When you buy a home, security and cost are probably two of your foremost concerns. One way to own a home at a lower cost than buying freehold, and with the added benefit of security, is to buy sectional title. This week, as part of our series on how to manage your money, we tell you about how to buy a sectional title property.
When you buy into a sectional title scheme, which is usually a block of flats or a development of townhouses or cluster homes, you become the owner of a unit (for example, a flat), which is a section of the scheme, and you have an undivided share in the common property you co-own with other owners.
A major difference between a sectional title and freehold property is that in a sectional title scheme, although you are the owner of your unit, the scheme is governed by a body corporate, made up of all the owners in the scheme. And the body corporate has the power to impose restrictions on what you can and cannot do on your property.
You may also be allocated exclusive use of a part or parts of the common property (see "Exclusive-use areas: your rights").
Sectional title ownership is governed by the Sectional Titles Act, which sets out how sectional title schemes must be run.
The section you own is defined as the area bound by the middle of the outside or dividing walls, the floor and the ceiling. In addition, your undivided share in the common property is apportioned according to the participation quota of your section.
The participation quota is the proportion of the floor area of your section compared to the total floor area of all sections in the scheme and is expressed as a percentage. The participation quota allocated to your section also determines your liability for a portion of the scheme's communal expenses.
For example, if your participation quota is 10 percent, you technically own 10 percent of the common property in undivided shares (that is, not exclusively). You are also liable for 10 percent of the scheme's communal expenses.
Body corporate
The body corporate is responsible for the scheme's administration and for maintenance of the common property. However, you are responsible for any repairs and maintenance costs for your section (such as a burst geyser), as well as for those areas that are designated for your exclusive use.
You automatically become a member of the body corporate when you buy a sectional title unit, and you can nominate yourself for election to the board of trustees when elections come up.
The trustees are responsible for carrying out the functions and duties of the body corporate, such as managing the scheme and taking care of its finances. Often, a body corporate will appoint a managing agent to help it with the day-to-day running of the scheme.
The managing agent's services may include:
- Collecting the monthly levies;
- Paying the scheme's insurance premiums;
- Arranging body corporate meetings and notifying owners;
- Ensuring that owners and the body corporate comply with the Sectional Titles Act; and
- Ensuring that owners and tenants comply with the body corporate rules.
The managing agent should also provide prospective buyers with a copy of the body corporate rules.
Once a year, schemes have to hold an annual general meeting, at which the scheme's annual financial statements are presented, decisions are taken for the year ahead and trustees are elected.
According to the Sectional Titles Act, there are different levels of authorisation required for the approval of various matters. The levels are as follows:
- Matters the trustees can make decisions on. These include whether or not to raise a special levy;
- Matters requiring an ordinary resolution of a general meeting of the owners or their representatives - for example, the approval of the budget. An ordinary resolution is passed by the ordinary majority of persons required to vote at a meeting, that is, 51 percent or more;
- Matters requiring a special resolution of the owners or their representatives - for example, the amendment of a conduct rule. A special resolution requires that 75 percent of all those present or represented in both number (on a show of hands) and value (in accordance with the participation quotas of those present or represented) must vote in favour of the resolution;
- Matters that require a unanimous resolution - for example, conferring registered exclusive-use rights on an owner. Everyone present at the meeting must be in favour of such a resolution and 80 percent of the owners calculated in both number and value must be present or represented;
- Matters that require the written consent of every owner - for example, a decision to purchase land to extend the common property.
Rules of the scheme
When you buy a sectional title property, the estate agent or seller should give you a copy of the body corporate's rules. If they do not, you should be able to obtain a copy from the local Deeds Office.
The body corporate rules are divided into management rules and conduct rules. Management rules deal with issues such as the election of trustees, when they can be disqualified, their powers and duties, and what procedures should be followed at meetings of the body corporate. While there are prescribed management rules set out in the Sectional Titles Act, bodies corporate can include rules which are specific to that sectional title scheme.
Conduct rules cover what you can and cannot do, such as not washing your car on the premises or not carrying out renovations at specified times, such as Sundays.
