The Sectional Titles Schemes Management Act, Act 8 of 2011 (the act) came into force on [date] and repealed and replaced the old prescribed management rules. In terms of section 10(2)(a) all schemes are to follow the new rules. One of the newest requirements in terms of the rules is that a Reserve Fund must be established, this fund must be paid for from contributions and held only for major capital items. I will explain both in further detail below.

The Reserve Fund and the Administrative Fund

To start with, the administrative fund is an overarching fund, which is voted upon at the body corporate annual general meeting (AGM) and is for the day to day operating expenses necessary to manage the scheme. Such as, payment of rates and taxes, security and staff to mention a few. The levies paid by the tenants and / or owners are paid into the administrative fund and approved at the AGM. The Act established a reserve fund for major capital items and the rules define it as:

An amount set aside by the body corporate to meet unexpected costs that may arise in future, including future cost of maintenance.

The rules and Act state that the body corporate or trustees should set up and approve a maintenance plan for major capital items. Such plan must cover major capital item repairs in 10-year cycles. The items mentioned are expensive to repair and replace and require experts to not only quote on the repair and replacement but also perform the aforementioned repair or replacement. The definition of a Major Capital Item is:

“means wiring, lighting and electrical systems, plumbing, drainage and storm- water systems, heating and cooling systems, any lifts, any carpeting and furnishings, roofing, interior and exterior painting and waterproofing, communication and service supply systems, parking facilities, roadways and paved areas, security systems and facilities and any other community and recreational facilities;”

The definition unfortunately does not include items such as doors and windows. Leaving the Trustees to decide what constitutes a Major Capital item. The Rules set forth that a maintenance plan should be approved and also that contributions to the reserve fund be retained to be used for the maintenance plan.

The contributions to the Reserve and Administrative Funds

Contributions to the administrative fund are the levies paid by the tenants and owners of units in a scheme, these levies are decided and voted upon at the AGM and are to cover the items operational expenses. Accurate records of all funds paid to the administrative fund must be kept and reported upon at the end of each financial year by the trustees to the members of the body corporate. The Reserve fund’s contributions are to be retained from a portion of the levies paid to the administrative fund as per rule 24. Rule 24 states that any part of the levies designated as being for the purpose of the reserves or the maintenance, repair and replacement plan, any amounts received from an insurance policy for damage to the common property, any interest earned on funds invested in the reserve fund and any other amounts determined by the body corporate. Otherwise all other funds are to be paid directly to the administrative fund. The amount to be retained in the reserve fund should be 25% of the annual contribution to the administrative fund per regulation 2(a) of the Act. Contributions and the calculation thereof will be dealt with in a later article.

The problem with the reserve fund

The fact that the reserve fund is derived for from a portion of the levies, means that the levies may need to increase to cover the portion to be retained. This has to be approved by the body corporate and if the levies increase to a point that the majority feels is too high then it is unlikely that the body corporate will approve. Meaning that the scheme and body corporate will fall foul of the law in this regard. Further in Wimbledon lodge (Pty) Ltd v Gore No and others [2003] 2 all sa 179 (SCA) it was stated that the body corporate is not an island unto itself, it is made up of all the members, so they share in the good and the bad equally. Thus the failure of the body corporate to set up a reserve fund can be detrimental to the entire scheme.

In the following article I will discuss the contribution calculation and the duties of the trustees.

Please contact us should you want to discuss the above further.

Robert Andrew Louw

Sources

  1. De Rebus, October 2018, Maintenance of Common Property in Sectional Schemes;
  2. The Sectional Titles Schemes Management Act, Act 8 of 2011 and Regulations; and
  3. Management Rules prescribed in terms of section 10(2)(a) of the Sectional Titles Schemes Management Act, 2011.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

THE SECTIONAL TITLES SCHEMES MANAGEMENT ACT AND THE RESERVE FUND, NO GOOD DEED GOES UNPUNISHED