Monthly Archives: September 2015

Homeowners’ Associations: Collect those outstanding levies

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A4BThe Registrar of Deeds’ Conference issued a resolution in 2010 ruling that, in the event of a forced sale, mostly in the event of insolvency, a clearance certificate is not obligatory in order to transfer the property into the name of the purchaser, despite a title deed requirement to the contrary. The resolution was met with severe opposition and the implementation thereof finally reversed.

Three recent matters brought before the court clearly indicated that the status quo will not go unopposed.

Homeowners’ associations have, by means of title deed conditions, ensured that membership requirements are compulsory and the fulfilment thereof obligatory. Generic requirements include the obligation to obtain a clearance certificate from the association, confirming that the provisions of the Memorandum of Incorporation or, where still applicable, the Articles of Incorporation and Association, have been complied with.

Most homeowners’ associations require that all amounts outstanding and levied shall be paid in full prior to the issuing of the clearance certificate. As the purchaser cannot be held liable for the arrears, the arrears are paid from the funds of the insolvent estate. The argument by those opposing the status quo is that by such title deed conditions, the homeowners’ associations have established themselves as preferential creditors of an insolvent estate.

Although an established business practice, the benefit created for the associations in terms of the title deed conditions, are being opposed and questioned.

Three recent matters have been challenging the status quo:

In the first matter, that of Cowin NO and Others vs Kyalami Estate Homeowners’ Association and Others (11377/12) [2013] ZAGPJHC 121, Judge BA Mashile ruled in the South Gauteng High court on 25 February 2013 that the conditions in the title deed should be upheld. The requirements of a clearance certificate have been found as a real right and can prevail against the whole world.

The court further held that by recognising the real right of the association, it does not confuse or change the status of the association in the concursus creditorum. The association will remain a concurrent creditor, but has a right to choose whether to lodge and prove its case or exercise the right afforded it in terms of the registered condition in the title deed regarding the property, to claim the outstanding amount from the cost of the sale of the property.

In the second matter, that of Koka NO and Others vs Willow Waters Homeowners’ Association (Pty) Ltd and Others (20361/12) [2013] ZAGPPHC 167, Acting Judge AJ Bam delivered his judgement on 13 June 2013 in the North Gauteng High Court.

The judgement considered whether the rights of the Homeowners’ Association as noted in the title deed, constitute real rights (rights enforceable as against the whole world) or personal rights (rights only enforceable against the other contracting party). The court dealt with two questions in order to establish the type of right that the association has.

  1. The first was the intention of the person who created the real right. Was it the intention of the person to bind the present owner of the property and also the successors in title?
  2. The second question was whether the nature of the right was such that the registration thereof resulted in a diminution of the ownership of the property (“subtraction from dominium”) against which it is registered.

The North Gauteng High Court ruled that the association does not have a real right. The court acknowledged the fact that the title deed conditions do bind the successors in title of the property. But the facts in this matter were that the association never had the intention to hold purchasers of the property liable for the outstanding levies and penalties of a previous owner. The conditions were thus a mere personal right against the insolvents.

It should be noted that the court ruled for this sale to be subject to the title deed conditions in that the purchaser of the property will be personally subject to the conditions and will have to abide by the rules of the association.

The applicant of the third matter, known as the South Downs HOA matter, withdrew the application before any judge could rule thereon.

The Willow Waters matter is currently under appeal and the Registrar issued a cautionary notice in terms thereof. Should the North Gauteng court ruling be upheld, it will have dire consequences for all homeowners’ associations.

It is therefore imperative that directors of homeowners’ associations carefully attend to timeous payment of levies due by their members. The delay in appointment of liquidators or curators, the time-consuming administration and winding-up of an insolvent estate, as well as the delay in selling the properties caused by delayed instructions from preferential creditors, can create an untenable situation for associations. The eviction of occupiers, bent on remaining on the property at all cost, also takes time.

Months can pass whilst the monthly levies accrue, with the association unable to recover from any other entity save the right to recover via the title deed conditions. As a non-profit company with the responsibility to render services to its members, the situation can easily become dire for associations. Insolvency of even a small portion of the members can financially upset a well-to-do estate and lead to financial chaos.

