By Ané de Klerk
While the regulations to the Sectional Titles Schemes Management Act (“the Act”) set out the prescribed minimum amounts that trustees are obliged to levy from members to fund a sectional title scheme’s Reserve Fund, it is important to note that those are merely the bare minimum requirements and that the Act itself obliges trustees to do more than simply tick a “minimum requirement” box by stating the following (own emphasis added):
“A body corporate must perform the functions entrusted to it by or under this Act or the rules, and such functions include to establish and maintain a reserve fund in such amounts as are reasonably sufficient to cover the cost of future maintenance and repair of common property…”
This means that, while the Minister has prescribed absolute minimum requirements for this type of contributions, trustees may not follow these prescribed requirements blindly, but instead must ensure that the amounts raised for this purpose are in fact reasonably sufficient to cover the expected actual costs they are likely to have to pay from this fund in future. For this purpose, the legislature requires that bodies corporate prepare written maintenance, repair and replacement plans covering a period of one decade and specifically requires that the annual contributions to the reserve fund for each major capital item listed in that plan be levied in accordance with the formula:
[(estimated cost – past contribution) ÷ expected life]
By prescribing this formula, the legislature again emphasises that the prescribed minimum amounts provided for in the regulation is just that, the minimum, and that the trustees must apply their minds, and the above formula, to ascertain whether it is necessary to levy greater amounts from members to meet the scheme’s actual needs.
The legislature further drives this point home by expressly stipulating which amounts must be paid into a body corporate’s Reserve Fund and, when doing so, electing not to repeat the prescribed requirements as set out in the regulations, but instead omitting any reference to those minimum requirements and only listing the following four categories (own emphasis added):
“Any part of the annual levies designated as being for the purpose of reserves or the maintenance, repair and replacement plan;
Any amounts received under an insurance policy in respect of damage or destruction of property for which the body corporate is responsible;
Any interest earned on the investment of the money in the reserve fund;
Any other amounts determined by the body corporate”
When reading the Act in conjunction with the Prescribed Management Rules, it is therefore clear that, while the regulations set out the absolute minimum amounts a body corporate is obliged to raise to fund the scheme’s Reserve Fund, the trustees have a legal obligation to consider other factors when conscientiously determining the appropriate amounts to levy from its members for this purpose. More specifically, they must ascertain how much would be appropriate to establish and maintain a reserve fund that is reasonably sufficient to cover the scheme’s future common property maintenance and repair costs; what amounts the scheme’s member-approved 10 year maintenance, repair and replacement plan requires to be raised to fund future major capital items and what amounts the body corporate, by ordinary resolution, have determined must be paid into this fund.
If you have simply been raising the prescribed minimum amounts to fund the body corporate’s Reserve Fund and have found this article useful, why not sign up for the next presentation of our UCT Sectional Titles Schemes Management online course and learn more about proper financial planning and management for bodies corporate from the comfort of your home.
Specialist Community Scheme Attorney (BA, LLB), Ané de Klerk, is a Director of The Advisory, a boutique consultancy specialising exclusively in community schemes law. Her focus is legal education, which includes presenting seminars and running online and in-person training programs and courses. You can reach out to her via email at info@theadvisory.co.za to request an obligation-free quotation for assistance with your scheme’s reserve fund budgeting.
