What is ratification?

 Albert Einstein once said “Everything must be made as simple as possible. But not simpler.” 

Legal terms can often be overwhelming and challenging to interpret. One of our objectives at STS is to nurture and encourage growth and development within the communities we service. In this post and the posts which will follow from me, we live up to this objective by making legal topics and certain jargon easier to understand, while ensuring that they do not lose their meaning. In today’s post, we take a look at the concept of “ratification”.

First, let’s take a step back and recall some important considerations concerning the establishment of a body corporate. A body corporate automatically comes into existence as soon as the first unit in a scheme has been transferred from the developer to another person. The developer and the new unit owner are the first members of the body corporate. Every new unit owner thereafter becomes a member of that body corporate.

It is important to note that once a unit owner becomes a member of a body corporate, they may be bound to various obligations, including financial, arising from transactions undertaken by that body corporate via resolution. This is especially true when a creditor to a body corporate successfully obtains a judgment against such body corporate, which remains unsatisfied, as provided in section 15(1) of the Sectional Titles Schemes Management Act[1] (“STSMA”).

This is also why it is mandatory that a developer convenes a meeting (the first general meeting) of the members of a body corporate within 60 days after the establishment of such a body corporate.[2] Furthermore, the developer must ensure that a comprehensive summary of the rights and obligations of the body corporate, under the policies and agreements entered into by the developer on behalf of the body corporate, is included with the notice of the first general meeting.[3] During this meeting, the members will have an opportunity to consider the agreements which the developer may have entered into, on behalf of the body corporate, prior to the establishment of the body corporate.

It is crucial to understand the significance and necessity of including a motion in the agenda for the first general meeting of a body corporate – for the members to either ratify or reject the terms of agreements entered into by a developer on behalf of the body corporate prior to its establishment.

Within this context, what is “ratification”? Ratification is where an agent (without existing authority at the time) acts on behalf of another (the principal), and the principal, after the fact, elects to ratify the action of the agent, and thus becomes bound by the contract.[4] In simplified terms, it means the act of signing or giving formal consent to an agreement, rendering it valid and enforceable, even though at the time that the agreement was entered into, there was no such authority.

Section 15(2) of the STSMA, read in conjunction with Prescribed Management Rule (PMR) 16(2)(d) of the Sectional Titles Schemes Management Regulations, 2016 (STSM Regulations), provides that any debts or obligations emanating from contractual agreements entered into by developers and other persons, will not be enforceable against a body corporate and the members thereof unless the contract is duly ratified by way of ordinary resolution by the owners at the first general meeting.

The agenda for the first general meeting must therefore include a motion to ratify or not to ratify the terms of any agreements entered into by a developer on behalf of a body corporate.[5] This is essentially when the members may endorse and give formal consent to (ratify) the agreements entered into by a developer on behalf of the body corporate, in order to render such agreements valid and enforceable against the body corporate. Up until that moment, those agreements are only enforceable by the third party against the developer. There is quite a lot more that could be written about this type of process and the types of agreements that some stakeholders are frequently faced with in this context, but that is a topic for another day

Lastly, it must be remembered that while a developer is a member of the body corporate at the first general meeting, in respect of the motion to ratify or not to ratify, any votes held or controlled by the developer, are suspended and do not count.[6] By suspending any votes held or controlled by the developer for this particular motion, the provision aims to prevent potential conflicts of interest. This is because the developer, who is responsible for entering into these agreements on behalf of the body corporate to be formed, could have interests that are not fully aligned with those of the body corporate members once the body corporate is formed. The legislature has made it clear that it wants the members of the body corporate to consider ratification of these special contracts, and that’s why their votes are the only ones that count.