Prompt debt collection action taken against any and all owners immediately on default will be the best defense. Therefore the directors and members themselves should keep a keen eye on prompt monthly payments and ensure that defaulting owners are immediately contacted and, if they persist in the default, hand the matter over to competent attorneys for collection of the debt. Any delay can be costly to the association.

Whilst clarity is awaited from either the highest court of appeal or the Constitutional Court directors should, not only for the sake of their own property investment but also for that of the other members of the association, ensure that defaulters are speedily and effectively attended to.

This newsletter is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

Is it beneficial to create a trust?

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A3BA Trust can be described as a legal relationship which has been created by the founder, who places assets under the control of Trustees. This either happens during the founder’s lifetime (inter vivos trust) or at the death of the founder (testamentary trust). This article will focus on the advantages and disadvantages of an inter vivos trust.

The advantage of a trust is firstly, that inter vivos trusts can be used to minimise estate duty. No estate duty should be payable on assets owned by the Trust as a Trust does not terminate or come to an end, since it has perpetual succession. Estate duty is currently taxed at 20% of the gross estate value. This saving in estate duty can be substantially large, especially for high net worth individuals who are worth millions of rands. Secondly, as the Trust’s assets are not owned by the beneficiaries, the creditors of the beneficiaries do not have a claim regarding the assets of the Trust. This advantage is especially important for people who are exposed to potential liability. Companies as well as individuals are able to transfer assets to Trusts. Lastly, because Trusts have perpetual succession, beneficiaries will be able to continue enjoying the benefit of the Trust assets even if one of the Trustees were to pass away.

The disadvantages are firstly, the costs of setting up a Trust, which can be high. It may cost up to R 20 000 to set up a Trust. If immovable property is transferred to the Trust then transfer duty needs to be paid. The founders of the Trust may also be liable to pay Donations tax, which is taxable at 20% of the value of the assets transferred to the Trust. Transfer duty is taxed according to a sliding scale. Secondly, Trustees could find themselves personally liable for losses suffered by the Trust if it can be proven that they did not act with care, diligence and skill in terms of section 9 of the Trust Property Control Act. It is important to note that “skill” requires more than just acting in good faith. Trustees may be proven to be negligent not only if they invested in risky investments, but also if they invested capital too conservatively, causing the capital not to grow sufficiently. Trustees also need to be aware of the fact that they can still be held liable if only one Trustee has signing power on behalf of the Trust and he/she makes a poor decision that holds all the Trustees liable for his negligence.

The founder of the Trust needs to recognise that the assets in the Trust do not belong to him/her anymore. The assets belong to the Trust. Should this loss of control (from founder to Trust) not occur, the Trust may be seen as an alter ego of the founder, which could result in the assets being included in creditors’ claims as well as having estate duty consequences.

The earnings from the assets in the Trust are taxed at 40%, and interest exemptions do not apply to Trusts. Also, the inclusion rate for Capital Gains tax for an inter vivos trust is 66.6% whereas the inclusion rate for individuals is 33.3%. Lastly, as we can see from the above, a Trust is not for everyone.

It is important to weigh up the advantages and disadvantages before deciding whether to go ahead or not. The best decision would be to speak to a certified financial planner or attorney who can assist you in making the correct decision regarding your personal situation.

This newsletter is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. E&OE (Errors and omissions excepted.)

Succession planning

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A2BOwning a business requires careful succession planning and is part of your estate planning as you have to determine who will succeed you, or who will purchase your shares, or who will be entitled to the income after your death. The future ownership of your business is at stake.

A Partnership automatically dissolves upon the death of a partner and the remaining partners will then have to dissolve it and divide the assets amongst them.

In the case of a Company the shareholders may agree that:

  1. The remaining shareholders have a right of first refusal to purchase the deceased shareholder’s shareholding, as opposed to dealing with it in a will.
  2. The future of ownership of shares can be regulated by a written agreement between shareholders that is referred to as “buy and sell” agreement and has an influence at the death of a partner or shareholder.
  3. The buy and sell agreement compels the executor of the deceased to offer the shares at a pre-determined price, and life policies between shareholders normally cover the purchase price.
  4. The remaining shareholders are the beneficiaries of the policy on the life of the deceased and use it to purchase the shares, normally pro rata to the shares they already own.
  5. Buy and sell policies fall outside the deceased estate and are not subject to estate duty provided that three requirements are met:
  • None of the premiums should have been paid by the deceased;
  • The shareholder relationship must have existed at the time of death;
  • A written agreement must exist.
  1. When the skill and knowledge of a partner is essential for the survival of the business, “key man insurance“ can be taken out on the life of such a partner or shareholder. The premiums are paid by the business and the benefit is paid to the business to prevent financial loss or to appoint and train a replacement.

