Understanding sectional title levies: A comprehensive guide for trustees and managing agents

In the world of sectional title ownership, levies are a critical financial mechanism that ensures the proper functioning and maintenance of shared spaces and facilities. For trustees and managing agents, understanding the structure and management of levies is essential in maintaining the property’s financial health and creating a desirable living environment for owners. An informative article published by Mirfin, experts in 10-year maintenance plans, explores the various types of levies, their importance, and best practices for managing them effectively.

Levies are regular contributions made by unit owners to fund the ongoing management, maintenance, and repair of the common areas in a scheme. These areas can include gardens, swimming pools, lifts, and security systems—spaces that are shared by all unit owners.

In a sectional title scheme, the body corporate is responsible for ensuring the common property remains well-maintained and financially stable. Each owner contributes to the levy fund based on their participation quota share in the scheme, which helps cover both routine operating costs and future maintenance projects.

Levies play a crucial role in the smooth operation of a sectional title scheme. Here’s why they are so important:

• Financial stability: Regular levy payments ensure the scheme’s financial health, allowing it to operate without relying on special levies or loans. This consistency provides a stable financial foundation for the body corporate.
• Preservation of property value: Timely levy payments fund maintenance and repairs, ensuring that common property remains in good condition. This helps preserve unit values and keeps the living environment attractive to both current and prospective owners.
• Legal compliance: Paying levies on time is a legal obligation. Non-payment can lead to penalties, interest charges, and even legal action which attracts high costs that the body corporate is entitled to recover from the unit owner in arrears.

In a sectional title scheme, there are several components that make up the total levy amount. These include:

This fund covers the day-to-day expenses of running the scheme. Examples of costs covered by the administrative levy include:

• Common property utility bills (electricity, water, etc.)
• Insurance premiums for the replacement value of the land and buildings
• Administrative, management and collection costs
• General maintenance of common areas

The amount for the administrative fund levy is determined based on a detailed budget that estimates the operating costs for the upcoming financial year.

The reserve fund levy is used to set aside money for future major repairs, renovations, or unforeseen expenses in accordance with the 10-year maintenance, repair and replacement plan. This can include costs for:

• Replacing roofs or elevators
• Renovating communal areas like the pool area
• Repairing plumbing or electrical systems that serve more than one section or the common property

By contributing to the reserve fund, owners ensure that the body corporate has the necessary funds for significant capital expenditure without the need for special levies or loans and the body corporate can comply with its 10-year maintenance, repair and replacement plan. The amount required for this levy is determined by assessing the long-term needs of the scheme, including the age and condition of the buildings and equipment (major capital items).

The Community Schemes Ombud Service (CSOS) levy is a smaller, legislatively mandated levy that contributes to the operation of the CSOS, which helps resolve disputes between owners and the body corporate and perform other functions in accordance with the CSOS’s legislative mandate. This levy is currently capped at R40 per month per unit, and the CSOS has recently mentioned that they wish to further simplify the calculation of this levy.

Each year, the body corporate, through the trustees, prepares an annual budget that estimates the expected expenses for the upcoming financial year. This budget includes both administrative and reserve fund levies, and owners are required to contribute based on their participation quota share.

A 10-year maintenance, repair and replacement plan should accompany the budget, outlining long-term maintenance and major capital item improvement needs. This plan acts as a financial roadmap, helping trustees and managing agents plan for both short-term and long-term expenses, hopefully without the need for special levies.

Once the annual budget is approved by the owners at the Annual General Meeting (AGM), the trustees notify each unit owner of their levy contributions. These contributions are usually paid monthly, but they may be supplemented by special levies if unforeseen expenses arise or if the body corporate needs more funds than it has budgeted for. This is another reason why accurate budgeting is so important.

Effective levy management is vital to the success of a sectional title scheme. Here are some best practices that trustees and managing agents should follow to ensure smooth operations:

Invoices should clearly outline the total levy amount due, the breakdown of expenses, and the due date. It’s important to include clear instructions for payment and highlight any applicable interest rates for late payments. Transparent communication with owners is key to avoiding misunderstandings and disputes.

Trustees should actively monitor payments and follow up with owners who have not made timely payments. A structured collection process should include:

• Sending reminders well before the due date.
• Sending final notices if payments are overdue.
• Charging punitive interest on outstanding amounts to encourage timely payment.

In severe cases, trustees may take legal action to recover overdue levies, including applying for court orders or initiating debt recovery processes through the CSOS.

Disputes over levy amounts or payment terms can arise from time to time. Trustees and managing agents should have a clear internal dispute resolution process in place. This process should involve:

• Open communication with owners to address concerns or misunderstandings.
• Offering payment plans to owners facing financial difficulties.
• Ensuring that owners who sell or transfer their units settle any outstanding levies before the transfer is finalised.

Dealing with delinquent owners who withhold payment can be a challenge. Here are a few strategies for managing this situation:

• Open communication: Address concerns quickly and professionally. Often, misunderstandings or dissatisfaction with maintenance can lead to non-payment.
• Payment plans: For owners facing financial difficulty, trustees might offer payment arrangements or instalment options to help ease the burden.
• Legal action: In extreme cases, legal action may be necessary to recover unpaid levies. This could include court orders or garnishing wages but should be pursued only after other avenues have been exhausted.

Levies are essential to the smooth operation and financial stability of any sectional title scheme. By understanding the different types of levies, following best practices for levy management, and addressing delinquent payments promptly, trustees and managing agents can ensure well-maintained common property, increased unit values, and a harmonious living environment for all owners and occupiers. Proper levy management helps protect property values, promotes legal compliance, and ensures the long-term sustainability of the scheme.

Need help with levies in arrears? Reach out to us today to assist with a bespoke solution with people in mind!

This information has been adapted from an article on the Mirfin website.