Sectional Titles

Financial disputes

Danny van Zyl, associate attorney at Van Zyl Kruger Inc, was recently awarded his Master of Laws Degree from the University of Stellenbosch and wrote his thesis on the Community Schemes Ombud Service Act 9 of 2011. He shares certain aspects of his thesis with us in a series of articles to be featured the next few months.

There are many different community schemes and arrangements in South Africa. For many years there was no regulatory body governing these schemes. The Community Schemes Ombud Service Act 9 of 2011 (“CSOSA”) came into operation in October 2016 and many of these schemes now qualify as community schemes under the CSOSA. Subsequently, the CSOSA established a regulatory body established by government to deal with complaints and disputes in community schemes and to oversee compliance and corporate governance in such schemes.

The CSOS is designed to provide an alternative, impartial, cost-effective and transparent service for the resolution of administrative disputes in community schemes. The term “community scheme” refers to a wide range of shared land use arrangements, including sectional title, share block and retirement schemes, home owners’ associations and housing co-operatives.

The CSOSA defines a “dispute” as:
“a dispute in regard to the administration of a community scheme between persons who have a material interest in that scheme, of which one of the parties is the association, occupier or owner, acting individually or jointly”.

This means that the CSOS can deal with disputes regarding the administration of a community scheme if the dispute is between persons who each have a material interest in the scheme, such as executive committee members, owners, occupiers, managing agents and bondholders, and one of the parties to the dispute should either be the association or an owner or occupier.

Section 39 of the CSOSA provides for a list of seven types of orders that a CSOS adjudicator can give in terms of a dispute application. Each month, I will consider one of these seven categories of types of orders from a practical point of view to determine which kind of community scheme disputes can be taken to the CSOS for resolution and how an adjudicator can deal with such disputes. It is important to note that the list of orders provided for in the CSOSA is not exhaustive as the chief ombud is entitled to propose any other order.

The first category of disputes relates to financial issues in community schemes. The sharing of financial responsibilities is common in all community schemes, and the existence of conflict between owners as to how the association’s funds should be applied and how owner contributions should be calculated for any expense, is almost certain. The first few orders relating to financial issues are summarised below.

An order requiring the association to obtain or increase the scheme’s insurance cover
It is not uncommon for the scheme’s governance documentation or legislation to direct that the association should take out and maintain insurance cover for some or all the land and buildings that forms part of the scheme. There are various kinds of insurance that the association can take out pertaining to the scheme. Indemnity insurance covers against the risk of damage or destruction of the buildings and other physical improvements in the scheme as well as damage or theft of its movable assets. The association should also make provision for fidelity insurance cover against the risk of loss by theft or dishonesty. Some schemes also cover themselves with public liability and other forms of insurance.

It might happen that the association omits to renew the insurance policy of the scheme and allow the scheme’s insurance cover to lapse. Disputes can also arise regarding the types of risk that should be covered by insurance, the amount of cover required for any risk or the insured valuation of the land and buildings in terms of the insurance policy. In terms of section 39(1)(a) of the CSOSA, a person may make an application for an order requiring the association to take out insurance or to increase the amount of insurance.

An order requiring the association to act to recover insurance proceeds
When an insured event occurs, the association has an obligation to make a claim against its insurers as it is the association, rather than its members, that enters into insurance contracts. Therefore, the association has the necessary locus standi to bring a claim against the insurer to recover any damages on behalf of the scheme.

In some instances, the association may feel that there are good reasons not to initiate an insurance claim, for example because this may lead to an increase in the scheme’s future monthly premiums or because the scheme may lose certain benefits under the existing policy, for example a no-claims bonus.

In these instances, an individual or a minority group of owners may feel that the association should act under an insurance policy to recover an amount, but they are unable to convince the association to do so. Section 39(1)(b) of the CSOSA allows a person to make an application for an order requiring the association to act under an insurance policy to recover an amount.

An order correcting wrong or unreasonable contributions
In terms of section 39(1)(c) of the CSOSA, an application may be for an order declaring that a contribution levied on owners or occupiers, or the way it is to be paid, is incorrectly determined or unreasonable, and an order for the adjustment of the contribution to a correct or reasonable amount or an order for its payment in a different way. This provision promotes the maintenance of the buildings in community schemes.

A member’s most important financial obligation is to pay their contributions to the association. It might happen that an owner, for various reasons, disagree with the calculations used to determine the contribution amount payable; the share of the contribution that they are liable to pay, or even the way the association has determined that the contribution must be paid.

In some schemes, members are expected to pay some sort of special contribution. Owners may also consider that such a special contribution is unreasonable because in their view it was not necessary or that the association did not follow the correct procedure in raising the contribution as required by the scheme’s governance documents or legislation

In practice, these types of disputes can become very complicated, particularly when a member believes that he or she should be paying a smaller share compared to other members of the scheme.

An order requiring audit of association accounts
The governance documentation of most community schemes provides for the association to keep detailed financial records and that its books of account must be regularly audited. In terms of section 39(1)(d) of the CSOSA, an application may be for an order requiring the association to have its accounts, or accounts for a specified period, audited by an auditor specified in the order.

It might happen in practice that a schemes’ books of account are not audited for certain periods, especially when an association’s annual general meetings are delayed. This might lead to the scheme’s finances not being properly handled or to the misapplication of its income. In such cases, the members of the scheme’s recourse are to demand an audit. If the association fails or refuses to comply with this demand, or in the unlikely instance that the scheme’s governance documents do not require an audit, a member who believes that there are good grounds for requiring an audit can apply to the CSOS for an order.

Daniël Van Zyl
Attorney & Conveyancer
Van Zyl Kruger Inc

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