Sectional Titles

Old hat

When sectional titles were introduced in 1971, the intention was to address the shortcomings of the share blocks' property-holding format and it was predicted that sectional titles would replace share blocks at a fast rate.

Sectional titles certainly gave property development an astounding injection of energy and it quickly overshadowed share blocks as the preferred development format. Many existing share block buildings were converted and the vast majority of new apartment developments were sectional title schemes. The attraction of sectional titles vis-à-vis share blocks mainly consisted in the possibility of raising mortgage finance, which opened the market to buyers unable to pay cash. The fact that sectional titles conferred real ownership, compared to mere shareblocking in a company, was also seen as a compelling argument in the thinking of potential purchasers.

Also, it soon became apparent that the sectional title model was a very flexible development vehicle for purposes other than housing.

In Natal (as it then was) conversion of existing share block schemes to sectional titles was slowed down by three factors, namely (i) the longer history of share blocks in the province, (ii) the high percentage of temporary holiday (share block) accommodation existing there, and (iii) the fact that many share block schemes were based on leasehold, which made such schemes unsuitable for conversion.

The advantages of sectional titles over share blocks as a development model became somewhat cliché and went largely unchallenged until recently. The fact that share blocks do offer certain advantages has again been put under the spotlight by the upsurge in so-called 'fractional ownership' of late. It has brought an awareness of the fact that, particularly for leisure accommodation, share blocks present some real advantages. These may be summarised as follows:

  • The establishment of the legal sub-structure of a share block scheme is less costly and quicker than for a sectional title scheme.
  • A developer may use the proceeds of sales of shares to develop the scheme, and even to purchase the land or building, which diminishes or sometimes eliminates the need for borrowed development capital, allowing a less costly end product due to the interest factor.
  • Registered ownership of the land on which a scheme is established, is not required a share block scheme may be based on leasehold.
  • A single share block scheme may be established on several pieces of land which need not be contiguous.
  • Real ownership, such as sectional title ownership, burdens owners with more obligations and commitments than shareholding in a share block company. In respect of leisure accommodation this is often seen as an advantage of share blocks.
  • The flexibility of share blocks makes them more suitable for time-share schemes.
  • The fact that bond finance is not obtainable for share blocks is perceived by some as a 'selectivity benefit' for existing owners.
  • Transfer procedures may be cheaper, particularly when a substantial loan obligation exists.
  • By utilising share blocks within a sectional title scheme, complex structures may be achieved which could accommodate divergent interest groups on one piece of land.

Despite certain warnings, the so-called 'fractional ownership' industry appears to be expanding at a rate of knots. In the majority of 'fractional ownership'- schemes, a combination of share blocks and timesharing is utilised. Whilst the use of the term 'ownership' is misleading and the legal integrity of some schemes may be doubtful, share blocks do offer the developer and purchasers real advantages in this type of leisure accommodation, and it may be successfully linked to time-sharing arrangements, provided that it is done correctly.

Share blocks have recently emerged as a useful device to facilitate certain developments in compliance with emerging policies and legislation, in terms of which provision must be made for benefits to previously disadvantaged individuals. This is particularly true in respect of rural/agricultural developments, which combine upmarket leisure accommodation with education, training, employment, profit-sharing, and housing benefits for members of local communities. Such schemes present interesting challenges and exciting possibilities for both investment and social development.

It would seem that we have not yet seen the end of the potential role of share blocks as a property- holding format.

Republished with permission from SA Deeds Journal

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