When you buy into a sectional title development, you have to:
- Within reason, allow the body corporate to have access to your section when necessary;
- Carry out any work on your section required by the local authority;
- Keep your section in a state of good repair, and keep any area of common property allocated for your exclusive use in a neat and clean condition;
- Inform the body corporate of a change in ownership of your unit; and
- Use your section only for the purpose expressly or tacitly intended by the sectional plan (for example, you may not rent out a garage for accommodation).
Financial stability of the scheme
Unlike a freehold property, where you have to pay your own insurance, electricity and water, when you buy a sectional title property, some of these costs will be covered by a monthly levy that you pay to the body corporate. Among other things, the levy covers the cost of your homeowner's insurance premiums, as well as the costs of running and maintaining the common property. As of last year, a sectional title owner is responsible for paying the rates on his or her unit directly to the local authority.
Not everyone in a sectional title scheme pays the same levy. The levy you pay depends on the value of your participation quota, and it is calculated by taking the annual budget of the complex, dividing it by 12 to get a monthly figure and multiplying the result by your participation quota.
Bear in mind that your levy is payable over and above your monthly bond repayments and rates and is likely to increase each year.
You should ask the managing agent, estate agent or seller if the body corporate has imposed, or is likely to impose, a special levy.
A special levy is an additional levy (usually for a higher amount than the regular levy) that may be raised to cover a large or once-off expense that cannot be met through ordinary levies or from the scheme's reserves - for example, for retiling the roof of the apartment block.
If a special levy has or will be imposed over a period straddling the transfer, you can include a clause in the offer to purchase that states who (the buyer or the seller) will be responsible for paying it.
EXCLUSIVE-USE AREAS: YOUR RIGHTS
An exclusive-use area is a part of the common property that may be allocated to you - for example, a garden, balcony or parking bay.
Although you may be granted the exclusive use and occupation of a particular area, it does not belong to you. If you are allocated an exclusive-use area, you will have to pay for its maintenance, and your levy to the body corporate will be higher than that of owners who do not have similar rights.
There are two ways to grant exclusive-use rights:
- In terms of an allocation dealt with in the body corporate's rules; or
- In the form of a notarial deed of cession registered in your name at the Deeds Office.
If your exclusive-use rights are not registered by way of cession at the Deeds Office, you should find out if these rights are permanent or temporary. For example, if the scheme does not have a parking bay for each unit, the parking bays may be allocated to different units at the body corporate's discretion. You may not have the right to "sell" your rights to a parking bay without permission from the body corporate.
BUYER'S CHECKLIST
As the prospective buyer of a sectional title property, you should ask for:
- The most recent financial statements of the body corporate. You should check whether the scheme has adequate reserves and that it is in a sound financial position. According to the Sectional Titles Act, a scheme is required to make "reasonable provision" for maintenance and any unexpected expenses that may occur. If a scheme has sufficient reserves, this reduces the need for a special levy.
- A copy of the sectional title plan of the scheme.
- The body corporate rules.
- The conveyancer's certificate, which was lodged at the Deeds Office when the scheme was first registered. It contains the municipal conditions and servitudes that apply to the scheme, as well as any conditions the developer may have imposed on the scheme. A servitude is, basically, a right of way, allowing the municipality to provide water, electricity and sanitation services to neighbouring properties in the area. It is important to know where the servitudes on your property are, so that if, for example, you do a renovation, you don't end up digging up the local water supply pipes.
- The rates charged for the unit, the monthly levies and any special levies.
WARNING
- This series of articles is written and researched by Personal Finance independently of any advertiser, product provider or financial services provider.
- Personal Finance does not endorse any products or services in the broader financial services industry.
- Personal Finance does point out the advantages and disadvantages of different products. It has done so in the case of numerous property investment opportunities, particularly property syndications, which have repeatedly proved to be very high risk. Previously published articles on property syndications may be found on our website.
- Before you invest in any scheme or product, you must take due care to understand all the risks and costs involved. This should include all the commissions that will be received by the person who sells the product.
- For more on sectional title living, see our website for articles by Graham Paddock and Mike Addison, which originally appeared in Personal Finance magazine.