Published on Paddocks
It is undeniable that the COVID-19 pandemic has placed previously unimaginable stress on our country’s economy and its people. The owners of units in sectional title schemes are certainly not exempt from this grim reality and therefore bodies corporate are increasingly facing a situation where their members are falling behind with the payment of their contributions. This puts many bodies corporate in a position where they are struggling to fund their administrative expenses. In such cases, it becomes tempting to make use of the scheme’s reserve fund (and understandably so), but one has to remain mindful of the fact that even a global pandemic does not allow one to act unlawfully.
The Sectional Titles Schemes Management Act very clearly dictates that there are only two circumstances under which one may make payments from the reserve fund. Let’s take a closer look at these:
1. When the payment is provided for in the scheme’s ten year maintenance, repair and replacement plan (which has been duly approved by the majority of members present and voting at a general meeting) AND such payment has been authorised by a trustee resolution.
It is important to note that only the common property major capital items expected to require maintenance, repair and replacement within the next decade may be included in the plan. The legislation provides examples of major capital items, including:
a) wiring, lighting and electrical systems;
b) plumbing, drainage and stormwater systems;
c) heating and cooling systems;
e) carpeting and furnishings;
g) painting and waterproofing;
h) communication and service supply systems;
i) parking facilities, roadways and paved areas; and
j) security systems and facilities.
2. When the majority of trustees agree that it is necessary to make payment in respect of an item that requires urgent maintenance, repair or replacement.
Some examples where this would be the case provided by the legislature include:
a) to comply with an order made by a CSOS adjudicator or judge;
b) prevent significant damage to property by repairing damaged common property without delay;
c) prevent people from getting harmed by repairing damaged common property without delay;
d) repair common property that has been damaged after the maintenance, repair and replacement plan was presented to, and approved by, the members; and
e) ensure that the body corporate can be adequately insured.
This means that the reserve fund may not be used to fund any expense that does not directly relate to the maintenance and/or repair of common property. Legislation does not allow the trustees to authorise the payment of expenses such as rates and taxes, water, insurance and/or any other administrative expenses from this fund. In fact, it specifically dictates that the administrative fund must be used to fund the scheme’s operating expenses.
While the body corporate cannot use its reserve fund during this trying time, it can do certain things to alleviate the strain on the body corporate. Some examples include:
- To take action against defaulting owners without delay. (This may pose a moral dilemma for some trustees who understandably wish to show sympathy toward those owners who are suffering financially, but one has to be mindful of the fact that an insolvent body corporate will not serve any owners and could even be detrimental to those defaulting owners when they wish or need to sell their unit and liquidate their assets to help them through this trying time); and
- To levy members with special contributions if additional income is required to meet the body corporate’s necessary expenses.
If you would like a consultation to discuss these practical steps, you are most welcome to contact us at firstname.lastname@example.org for a no-obligation quotation for such consultation.