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What Investors Need To Know About Levies

Levies are the ‘lifeblood’ of the body corporate; owners have to pay them, and trustees, managing agents and attorneys may have to collect them. Every person involved in a sectional scheme needs to understand how levies work, from the procedures to be followed when they are raised, to the consequences of non-payment.

Levies for Property Investors

Why are levies raised

Each body corporate is required in terms of Section 37(1)(a) of the Sectional Titles Act of 1986 (the Act) to establish an administrative fund sufficient, in the opinion of the body corporate, to cover its expenses. A body corporate’s expenses include the following:
•    the repairs, upkeep, control, management and administration of the common property (including reasonable provision for future maintenance and repairs)
•    payment of taxes and other local authority charges for electricity, gas, water, fuel, sanitary and other services to the building/s and land insurance premiums
•    the discharge of any duty or fulfillment of any other obligation of the body corporate.

Levies are charged so that the funds necessary to pay for these expenses are available. These funds usually make up the bulk of money received by the body corporate’s administrative fund.

 

The process – from budget to levy

The outgoing trustees estimate the body corporate’s expected expenditure for the following financial year, and this budget is considered at the AGM (annual general meeting). Once approved by owners, and after alterations have perhaps been made, the trustees meet again to distribute the estimated expenditure among the owners in order to work out what each owner will pay as an ordinary levy; in what instalments each levy will be paid; and what rate of interest will be charged on overdue payments. The trustees then notify each owner of the amounts due, and each owner is then liable to pay such levies, normally in monthly instalments.

Ascertaining the owner’s levy

The approved budget of estimated expenditure is normally divided among owners in accordance with each owner’s PQ (participation quota). The PQ is a fraction worked out by dividing the floor area of each owner’s section (as shown on the sectional plan) by the total of all the floor areas of sections in the scheme.
However, the PQ formula for levy contributions is not absolute; it can be varied if the correct procedure is followed. Section 32(4) of the Act makes it possible for the developer when opening the sectional title register, or later by the body corporate in terms of a special resolution, to make rules under Section 35 whereby the owners’ levy contributions are modified so as not to be based on the PQ formula. But where owners are adversely affected by the adoption of a rule in this regard, their written consent must be obtained. A rule of this nature could be adopted in a scheme where the owners resolve that those owning ground-floor sections should not have to contribute towards lift maintenance costs, or where it is resolved that owners will pay levies in equal amounts, provided those owners who are negatively affected give their written consent.

Special levies in special circumstances

In terms of PMR (prescribed manage-ment rule) 31(4), the trustees may from time to time charge special levies for expenses which are necessary but were not budgeted for in the estimated expenditure approved at the previous AGM. Trustees do not have the power to raised a special levy when a budgeted expense exceeds the approved estimate. But they can raise a special levy for unexpected expenses which were not included in the budget. These special levies may be payable in one lump sum or by such instalments as the trustees deem fit.
It is important to note that the trustees alone have the power to charge special levies for genuinely necessary and unbudgeted expenses. Many owners think that if they were not consulted by the trustees or did not vote in favour of a special levy, it was invalidly raised. Not so – trustees are under no obligation to consult owners in this regard and are entitled to raise special levies in accordance with the provisions of PMR 31(4).

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Liability for special levies

In terms of Section 37(2) levies are due and payable on the passing of a resolution to that effect by the trustees. They may only be legally recovered from the persons who were owners of units at the time when the resolution was passed.
This can become a contentious issue when, for example, a special levy is
raised and becomes due and payable after an owner has sold the unit but before transfer of ownership has taken place. As soon as the unit has been transferred from the seller to the purchaser, the seller may believe that they are not liable for the special levy because they are no longer the owner of the unit. But because the seller was the owner at the time the special levy became due and payable, the body corporate is legally entitled only to recover it from the seller. The body corporate is not legally entitled to recover the special levy from the new owner. Similarly, if the day after trans-fer has occurred, a special levy is raised for something that occurred ‘before the purchaser’s time’, the purchaser as the owner at the time the special levy was raised is liable to pay it.
To avoid disputes regarding levy liability, the seller may assign this obligation to the purchaser with effect from the date of transfer. Strictly speaking, the seller and the purchaser are not able to conclude such an agreement on their own. The body corporate must accept the benefits of such an agreement, releasing the seller from their statutory obligation and acquiring a contractual right to recover the outstanding levies from the purchaser. This can be achieved by way of a ‘tripartite agreement’ entered into by the seller, purchaser and body corporate.

To pay or not to pay

If owners believe that the body cor-porate owes them money, they may decide that they are entitled to withhold their levy payments to offset this debt.

water leaking into their section and the leak is clearly emanating from a defect in the common property. The owner has asked the body corporate on numerous occasions to repair the defect, yet after two months the body corporate still has not done so. The frustrated owner resorts to employing a contractor to repair the common property defect and foots the bill of R2 000. Their levy is R1 000 per month, which they decide not to pay for two months to offsetwhat they believe they are owed by the body corporate. Although this action may sound reasonable, it is not legally justified. One is only entitled to offset a ‘liquid debt’ once a matter has been adjudicated by an arbitrator or a judge. Therefore, an owner must continue to pay levies and can attempt to recover the money through the legal channels of litigation, or declare a dispute under PMR 71 by taking the body corporate to arbitration.

Can levies be reclaimed?

PMR 45 states that owners are not entitled to a refund of contributions lawfully levied upon them and duly paid by them. Therefore, unless owners can prove that a levy, or part thereof, was unlawfully raised, they are not entitled to recover or be refunded any paid levies.

 

Repercussions for defaulters

The prescribed management rules set out a ‘sanction’ for owners who default on their levy payments. PMR 64 states that if any contributions payable by owners in respect of their sections or the common property have not been paid, these owners shall not be entitled to vote at any general meeting. However, this ‘no vote’ sanction is only applicable to general resolutions, and therefore defaulting owners are still entitled to attend trustee and body corporate meetings to speak and to vote on any special or unanimous resolutions. Furthermore, if a defaulting owner’s bondholder has made its interest known to the body corporate, it may vote on behalf of the owner for general resolutions by exercising the proxy in the mortgage bond. However, it is clear that this sanction is ineffective and does not deter owners from not paying their levies.

An owner who continually defaults is effectively being subsidised by the other members of the body corporate who conscientiously pay their levies. This is clearly not an equitable situation, and the trustees, managing agent, or the scheme’s attorney will most likely issue a summons against a regular defaulter.

If owners believe they are entitled to withhold levy payments, they should declare a dispute with the body corporate under PMR 71. If owners are in default for any other reason, they will have to defend themselves in litigation procedures instituted by the body corporate to recover the arrears and will, almost certainly, find that they have to pay the outstanding levies as well as interest and legal costs.

 

By Jennifer Paddock

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