Garage swapping in a share block scheme can cause headaches for property investors. Picture: 123RF/JAMES MARTIN
Garage swapping in a share block scheme can cause headaches for property investors. Picture: 123RF/JAMES MARTIN

When you buy into a share block scheme, you do not buy a specific section of the block as you would when buying sectional title. In fact, the shareholders can swap units before selling it to you, as a recent case heard in the Durban High Court shows.

Nadia Moosa from Midrand bought shares in a Durban share block company that owns a block of flats called Albemarle Court near the Durban beachfront. According to the share block company’s Articles of Association, the shares she bought in 2004 entitle her to the exclusive use of flat 29 and garage 28.

Ten years later, when she asked for permission from the property’s managing agent to automate the garage door, Moosa learned that the garage she should have been using was located on the inside of the complex courtyard. She had been using a street-facing garage on the outside perimeter of the building. The inside courtyard garage is more valuable for purpose of resale and letting than the outside, street facing garage.

In its response to her request for permission, the managing agent at the time, Wakefields Property Management, advised that a resolution was required to regulate the use of garages by shareholders and attached a plan of the building which showed garage 28 being situated on the internal courtyard of the complex.

Court papers showed that a day prior to Moosa signing the purchase agreement of the shares related to the flat and garage, the seller, Alida Boote and a director of the share block company who was also the supervisor for the building, Shanthee Maharaj, agreed to swap their garages. The garage numbers were subsequently swapped resulting in garage 28 shown in a different location from the municipal approved plan.

In papers before court, Moosa argued that according to the Share Blocks Control Act, the articles of a share block company entitled a member to use a specified part of the property that the share block company owns, and the conditions for use are set out in the Articles of Association and use agreement between the company and member.

The property is linked to the municipal plans and that any reallocation of the garage could not be done without the transfer of the shares because the right of use and occupation of the garages and flats is directly linked to a block of shares. Renumbering of garages would be contrary to the Share Blocks Act, she argued.

In its defence, the Albemarle Court Share Block Company claimed that the physical location of the garage is not mentioned in the company’s Articles of Association, which was signed in 1957. It said that due to the lapse of time since the block had been built and changes in the auditors and managing agents, as well as the fact that nobody presently resident had any personal knowledge of the physical location of the garages, it had no record of the precise location at that time the Articles of Association were signed.

Albemarle Court asked the court to ignore the 1935 municipal diagram because the physical location of the garages differed in plans dated 1957, 1993 and 2004.

Abdul Docrat, on behalf of the Albemarle Court Share Block company, said in court papers that the purchase of shares entitling the purchaser to the use of a garage, does not according to the Articles of Association, identify a specific location of a garage. The relevant location of the garage is the location at the time those rights are sold and transferred to the purchaser, he said.

In her judgment, judge Dhaya Pillay of the durban high court ruled against Moosa because she failed to prove the precise location that her block of shares entitled her to use when the Articles of Association of the complex came into being, in 1957.

The judge said while the Share Blocks Control Act does require that the articles provide rights of use to specified property to members, it does not expressly prohibit these rights being transferred to other blocks of shares and the holders of those shares.

The Articles of Association expressly allows for the variation of the rights in the shares and it is not disputed that there is a long-standing accepted practice (at Albemarle Court) of swapping garages, the judge said.

The judge also found the agreement between Boote and Maharaj to swap garages to be valid. Had the judge ruled in favour of Moosa’s application, 19 of the 41 shareholders in the share block scheme would have been affected.

Moosa has lodged leave to appeal against the judgment with the Supreme Court of Appeal, as she believes the judge erred in her findings.

Among other things, Moosa claims that the judge erred in not finding that there was an indivisible link between the shareholding and the use of a specified portion of the building, that ownership of all share block units vest in the share block company and that owners of share blocks can exchange or swap units only by transferring the related shares.

Meanwhile, the new managing agent since March 2018, Tricor Property Administration, resigned seven months later over concerns about the reputational damage to its brand.

MD Clinton Felton said in the letter of resignation that the current crisis was brought about by the previous leadership of Albemarle Court and was likely to have far-reaching negative implications for all shareholders in the scheme.

How share block property works

There are many established, existing properties operating as share block schemes in SA in which you can invest but this form of property ownership is particularly prevalent in the popular KwaZulu-Natal Durban golden mile beachfront area. Several retirement complexes also operate under the share block ownership scheme.

Share block ownership is similar to sectional title ownership. The fundamental difference is that in a share block scheme, you acquire shares in a company that owns the immovable property (land and buildings).

Your shares, together with a use and occupation agreement that you have with the share block company, entitles you to the use of a particular, “specified” part of the company's immovable property in perpetuity.

You are issued with a share certificate which is recorded in the share register of the company instead of a title deed which ordinarily would be registered in the Deeds Office. Share block property sales and ownership is governed by the Share Blocks Control Act, which came into effect on January 1 1981. Share block companies are required to be registered with the Companies and Intellectual Property Commission (CIPC).