I am going to rehash the importance of paying levies on time and in full because it remains a sticky matter.
Times are tough with many people losing their jobs or having less income.
From a body corporate management side, it is important that trustees and managing agents understand their very important roles in running any body corporate.
Trustees and managing agents are there to enforce the rules and to collect the agreed levies – period.
Not making the strongest effort to collect outstanding levies means just that and is not acceptable.
If one owner owes months of levy, effectively other owners have to subsidise the unpaid levy.
In effect the body corporate is giving a loan to an owner.
While this may not mean an immediate increase in the actual levy, that is the real effect.
Unpaid levies can only come from one place, the reserve fund, and there are now buildings and complexes that have proper budgets and levies to run their operations on a daily basis and to collect the required long-term reserves but in effect are running in a negative financial situation when you calculate the charged income, less prepaid levies and services, less the agreed reserves.
This situation is becoming more and more common.
It does not matter that your 100-unit building has R1-million in the bank if it was supposed to have R2-million if all the levies were collected.
It still means that the building is running with a deficit on its budgeted funds of R1-million.
Trustees and managing agents have no authority to make arrangements with outstanding owners, especially those that owe substantial sums.
More and more owners are getting seriously in arrears and it is having a major effect on the finances of their buildings as a whole.
Some of them are now becoming marginally viable.
This is especially the case if the situation continues to deteriorate so that the bad debt rises from 10 percent to levels of 25 to 30 percent and in many cases even higher.
The courts are greatly to blame.
While it is now possible to go the Community Schemes Ombud Service (CSOS) route, our company has not seen the result of these applications to date.
Going the legal route has now become not only immensely expensive but also far too time consuming.
How can the trustees and managing agents do proper credit control when the basic procedure to notify the debtor can take three months, followed by an application to court?
Court dates are months into the future and certainly not less than three months in advance of putting in a claim.
When the court date does arrive, it is quite frequently delayed for another three months because the magistrate does not feel up to the job or the recording system is not working.
Even where the courts are working, they are often heavily biased in favour of the defaulting owner or tenant.
Paying your levy is the minimum that you should be doing if you own a unit in a sectional title scheme.
If you don’t or cannot then it is not for the body corporate to give you time to pay.
It is your responsibility to find the money from somewhere and immediately bring your levy up to date.
That is part of being a property owner.
Far too many owners feel that they are being victimised because they are being pressed to pay up or sell out.
It is not the body corporate’s problem that you have not had a tenant for two or three months.
Find the money or sell.
This is the attitude that should be taken, especially where the owner is an investor owner.
The problem is that when the body corporate takes a lenient view debt mounts up.
If action is only taken after three months and take another three months to come to court then already that owner can be up to a year in arrears.
At that stage they don’t have the means to pay their debt.
I would suggest that no body corporate has the right to make any arrangement that extends longer than four months to fully bring your account up to date.
Longer than that you are giving a loan to the owner.
Interestingly by going to the CSOS it is possible to make a direct claim to attach the income from the owner’s tenant (if you can find their details), in which case the CSOS will instruct the tenant to pay the full rent amount to the body corporate until the arrear levies are paid in full.
This compares to a court order via the attorneys where you attempt to attach the rental from the tenant.
Before the attorney goes that route they are looking for at least R10 000 up-front payment by the body corporate.
The irony is that if owners are not paying, then the body corporate does not have the money to pay up front and therefore cannot attach the rental.
The CSOS is currently free (it used to be R50).
From a valuation point of view, it is vital that the valuer doing a valuation in a sectional title building is offered a copy of the annual financial statements plus a copy of the current income and expenses on the building.
A clear indication of trouble would be where there are no current financial statements available – this is quite common with many body corporates being years in arrears.
The same applies to the current financial situation.
Where these figures are not available or where they show serious percentage of long-term outstanding levies, then this must have a negative effect on the real value of a particular unit.
If the accounts are so poor that the building does not have funds to pay its way, then the value of any particular unit must be dramatically reduced.
Some schemes are in serious trouble with outstanding levies being equal to the whole of the current proposed budget.
Schemes with serious arears of 25 percent or more are in serious risk of being bankrupted.
This is not an isolated case.
I would suggest that on a national basis probably 25 percent of body corporates are in serious financial trouble.
Ways must be found to alleviate the situation.
Firstly, a bold strong credit control situation must be put into place.
Anyone who is more than one month’s levy in arrears must be handed over to the CSOS or an attorney for collection.
Leaving the situation allows owners to believe that no serious action will be taken.
Owners need to be told in no uncertain terms that paying your levy is part of property ownership and that other owners will not tolerate unpaid levies.
Those that are in arrears must be told plainly what the options are, which simply put is a choice of:
- Pay your levies on time
- Make arrangement to pay off arrears over a three-month period and bring your account up to date
- If you don’t pay your levy or keep to the arrangement then the body corporate will:
- Blacklist you – causing serious financial inconvenience including the probability that you will never at a bond again.
- Request attachment of the property and have it sold by Judicial mean, which will usually result in bargain hunter prices being paid. Not only will you receive a knock-down price on your property but all your debts will remain in force ie for rates and taxes, levies, etc. You won’t be able to get credit open a store account and are likely never to be offered a home loan again.
- I would also suggest that the outstanding levy needs to be added to the next year’s budget because the body corporate needs the money to run. Upping the levy in this way will be a sobering reminder to every owner that they need pay their levies on time’
Effectively, what happens in a low-collections building is that maintenance suffers.
This will have a major effect on the value of the property being appraised.
No matter how nice a building is inside, being generally neglected and having large future debt collection problems must have a serious effect on the value of ay unit, even in the best run scheme.
Valuers must take great care when valuing individual sectional title units that they have the full picture of how well the scheme is being managed from a financial point of view
- Mike Spencer is the founder and owner of Platinum Global. He is also a professional associated property valuer and consultant with work across the country as well as Eastern Europe and Australia.
