Developers caught off guard with sectional title costs
In the recent case of Club Kerkira (Pty) Limited v Trustees of Club Kerkira Body Corporate and Others (D11451/2021) [2024] ZAKZDHC 40, the KZN High Court had to clarify the position as to whether the holder of a real right of extension (in this case the developer) had a responsibility to contribute towards the maintenance costs of the sectional title scheme.
Before we look at the court’s finding, it is good to just briefly refresh on what a real right of extension is. In terms of the Sectional Titles Act 95 of 1986 (“Act”) a real right of extension is the right to extend a sectional title scheme by adding sections or exclusive use areas to the scheme. Such a real right of extension is reserved by a developer when the initial sectional title scheme is opened in the Deeds Office.
Section 25(1) of the Act describes a real right of extension as the right to erect, complete or include from time to time, but within a period stipulated in such condition or such extended period as may be agreed upon (by unanimous resolution of the body corporate and with the consent of the bondholders existing on the date of the taking of the unanimous resolution, which resolution and consent must be obtained by the notary and filed in his or her protocol), before the expiry of the stipulated period by way of a bilateral notarial deed, for his or her personal account - a) a building or buildings; b) a horizontal extension of an existing building; c) a vertical extension of an existing building or to create and delineate exclusive use areas.
In the Club Kerkira matter, Club Kerkira (Pty) Ltd was a developer who registered a sectional title scheme on the lower south coast of KwaZulu-Natal. Club Kerkira’s sectional title plan included 101 units to be developed in four phases. Since the registration of the scheme at the deeds office, only 16 units were built and transferred to new owners. In addition to the 16 units, the developer also completed a tennis court, two swimming pools with amenities, an administration office, a guardhouse, a workshop, a manager’s dwelling, and a clubhouse. The estate was structured and prepared for the inhabitants of 101 units, but for many years the obligation to maintain the large estate fell to the 17 owners of the existing sectional title units.
The Body Corporate collected levies from these owners but failed to have the benefit of the full 101 sectional units contributing to the maintenance of the estate. The Body Corporate demanded that the developer, as the holder of the right of extension, contribute to the costs of the upkeep of the scheme. The developer however resisted, resulting in the Body Corporate referring the dispute to the Community Schemes Ombud Service (“Ombud”) to confirm if and when a Body Corporate could claim contributions to its expenses from the holder of the right of extension.
The Body Corporate claimed that the Sectional Titles Schemes Management Act 8 of 2011 (“STSMA”) empowered it to raise and collect levies from the holder of a right of extension and that the holder was liable for the payment of such amounts. The developer in turn argued that the Body Corporate was first obliged to have incurred the costs before it could claim from the developer, and as the Body Corporate had not provided any evidence of its costs, the developer had no liability for any contribution.
The Ombud considered the STSMA and correctly concluded that the holder of a right of extension was liable for contributions and that such contributions would be determined in terms of the ordinary budgeting processes followed by the Body Corporate when determining the levies payable monthly. The Ombud also confirmed that to claim that the Body Corporate must first incur costs before the holder of the right of extension was liable would result in the Body Corporate having to incur costs without having the money to do so implying that the scheme should run on credit, which is inconsistent with the STSMA.
The developer appealed the decision as well as the Ombud’s eventual reasoning in how the past contributions of the developer had to be calculated, and on appeal, the KZN High Court concurred with the developer as regards the calculation of liability for the past contributions and referred it back to the Ombud, but confirmed that the Ombud had been correct in its determination that the holder of a right of extension was liable for contributions as budgeted for by the Body Corporate monthly.
This confirms the STSMA position as regards the liability of the holder(s) of a right of extension to contribute towards the costs of a sectional title scheme.
Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy has been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s).
Source: SeymoreDuToit&Basson
