Duties of trustees I

In this article Prof. Paddock summarizes the financial, physical and administrative duties of the body corporate for which trustees are responsible.

Each scheme must have a body corporate that is responsible for 'the control, management and administration of the common property for the benefit of all owners', and for the enforcement of the scheme's rules.

This is laid down in section 36 of the Sectional Titles Act of 1986.

Section 37 of the Act sets out in some detail the functions that every sectional title body corporate must carry out, but it is not an exhaustive list. A scheme may make management or conduct rules that add to these functions.

The Act provides that the functions of the body corporate must be performed by its trustees, who hold office in terms of the scheme's rules, and that the owners may at any general meeting impose restrictions on or give directions to the trustees in regard to the performance of these functions. Although the owners may give the trustees instructions, these may not contradict the clear wording of the Act. Even by an unanimous resolution, owners cannot vary or limit any obligation imposed in terms of the Act.

The phrase 'the control, management and administration of the common property for the benefit of all owners' deserves comment because, firstly, it implies that the body corporate's jurisdiction is limited to the common property. But this is not the case.

The rules of the scheme and parts of the Act relate to activities within sections, as well as on the common property, and so the body corporate's obligation to enforce the rules and the provisions of the Act extend the scope of its activities to all parts of the scheme. Secondly, the actions of the body corporate, and therefore those of the trustees, must be for the benefit of all the owners. In practice, it would not be possible to act in accordance with the wishes of all owners at all times. If this were the case, how would the trustees be able to sue a levy defaulter?

The body corporate must be governed in accordance with the democratic principles set out in the Act and the scheme's rules. Trustees must act in the interests of all owners generally, even though this may mean acting against the wishes and interests of particular owners at times.

The most important duties applicable to all sectional title schemes can be classified as financial, physical and administrative.

Financial duties

• Maintain a fund for administrative expenses.

  An administrative fund must be created to cater for the scheme's liabilities. The amounts credited to this fund and debited to owners must, in the estimation of owners, be sufficient for the repair, maintenance and management of the common property and, in addition, must include reasonable provision for future maintenance and repairs.

  The most important point to be made here is that although many schemes budget on a 'just in time' basis when it comes to scheme maintenance, the Act and prescribed rules in fact require that every scheme budgets on an accrual basis.

  The obligation to maintain and repair is wide enough to cover structural defects, defects that are attributable to poor original design and defective workmanship as well as the replacement of items, such as lifts, that can no longer be repaired. It does not include improvements to the common property.

• Collect contributions.

  The body corporate must collect from owners contributions to the administrative fund to satisfy claims against the body corporate. Any owner who has exclusive use rights to a part of the common property must be required to make the additional contributions believed necessary to cover the body corporate's costs in respect of that exclusive use area. The amounts to be collected by the body corporate from owners are normally set out in an annual budget proposal made by the trustees for approval by owners at the annual general meeting (AGM).

  In a scheme with a variety of common property amenities, budgeting may be a complex exercise that requires expert assistance.

  Once the annual budget is approved, the trustees determine what amounts must be recovered from the holders of exclusive use rights. The balance of the budget must be funded by contributions recovered from each owner. These are known as levies, which are calculated in accordance with the scheme's participation quota, unless there is a special scheme rule that allocates financial liability differently.

  Levies and other owner contributions are usually payable monthly, and the prescribed rules allow the trustees to set a rate of interest payable on overdue payments.

  The trustees have the power to raise special levies when necessary and in regard to expenses not covered in the budget approved at the AGM.

• Operate bank accounts.

  The body corporate must open and operate at least one bank account to hold its money. The Act does not specify the type of account, so the body corporate's primary bank account may be a current or a savings account.

  The prescribed management rules allow the body corporate to deposit any of its funds that are not immediately required for disbursement into a savings or similar bank account. Bodies corporate cannot invest their funds in unit trusts or other higher-risk financial instruments unless they amend the relevant prescribed rule in this regard.

  The prescribed rules allow the trustees to authorise a managing agent to administer and operate the body corporate's primary account and any investment accounts. Any cheques drawn on a body corporate's account must be signed either by two trustees or by one trustee and the managing agent.

  The trustees may also authorise a managing agent who is a registered estate agent to deposit the body corporate's funds into a trust account. This may be an account into which only that scheme's money is deposited or one into which levy payments for all the managing agent's client schemes are deposited. In this case, cheques drawn on that account are signed only by representatives of the managing agency.

  Trustees should ensure that any managing agency employee who plays any role in the collection, receipt, investment or disbursement of body corporate funds is registered as an estate agent with the Estate Agency Affairs Board (EAAB) and has a current Fidelity Fund Certificate. This is the only way in which the owners can be assured that any theft of scheme funds by the managing agency will be covered by the EAAB's Fidelity Fund.

• Insurance.

  The body corporate must insure the buildings in the scheme and keep them insured for full replacement value against fire and other prescribed risks.

  The trustees must prepare for each AGM a schedule of proposed replacement values, showing values for each unit and including the value of the section and its undivided share in the scheme's common property. The total of the values given must equal the replacement value of the buildings and all improvements to the common property. Replacement value is not market value; it is the amount it will cost to re-erect the buildings if they are destroyed. Where high-rise and complex buildings are involved, the trustees should obtain professional advice in this regard from time to time.

  The policy must make specific provision for risk against fire, lightning, explosions, riots and strikes, burst water tanks, taps and pipes and housebreaking.

  The prescribed rules provide for public insurance liability for a minimum of R100 000 and for cover against loss due to any act of fraud or dishonesty by trustees, employees and managing agents to the extent, if any, determined by owners in a general meeting. The owners of every scheme should consider these insurances at each AGM. Owners can also, by special resolution, decide that the body corporate must take out insurance against additional risks.

  Having taken out the required insurance, the body corporate must make sure that it is kept in force by paying the premiums and abiding by the requirements of the policy.

  The requirements of the policy will extend to actions not only on common property but also within sections and exclusive use areas, so the body corporate must make sure that owners and occupiers know what actions will constitute a breach of the conditions of the insurance policy.

Page two — Physical duties

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