must realise that these developments can hold the same pitfalls as their residential counterparts.

Legal experts say investors must study the financial state of the body corporate if they are buying into an existing scheme or make sure the developer driving a new scheme is reputable.

If there is widescale non- payment of levies in a sectional title scheme, a good unit owner who makes sure his levies are paid up to date may lose value in his investment.

Over the past two years there has been significant growth in demand for these types of investment because they afford investors and owner occupiers a cheaper way of participating in the relatively expensive commercial property market.

Attorney Russell Warner, who specialises in property matters, says sectional title office and industrial schemes are potentially a good investment because they are an easy way to enter the commercial property market.

“It is similar to someone who can’t afford to buy blue-chip shares but could invest in those via a unit trust. In such a case the investor would want to be sure that the management of the unit trust was sound, and would look at its past performance.”

He says an investor or potential owner-occupier must review the audited financial reports of the scheme if it has been in existence for a number of years.

“They should get the financial reports for the last three years of the body corporate, and they also need to look at the management of the body corporate, which is the trustees, and ascertain whether they are competent.

“Any managing agent appointed should preferably be a member of the National Association of Managing Agents and have a good track record.”

Warner says owners of units in such schemes can be liable for the unpaid debts of other owners even if they have paid their levies up to date.

This is in spite of an amendment to the Sectional Titles Act, which came into force last year aimed at changing the position that the owners of sectional title units are accountable for debt racked up by their bodies corporate even if they have paid their levies in full, he says.

The wording in the amendment was changed at the last minute by the agriculture and land affairs portfolio committee after consultation with stakeholders, including institutions that lend money to bodies corporate in financial trouble. The new wording protects creditors to the detriment of good unit owners, says Warner.

The original amendment in section 47 of the act aimed to reduce the risks of sectional title owners losing their units if the development was not managed properly. The amendment stipulated that if unit owners were up to date on payment of levies to their body corporate they would be protected against losing their units if the body corporate ran into financial difficulties.

Warner says if the amendment of the Sectional Title Act had not been reworded at the last minute, owners who paid their levies up to date would have been protected. But creditors of the body corporate would have been prejudiced in that they would be able to recover only a portion of the debt owing to them.

“What could now happen is a creditor could take a judgment against the scheme and hold the owners who have already paid liable for a portion of the outstanding debt irrespective of the fact that they are up to date with their levies.”

Warner says investors in these kinds of schemes must remember they are essentially joining a club from which they cannot resign as long as they are owners. “One is liable for the debts of that club jointly with the other investors or members. One therefore has a vested interest in seeing that proper budgeting of income and expenditure has taken place and that sufficient reserves are held. One is, after all, buying a business, and shouldn’t go blindly into something like this whether it’s a new or existing scheme.”

Warner says if the development an investor is buying into is new, he should take into account the track record of the developer and also obtain either legal and/or accounting advice from a professional who is knowledgeable in this area.

“Of particular importance is checking to see that the future income and expenditure has been accurately budgeted and is not merely at best a thumbsuck or at worst deliberately understated to make the units appear more attractive to prospective purchasers. Money spent on proper professional advice is money well spent.”

But Frans van Hoogstraten, property director at Werksmans Attorneys, says an owner can be responsible only for his proportionate share of the expenses of a body corporate.

“By reason of the provisions of section 47 of the act, if an owner has paid his levies in respect of unpaid expenses then he cannot be joined in an action against the body corporate. If he has not paid his levies, his liability is limited to his pro rata share.”

He says the liability of an owner can never be affected by the nonpayment by other owners.

But Van Hoogstraten says a “bigger difficulty” is that if enough owners do not pay their levies the scheme as a whole will deteriorate. This will have a negative effect on a unit owner’s investment.

“If the whole scheme goes down, the property value will go down and that is by far the biggest issue.”

He says investors have to make sure that the trustees enforce the levy obligations against all owners and take action against “delinquent owners”.