The purpose of this article is to explain to new investors in the sectional title market why it is necessary to pay your levies.
It seems many new property investors are entering the market because they see it as a way of getting profit but have no idea how any business works.
They are getting into trouble because they don’t understand property and have not been properly primed by the agents that they bought from.
Also, they think it is possible to make arrangements when times are tough.
One even tried to justify this by giving the example of an Edgar’s clothing account where you can make arrangements to pay off.
It does not work like that with levies.
Some of these new property owners complained bitterly at one annual general meeting because they were being penalised for late payments.
The penalty fees go towards compensating the managing agent/trustees in a self-run building for the extra work involved.
They also have to pay attorney fees because if their accounts are handed over.
This was despite the fact that they have never been up to date for over two years and that late payment fees had not been added for the first five months.
So, what is a sectional title and what are the owners’ obligations?
Like I have already said, it is quite clear that many buyers of sectional title units buy property without understanding exactly what it is they are buying.
It is a great pity that estate agents that sell sectional title property do not, as part of the selling process, clearly explain to their buyers exactly what it is that they are getting involved in.
Essentially, sectional title is a way of investing in property by buying an individual property (unit) in a communal scheme.
Each owner buys a box plus a communal share in the common property.
The common property is anything that does not form a unit.
When a buyer buys into a sectional title scheme, they automatically in terms of the Sectional Titles Schemes Management Act (STSMA) become part of the body corporate and must pay their levy.
The levy is their share of the running costs of the common property of the building.
You cannot opt out of paying your levy and the levy must be paid in full in advance – that is at the beginning of each month.
There is no negotiation on whether or not you have to pay your levy and there is no negotiation as to when the levy should be paid.
Not paying your levy on time means that in effect you are forcing the other owners to pay your share of the running costs of the building.
None or late payment has consequences, which will include:
· Late payment fee: at Platinum Global, this is R200 and is there to compensate the manging agents or the body corporate when self-managed for the extra work required to do credit control over the non-payers. It is in the rules of the body corporate.
· You will be handed over to the legal authorities for collection of your arrear levies. In the rules of your body corporate anyone who is more than 30 days in arrears is automatically handed over.
Attorneys are expensive and all legal costs are borne by the owner who is in arrears.
The alternative is to hand over the owner to the Community Schemes Ombud Service (CSOS).
Until recently, this was not effective, but they seem to have become more efficient of late.
Here the process is less expensive, but the outcome will be the same.
An owner who is in arrears, after the arrears have been confirmed, will be found to be in arrears and an order – equivalent to a court order – will be issued to pay.
In either case the body corporate will be able to blacklist the non-paying owners which has serious consequences.
The CSOS or the attorney are able, on behalf of the body corporate, to attach furniture and goods, including cars and the like, of the non-paying owner.
If the owner still fails to pay, the body corporate can sue them to attach the property or have the tenant pay all rental to the body corporate.
The fact that they are in arrears will be noted by the credit bureaus and they will find it very difficult or expensive to get credit.
Trustees, as part of their duty, must hand over an owner who does not pay their levy.
If they don’t and there are any losses as a result, they can be held personally liable for this lost debt – the trustee will have to pay the lost levy of the defaulting owner.
The amount of the monthly levy is set based on two things:
· The running costs of the building.
· The legally required long-term maintenance reserve for the building.
The running costs are the day-to-day costs of managing the building and paying the accounts of the body corporate, such as wages, fees, insurance, maintenance, water, electricity and managing agent fees etc.
Rates and taxes are levied on individual units, not the body corporate, and the individual owner must pay their own rates and taxes.
The body corporate is forced to have long-term maintenance reserves in terms of the Sectional Titles Schemes Management Act.
These long-term maintenance reserves are specific funds that are saved over a period of 10 years to do maintenance to the building that happens in the future.
For example, the roof of your building needs to be re-waterproofed every five years and is estimated to be R500 000 when it is done.
That means R100 000 per annum would need to be added to the levy so that in five years’ time the money to re-waterproof the roof would be in the body corporate’s account to do this work.
If the approved budget for your building was say R120 000 for the year that would mean that the body corporate should collect an additional R10 000 levy from all the owners each month.
Each unit must contribute to the levy based on the size of that unit as a percentage of all the units. ‘
So, if there were 10 units of 100 square metres, each one would need to pay 10 percent of this amount each month, which is R1 000.
Anyone that does not pay means that there would be 10 percent less in the levy than is needed to run the building.
That is why owners must pay their levies on time each month.
It is important to understand that the levy is the money needed by the body corporate to run and maintain the whole building.
When people do not pay their levies or pay late, it means that there is not enough money to settle the body corporate’s account.
It is not possible for a body corporate to “make arrangements to pay off the levy”.
Each month a new levy is due.
Not only will an owner who “is having a hard time” and does not pay owe more each month, it will mean that the levy will have to take this into account and get all the other owners to pay more to make up the difference.
In effect, it means that all the other owners are paying the levy of the defaulting owner.
The same applies to unpaid water and electricity accounts.
Clearly an owner living in a unit is paying his own levy and expenses, but this applies even more to an owner who has bought a unit as an investment.
An investment property is bought with the idea of making profit – but it also comes with risk.
Nobody should buy an investment property if they don’t understand this.
If you buy a flat but cannot find a tenant, you have to bear the costs that are still there.
The bond still has to be paid as does the rates and taxes.
Even more importantly, the obligation to pay the levy does not stop because you don’t have a tenant.
If you don’t have money to pay the costs of owning a property when you don’t have income, then maybe you should not be buying investment properties.
It is not the obligation of other owners to keep the body corporate going until you can find a tenant.
You need to find the money to pay your levy from somewhere else – friends, family, the bank, short term lenders, from your savings or sell your car.
If owning an investment property is too much or too risky for you then you should sell it.
Unfortunately, too many estate agents are too eager to do the deal and do not educate those who have not invested in property before.
Too often buyers buy at the margin – for as much as they can afford – and don’t have the reserves to cope when problems arise.
Being able to pay your levy every month, in full and on time, is an obligation of being an owner of a property and especially of an investor buyer.
Don’t enter the property rental market if you cannot pay your levies when you don’t have a tenant or the tenant does not pay.
· 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.