It is surprising, but true, that there are many sectional title property owners who still do not appreciate exactly why monthly levy collection is essential, says Michael Bauer, General Manager of the property management company IHFM.
When an owner falls behind on his levy payments, says Bauer, the other members will probably have to carry his share until the arrears are recovered - but he continues to enjoy all the benefits that the sectional title scheme offers.
The simple truth, which the owner of every freestanding property knows, is that on any property there will be maintenance and operating expenses, he says. “In a sectional title scheme it is perfectly logical that if your unit comprises say 5% or 10% of the entire floor space, you should pay 5% or 10% of the running costs - but on certain schemes there will always be a small handful of owners who cannot or will not acknowledge this.”
When an owner falls behind on his levy payments, says Bauer, the other members will probably have to carry his share until the arrears are recovered - but he continues to enjoy all the benefits that the sectional title scheme offers.
“This is fundamentally unjust and it should, therefore, be a top priority of trustees and their managing agents to ensure that levy collections are efficient and timeous.”
Bauer says trustees should institute an interest charge that will deter owners from falling behind on their payments but is not so onerous as to drive the offender into despair.
Interest rate charges can vary from prime plus 3% to 30% per annum, he says.
“The aim should be to encourage the defaulting payer to pay, not to annihilate him and it is vitally important to realise that delays in payment must be reacted to at once. “
Debt collection delays, adds Bauer, have crippled more schemes than most would acknowledge.”
Bauer says as soon as a payment is one week overdue a letter of demand should be sent to the owner. If this elicits no response within 30 days, attorneys must then be instructed. They will write another letter of demand to the owner, giving him seven days to pay – or, at the very least, to make an arrangement with them.
If, again, there is no response, the attorney will then apply for a magistrate court summons on the debtor. This can take three to four weeks for the summons to be issued. With the current backlogs in the judicial system, says Bauer, it can take two to three weeks for the Sheriff of the Court to serve the summons - and he may well be delayed by the fact that the summons cannot simply be put into the owner’s post box or stuck on the door - it has to be handed to and signed for by him or by any person over the age of 16 living at his home or working in his office. (It is also not permissible to deliver the summons to a tenant living in the owner’s unit in case of a landlord.)
When he has been summoned, the debtor has seven days to respond and tell the court whether he will defend his case. If he agrees to do this a date will be set for his court appearance. Alternatively, he can elect to pay within the prescribed time.
If the debtor does not act on or defend the summons, the sectional title lawyer will then apply for a default judgment against him. This, again, takes time - anything from one to six weeks - but once granted it authorises the Sheriff to attach any movable goods belonging to the debtor.
This very harsh measure is, however, often less effective than it might be because in South African law preference is given to creditors of any goods on hire purchase or, it will be found the goods belong to a different natural or juristic person. In some cases, too, debtors avoid having their goods seized by removing them from their premises prior to the Sheriff’s arrival.
Furthermore, when sold at Sheriffs Auctions such goods seldom realise more than 30% of their original retail value and in most cases do not satisfy the creditors’ claims. Attaching goods in this way therefore, says Bauer, may not raise much cash.
Where the default judgment is unable to satisfy the claims of a creditor, the attorney can apply for a garnishee order, issued and managed by the court. This entitles the body corporate to a percentage of the debtor’s income each month - or, if he as a tenant in his unit, to the entire rent until the full sum owing to the body corporate is paid. Administrative and legal costs are added to the sum that is outstanding.
When it is clear that the amount owing is so large that it cannot be met by the measures outlined above (e.g. where the owner is out of work and has no income), the unit itself can be sold in execution by the Sheriff.
Here, however, says Bauer, not only will this involve further delays but there is likely to be a problem if the debtor (and his family) are living in a unit which is their primary residence. In these cases the courts will probably be lenient and will only grant the order if all other legal avenues are exhausted.
If, however, if the property is a secondary residence or investment property, the order will be granted without much delay – and it is probable that the tenant’s rent will also be attached for a time.
In sales of execution, says Bauer, if, as is usually the case, the unit has a bond registered in favour of a bank, that bank is also a preferred creditor. However, the bank will only be the second in line for repayment if there are rates, taxes and service charges owing to the local municipality.
It is, therefore, possible that there may be no proceeds left to pay the outstanding levies. In such cases, the new buyer will have to settle the outstanding levies on transfer and trustees are advised to be very careful that all funds (preferably in cash) are received prior to passing consent and levy clearance.
Bauer says it will be obvious from these facts that debt recovery from serious defaulters is a lengthy process taking anything from six to twelve months - or longer. “We have had cases that took two years. Someone has to fund the process - and it is usually the other owners of the body corporate who end up doing this.” A faster solution could, of course, be to apply for the liquidation and sequestration of the debtor, he says.
So - what lessons should be learned from this?
Bauer says the number one lesson is that the trustees must communicate with their owners the moment there is a problem. “A phone call or a meeting will often result in the problem being worked out early on, especially where the owner is suffering hard times and is doing his best.”
He says if legal processes are resorted to, not only will they take time but they will be expensive, the sums spent may still not be fully recovered and the whole situation will in the end be a lose-lose one for all except (with respect) the attorneys.
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