Although most community housing schemes in South Africa are either sectional title schemes or developments run by homeowners’ associations (HOAs), there is still quite a number, especially in KwaZulu-Natal, that are share block schemes, which differ in several material ways from the others.
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The most important of these differences, says Andrew Schaefer, MD of leading property management company Trafalgar, is that when you buy into a share block scheme, you are not buying ownership of any actual property. “You are instead buying a block of shares in a company which owns the property, and with these, the right to use specific parts of that property, such as the apartment you will occupy, a parking space or a garden.
“For this reason, you will need to conclude a Use and Occupation agreement with the company, which is run by a chairman and directors. You will not receive a title deed for your home.”
This leads, he says, to the second major difference that buyers may need to contend with, which is financing. Since there is no physical property to act as collateral against a mortgage bond, there are very few financial institutions that will finance a home purchase in a share block scheme.
“There is only one bank we know of that will sometimes do so, using the buyer’s share certificate and cession of shares as security against default. However, the loan period will usually be shorter than the normal 20-year home loan, and a higher interest rate will usually also apply.
“So in the majority of purchases, the share block buyer will either need to pay the whole purchase price in cash, or be willing and capable of obtaining a personal loan for that amount. This lack of easy home finance will of course also make reselling at a later stage much more difficult.”
Schaefer says the third big difference between share block schemes and either sectional title or HOA developments is that the share block company might not even own the underlying land. “In KZN beachfront areas, especially, we often find that share block apartments were developed on land leased from the municipality, in some cases for 99 years and in other cases for shorter periods.
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“In fact, we are currently dealing with several instances in which the lease has expired, or the municipality is calling in a lease and the share block company now has to either obtain the consent of the shareholders to purchase the land, or try to renegotiate the terms of the lease.
“Fortunately, there have been no reports to date of any shareholders having to close a share block company and vacate a development because they were unable to reach an agreement on the rental/ purchasing of the underlying land.”
The benefit of buying into a share block scheme, he says, is that you will not have to pay transfer duty or VAT, and will also avoid the bond registration fee and most of the legal costs associated with transferring a property from one owner to another. There will still be some legal fees, but the process of transferring shares and ceding a loan account and use agreement in a share block transaction is relatively inexpensive.
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“Nevertheless, more and more share block directors are now suggesting that their shareholders should convert their shares to sectional title ownership. This is quite a complicated process and can be costly, but given the drawbacks of share block schemes and the long-term benefits of owning an actual section, we believe it is to be recommended.”
A share block scheme can be converted in its entirety to a sectional title if at least 30% of the owners require the company to apply for the opening of a sectional title register or if the directors of the share block company decide to make an application, and the steps to be followed are set out in Schedule 1 of the Share blocks Control Act. These include:
- Obtaining the consent of the mortgage holder, if there is one, to proceed with the application
- Having a set of sectional title plans drawn up by a land surveyor
- Notifying all shareholders of a meeting to vote on the proposed conversion. This notice must contain details of the proposed sectional title scheme, including the plans, and an explanation that the new scheme would have a set of management and conduct rules as stipulated in sectional title legislation
- Dealing with any objections to the proposal, which must be lodged in writing within one month of the meeting notification being sent out
- Obtaining approval for the change from the local authority if the shareholders vote in favour
- Notifying the CIPC that the share block company is being converted to a sectional title scheme
- Drawing up budgets including the levy schedules for the proposed sectional title scheme; and registering the sectional title plan at the Deeds Office and obtaining a certificate of establishment.
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Alternatively, says Schaefer, if a sectional title register has already been registered for the share block scheme, individual shareholders can opt to sell their shares and convert them to sectional title.
“It should be noted, though, that directors may not force any shareholder to convert to sectional title, and also may not advise any shareholder that if they sell their shares, the new owner will have to convert to sectional title.”
For more information about share block schemes and the conversion of shares to sectional title ownership, contact Andrew Schaefer on 083 399 9907 or andrews@trafalgar.co.za
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