Although new share block developments are not common nowadays, there is a fairly large number of established, existing schemes in South Africa that you can buy into. There are also many retirement complexes that operate using the share block ownership system. In this instalment of our series on how to manage your money, we tell you how to go about buying into a share block property.
In many ways, share block ownership is similar to sectional title ownership. The key difference is that in a share block scheme, you own shares in a company that owns the land and building; you do not own an individual unit. You have a "use and occupation" agreement with the company entitling you, as a shareholder, to the use of a particular part of the company's property, and you are issued with a share certificate instead of a title deed.
Share block property sale and ownership is governed by the Share Blocks Control Act. Share block companies must be registered with the Registrar of Companies. By law, a seller may not sell shares in a share block scheme unless the company has the words "share block" or "aandeleblok" as part of its name.
When you buy shares in the share block company, you are entitled to occupy a specified portion of the building owned by the company and to vote at its general meetings. You will be allocated voting rights in proportion to the number of shares you hold.
There are certain risks to this type of ownership. If other shareholders in the share block scheme repeatedly fail to meet their monthly levy payments, and other creditors of the company, such as the local municipality, are not paid, this can jeopardise the financial stability of the scheme.
Judith van der Walt, a sectional title specialist with a company called 95 of 86 Consultants, says even if there is no bond on the property (for example, it was purchased 20 years ago and the bond has been paid off), a creditor can still get a judgment against the company in respect of monies owing to the creditor, and a court can still order that the property owned by the company is sold to pay its creditors, if necessary.
No action can, however, be taken against you as an individual shareholder to meet the debts of the company unless you have signed surety for the company's debt. But if the property of the company is sold as a result of a court order to pay the company's debts, you will lose your right to the continued use of your portion of the property. You will have lost your investment and may have to find a new place to live.
If the company is wound up, the shareholders are entitled to receive the proceeds of such winding up in accordance with the provisions of the memorandum and articles of association of the company, or in proportion to their shareholding in the company.
When a shareholder sells his shares, it is a normal sale transaction between two parties, except that you are dealing with the sale of shares and not the sale of immovable property. The money does not go to the company but to the person you are buying the shares from.
Established blocks
David Warmback, a partner at Durban-based law firm Shepstone and Wylie, says most existing share block schemes in South Africa were established many years ago.
"Many such schemes have operated for decades on the Durban beachfront where it was traditionally not possible to open sectional title registers. Many of these and other share block schemes are very well run and quite financially secure," he says.
If you are buying shares in an older, well-established share block scheme, you will be required to pay the full price for your shares in the scheme before you are allowed to take occupation.
One of the disadvantages of buying into a share block scheme is that your purchase price will be more difficult to finance. You may not be able to get a home loan to buy a unit in a share block scheme (unlike buying a freehold or sectional title property), because there is no property that can be bonded as security for the money advanced by the bank. However, you may be able to obtain a loan from a bank using your share certificate as security in the form of a pledge and cession of such shares.
You will also generally be required to put down a bigger deposit compared with a freehold or sectional title sale. The period of the loan is likely to be shorter, and the rate of interest on the loan is likely to be higher.
Levy and trust fund
As in a sectional title property, in a share block scheme you have to pay a monthly levy for administration and maintenance costs.
The levy covers costs such as the rates, the payment of staff, insurance premiums, the costs of a managing agent, and common water and electricity (if you do not have separate meters).
The amount you pay is in proportion to the number of shares you own. For example, if you own 10 000 shares and Tom owns 20 000 shares, he might have the use of a two-bedroom flat compared to your one-bedroom flat. Tom would also have greater voting rights than you, and he would pay a levy that may be twice the amount of yours.
According to the Share Blocks Control Act, the share block company must have a trust account, and money in this account must be kept separately from all other funds. The trust account must be used only to pay the company's loan obligations. The share block company, like other companies, must produce regular, audited financial statements.
Unless it was stated as an intention at the time the shares were initially offered, a share block company may not increase its loan obligation without the approval of at least 75 percent of the shareholders holding at least 75 percent of the votes.
As a shareholder you have the right to elect directors for the share block company at the company's annual general meetings. You are also eligible to become a director of the company. The directors meet throughout the year to discuss how the property is being managed.
Obligations
Your obligations as a shareholder in a share block scheme are to:
- Pay the monthly levy;
- Repay your portion of the company's loan obligation each month, if applicable;
- Keep your exclusive part of the building in a neat and tidy condition;
- Allow the company reasonable access to inspect your section of the building when necessary;
- Be responsible and financially liable for any repairs to the interior of your unit, such as fixing a burst geyser in your flat; and
- Take out household contents insurance. The share block company will not accept responsibility for damage arising from an accident or an injury occurring within your unit but should have a public liability policy covering it against mishaps occurring on the common property.
WHAT YOU MUST BE TOLD
According to the Share Blocks Control Act, when you buy into a share block scheme, your sales documentation should contain at least the following information:
- Details of the directors, auditor and management of the share block company;
- Details about insurance of the property;
- The latest annual financial statements of the company;
- The memorandum and articles of association of the company, which tell you what your obligations and rights are in that particular scheme;
- The use agreement;
- The management regulations of the scheme;
- Confirmation on whether a sectional title register has been opened or whether one is anticipated.
CONVERSION TO SECTIONAL TITLE - WHAT IT ENTAILS
Under the Share Blocks Control Act, there is provision for the conversion of share block units to sectional title, and a large number of share block properties have been converted to sectional title.
The procedure for conversion is governed by a schedule to the Act. The company directors have to convene a general shareholder meeting if at least 30 percent of the share block members wish to explore the opening of a sectional title register.
The directors must also have details of the proposed conversion such as sketches, building plans and rules, at hand at the general meeting. The directors must then give notice of a meeting for the consideration of a special resolution to open a sectional title register.
At this meeting, 50 percent of the share block members, with not less than 30 percent total voting rights must approve the decision.
The share block company has to give notice to all concerned parties that the company is applying to convert the property to a sectional title scheme.
The next step is to have a formal sectional plan drawn up by a land surveyor. Once the sectional plans are approved by the Surveyor General, a conveyancer will submit an application to the Registrar of Deeds for the opening of a sectional title register.
Before a company applies to the Registrar of Deeds for the opening of a sectional title register, the company must provide proof to the Registrar of Companies that either no valid objections were received or that any such objections have been addressed.
When the sectional title register is opened, all the units are registered in the name of the share block company. A member of the company is not compelled to take transfer of the unit he or she occupies it. His or her rights and liabilities against the company remain unchanged until the transfer of the unit. So, it is possible to have both share block and sectional title apartments in the same building.
The sectional title unit owners, together with the share block company, will make up a body corporate and will assume responsibility for administration and maintenance of the property.
The share block company becomes liable to the body corporate to pay the levy contribution on units that have not been transferred from the company to individual owners.
Those members who have not taken transfer of the units they occupy have to make a monthly contribution or levy payment to the company, which pays the contribution for those units to the body corporate.