In the case of a “sole proprietor”, succession planning is dealt with in the Last Will and Testament.

  1. All the value of the business vests in the deceased estate.
  2. Planning is essential as the business terminates at death, although the executor may sell it as a going concern.
  3. It is a good idea to grant a right of first refusal to an associate, who can purchase the business and intellectual capital at the time of the death.
  4. A life policy can provide for cover on the life of the owner, with the associate being the beneficiary, and the proceeds at time of the death utilised to purchase the business.
  5. It deserves no debate that planning increases the benefit for the estate as opposed to closing the business down, where the assets will be worth far less.

Continued succession planning must be part of your business strategy to ensure your hard work benefits the right people.

This newsletter is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. E&OE (Errors and omissions excepted.)

Co-ownership of land

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A1BThe word “co-ownership” in relation to land means that two or more persons own land simultaneously in undivided shares. A share in land does not represent, and may not be held to represent a defined portion of land. A co-owner who holds a share in land does not hold title to a defined piece of land even if by arrangement with his co-owners they might have agreed to give him occupation of a specific portion of land. The title he has is to an undivided share only, in the whole of the land, held in joint ownership. The portion he occupies is owned jointly by him and his co-owners in the whole thereof. If he should build a house on the portion he occupies, the house will be owned jointly.

When X, Y and Z are co-owners of a farm, they are not each entitled to a physical part of the farm but each of them has an undivided share in the whole of the farm. The shares will not always be equal. One person can have half a share while the other two can each have a twenty five percent share. However, co-ownership unfortunately often leads to disputes among the owners.

Co-operation between the co-owners

It is advisable that co-owners enter into an agreement which regulates the relationship between them. Unfortunately this agreement will have no bearing against third parties. The consent of all the co-owners is required when administrative decisions have to be made. No owner is entitled to change or improve the property without the consent of the other owners. All the owners have to agree to the use of the property, e.g. they have to agree to the chopping down of trees, the erection of a storage facility/building, or to let cattle graze in the field. If co-owners are not consulted they may request an interdict from the court. The court may even order that buildings that have been erected, be removed. However, in instances where the aim is to preserve the property, it is not always necessary to obtain the consent of the co-owners.

The profits and losses

All the co-owners must contribute proportionally to necessary and also useful expenses for the preservation of the property. Such expenses include taxes and expenses to maintain the property in good condition, but do not include luxury expenses. Losses and charges must be shared by the co-owners, except those attributable to negligence of one of the owners. As with expenses, fruits and profits must be divided amongst the co-owners according to each owner’s shareholding.

Alienation of a share

A co-owner may alienate his share or even bequeath it to his heirs, without the consent of the other owners, even against their will. A co-owner’s share may also be attached by the sheriff.

Use of the property

Each co-owner may use the property in accordance with his undivided share. He must, however, use it with due regard to the rights of the other co-owners. Each co-owner, his employees and guests are entitled to free entry to any part of the property, except if the co-owners have agreed that a portion of the property is reserved for the exclusive use of one co-owner.

Partition

Co-owners may decide to partition the property, usually if they cannot agree on the utilisation of the property. The property will then be divided physically in accordance with the value of the property and each owner’s share in it. When this is uneconomic, which is usually the case with a farm, the property can be awarded to one co-owner, but he must then compensate the other co-owners. The court may also order that the property be sold by public auction and the proceeds divided amongst the co-owners. There is strict statutory control over the subdivision of land and also the actual physical division and use of land, so that partition may not always be possible.

Co-ownership is an excellent vehicle to becoming an owner of a property that one otherwise might not be able to afford. However, be aware of the pitfalls, choose your co-owners wisely, and draw up an agreement to regulate payment of the bond and rates, the day-to-day expenses and house rules.

This newsletter is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. E&OE (Errors and omissions excepted.)