BUSINESS DAY TV: Life becomes more complex for people in complexes
Juanita Steenekamp from the South African Institute of Chartered Accountants and Whitfields’ Andrew Simpson speak about changes to legislation governing sectional title properties and how it affects owners and managing agents
Juanita Steenekamp is from the South African Institute of Chartered Accountants and Andrew Simpson is from Whitfields.
BUSINESS DAY TV: For the many people who live in apartments, clusters and townhouses life has become a tad more complex. The new Sectional Title Scheme legislation proposes some onerous provisions and extra costs.
My guests in the News Leader studio will tell us what new buyers need to know. They are Juanita Steenekamp, project director at the South African Institute of Chartered Accountants (Saica) and Andrew Simpson, managing director of Whitfields Property Management Division.
So the new legislation came into effect in October last year. How are the complexes dealing with its implementation? Are there problems?
ANDREW SIMPSON: It’s been a bit of a challenge for the different trustees and the managing agents who are involved with them to get their heads around some of those changes. But primarily my impression from the various training sessions we’ve been to with the National Association of Managing Agents, most people appear to be coping with it very well.
BDTV: Juanita, your view?
JUANITA STEENEKAMP: The biggest issue for us is the fact that there are no transitional provisions. So it was published on the 7th and effective on the 7th so that’s where we are picking up from the auditing side and accounting side that there are a lot of issues because people had no time to actually think about it and how you’re going to change and implement all the requirements, and it was immediately effective.
BDTV: Yes, and one of those aspects comes into play, where there’s no transition requirement, is the reserve fund. Now this is a big one under the Sectional Titles Act. It’s a reserve fund to cater for the next 10 years of maintenance. How are people coming up with the funds?
JS: That is part of the problem. Initially what happened was that because it was effective from October 7 you had to, at your first annual general meeting after that you had to now put through your budgets and explain where you’re going to get this money? So in our discussions with the Ombuds Office, they have given some leeway to say that they will give people the chance to actually then build up these funds. There is a formula where you can probably help us more with this …
AS: They haven’t really specified this …
BDTV: Or how long this chance is?
JS: Yes, but also to calculate it is because there is an administrative fund which has always been there which is for your day-to-day money that you need for your complex. But you have to use the administrative fund and actually then calculate how much money you can put in this reserve fund. And of course one of the other issues is that it has to be two separate funds, with two bank accounts, and that’s expensive.
AS: It’s expensive and it’s difficult from an administrative point of view. It’s a challenge I think for people to also understand why suddenly now they’re paying this extra fund amount and primarily the biggest challenge has been that if a complex doesn’t have at least 25% of its annual administrative budget spend in this reserve fund at the end of the financial year, in their next financial year they’re required by law to increase their levies by 15% minimum, just to cover the reserve fund contribution and they will then still have to increase for the normal inflationary increases.
BDTV: How appropriate and how necessary is it to have a 10-year fund?
AS: It’s very important from a maintenance and repair replacement point of view for a complex. A lot of the time in these schemes people have relied on having zero reserves and then have relied on having…
BDTV: … sort of like ad hoc payments?
AS: … they introduce special levies … which are always difficult particularly for new owners coming in and sometimes they know about a special levy and they are suddenly responsible paying for it. The people who have lived in it, they haven’t really contributed towards that cost and the new owner ends up having to pay for the full maintenance cost.
BDTV: Juanita, your view as an accountant, is it appropriate to have a 10-year fund?
JS: It is yes, because of the costs of upkeep a lot of the complexes are actually falling down. If you drive past some of them you can see that maintenance is needed. Just in terms of the maintenance or this reserve fund, you actually have to have a maintenance plan, so you have to do a plan to say what you are going to be changing in the next 10 years and that plan, then the reserve fund needs to fund the plan. So it’s very complex.
AS: It’s closely tied together.
BDTV: One of the other new angles is that owners or the complex have to take out fidelity insurance. On what and what is the purpose of that?
AS: There’s the building insurance which is your normal insurances and then the fidelity insurance is a requirement, its specified separately now as part of the regulations that a building has to take out this additional insurance to cover the minimum of three months’ worth of levy recoveries and that adds another additional cost in terms of having to take out this additional insurance to cover that cost, and that is there to protect the owners in the event of that money being stolen by employees, by their own employees, or managing agents or by …
BDTV: … the body corporate can take away the funds?
AS: Or whoever has signing power over it and part of that … I guess the responsibility in the accounting side to actually ensure that there is compliance going on and the right procedures are being followed.
BDTV: Yes, and about how much is fidelity insurance, how much does it add onto the levies, Juanita?
JS: I wouldn’t know.
AS: It’s …
BDTV: Is it a major cost, significant?
AS: It’s a significant cost in terms of overall levies that an owner pays per unit, but …
BDTV: Does an owner, even though he or she would contribute to the fidelity insurance on the complex as a whole, would that be in addition to the building insurance that they have?
AS: Yes it is in addition. So it would go in as a line item as part of the budget that the complex or the trustees are required to draw up for the new year and they would then have to draw up this list of expenses that they would anticipate and included in that would or out of that would be what we call the administrative contribution that the owner has to make.
BDTV: And now because Home Owner Associations don’t fall under Sectional Title they do not have to comply with this Juanita?
JS: That’s correct. This is specifically for Section Title so body corporates as we know it, yes.
BDTV: Who governs, or which guidance governs homeowners?
JS: There is also new legislation. At the same time as the Sectional Titles Act and Regulations were published, they published the Community Schemes and Ombud Sections Act as well. So the Community Schemes Act has created an Ombud and this Ombud will manage what they call Community Schemes. The Community Schemes …
BDTV: That’s everybody?
JS: Everybody that has communal property that they share manage and that would include your homeowners …
BDTV: We’re going to have a longer discussion on that, so do join us in the next hour where we continue with our discussion.