Hard lesson to be learned by sectional title body corporates, trustees and agents

A recent decision of the Supreme Court of Appeal in Bloemfontein should have owners of sectional title properties, their body corporates and agents shaking in their boots, while emboldening the action of municipalities wanting to cut off water and electricity for arrears in money owed for rates or services.

Given the tough economic times, unpaid levies from owners in many sectional title buildings, the body corporates’ debts and general indebtedness in South Africa at present, many residential and commercial buildings owned under sectional title schemes in terms of the Sectional Title Act, may find their arrears to municipalities leading to water and electricity being cut off to the entire complex, whether or not some individual owners have paid their dues to the body corporate.

The judgment of the Supreme Court Appeal sets the main issue out in the first paragraph of the judgment. The crisp issue in this appeal is whether s 102 of the Local Government: Municipal Systems Act 32 of 2000 (the Systems Act) empowers a local authority to disconnect a ratepayer’s water and electricity supply because of an outstanding debt for municipal rates. The appeal is against a decision of the KwaZulu-Natal High Court, Durban (Hughes-Madondo AJ) in which the court dismissed the appellant’s application for an interdict barring the respondent from disconnecting water and electricity services to a property managed by the appellant.

The dispute that landed up in the Supreme Court Appeal was between Ethekwini Municipality and the body corporate of a shopping mall in Durban, called the Croftdene Mall which was owned in terms of the Sectional Titles Act. The body corporate owed the municipality around R1m in rates arrears plus interest and penalties which the body corporate claimed amounted to more than original debt amount.

The Supreme Court Appeal judgment painstakingly goes through each bit of law, and the bylaws that would apply, as well as the Constitution, to understand and explain what turned out to be a main point of the finding and which was crystallised in a particular paragraph of the judgment and read:

The simple fact is that the appellant (Croftdene Mall body corporate) failed to carry out its legal obligation to impose levies on its members and collect from them a sufficient amount to enable it to pay for the relevant municipal charges and levies. This view is confirmed in terms in the document referred to above which Pillay [the body corporate’s lawyer] submitted to the respondent on September 4 2008 as part of the appellant’s representations in support for its plea for a write-off.

It appears from the summary of events recorded in the judgment that the municipality, faced with growing arrears and no payments for the Rates Bill, and after several attempts to communicate with the body corporate and reach some arrangement, decided it was going to cut off the electricity and water to the building. It also appeared that this was the moment when the body corporate began to appreciate the problem and the haggling became more serious. On its way to the High Court, the body corporate had raised some issues of dispute about the debt and the action the municipality wished to take. The body corporate believed, it appeared that if the dispute was about rates then, other municipal services which may have been paid, like water and electricity should not be cut off. The judges of the Supreme Court Appeal however cite the applicable bits of law to show that this was not valid, particularly in this case. There was an issue of timing in that the dates of the building becoming a sectional title scheme with no outstanding amounts owed to the municipality as well as the date on which the law changed which among other things enabled municipalities to cut water and electricity for an outstanding rates bill, ensured that this part of the body corporate’s case would not work.

The body corporate also asserted that if a dispute about the debt in question existed, that could not be used to cut the building off from its services. This too, it seemed, might have applied had the dispute been properly dealt with, and lodged with sufficient adequate paperwork to back this up, and more importantly had the properly documented dispute occurred before the council lost patience and began proceedings. The judgment however pointed out that aside from the dates not backing this up, in the main the only submission the body corporate had made on the debt was to try and get it written off. At one point it asked that sympathy for the body corporate be shown. There is a legal maxim expressed in Latin that effectively means that the interest and penalties may not exceed the principle debt amount – but although this was raised in the High Court, it was not pursued and said the Supreme Court Appeal judges, too little supporting information was provided in any event. It appears from the judgment that the municipality had in fact carefully met its legal obligations and had stayed the process at times to talk to the body corporate. In turn, the body corporate had failed to respond at times for months, and simply did not pay anything it owed at all.

The issues landed up in the judgment crisply summarised (and quoted above) that the body corporate failed to do its job, collect enough of the levies to pay the building’s debts and it appeared too that the trustees and agents had not ensured that this was adequately done. The body corporate’s appeal against the municipality was denied, and the municipality would have been free to cut the lights and water to the building over its rates arrears bill.

Source: Moneyweb

Courtesy: The EAAB - Estate Agency Affairs Board

“Redressing the Past, Building the Future and Guiding the Real Estate Business towards Professionalism”