Monthly Archives: May 2017

Maintenance in Sectional Title Schemes

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B4The requirements now necessary with regards to sectional title maintenance of major capital items as per the Sectional Title Schemes Management Act (STSMA) are there to create a more formalised and long term view with regards to maintenance, which in turn will create a need for better budgeting and financial management, says Michael Bauer, general manager of property management company IHFM.

There are two provisions in the STSMA, Regulation 2 and Annexure 1 of the new Prescribed Management Rules.

Regulation 2 provides for a reserve fund to be established (purely for maintenance of major capital items) and the amounts to be in reserve.

Trustees must distinguish between normal repairs and maintenance (on-going during the year) and replacement of major capital items as these will have purpose-bound funds in the reserve fund, said Bauer.

Repairs and ongoing maintenance need to be adequately budgeted tor in the operational/administrative budget and cannot be cross-subsidised. If the scheme runs out of budget in the repairs and maintenance, trustees may have to raise a special levy.

“Many will attest to the fact that well-maintained buildings create better first impressions and growing property values. The financial protection offered through a well-managed scheme will create a demand for units for sale and the cycle of increased prices and demand perpetuates,” he said.

The first new requirement in terms of the new legislation is that all sectional title schemes must have a ten year maintenance plan which must be presented at the Annual General Meeting (AGM). The Act does not specify what format this documentation should be in but it should include all major maintenance items, e.g. electrical installations, plumbing, glazing, waterproofing, perimeter fencing, and the like, and the costs of repairing, replacing or maintenance of any of these items over the coming ten year period should be listed.

“The problem with the fact that there is no prescribed form provided for the maintenance plan, is that some might not list the necessary details required, and miss an important part or aspect of the plan”, said Bauer.

“The maintenance within the scheme of any of the common property for the previous year, the current year and the following year should also be presented. With the specific information required, all the projects will be clearly defined and documented, which will help with more effective budgeting for maintenance”, said Bauer.

Larger sectional title schemes might need to employ a professional to survey the premises and compile the ten year maintenance plan, as this is something that the layperson might not be able to carry out with the necessary detail.

The second requirement in terms of regular maintenance is the provision for a reserve fund to be established, which goes hand in hand with the ten year maintenance plan. This is listed in the regulations of the STSMA and Annexure 1 of the Prescribed Management Rules. The suggested amount is to have 25% of the scheme’s annual Levy budget in reserve at all times, if it needs topping up from year to year, this should be done, and it is not necessary to pay in 25% of the levy budget each year.

The reserve fund should be in a separate account and separate financial records should be kept for this.

“Trustees might see this as creating much extra work, but a future maintenance and budget plan is very important when it comes to protecting the owners’ investments – proper maintenance helps hold property values and proper financial planning helps eliminate large special levy payments, which have been known to create very difficult financial situations for some sectional title owners,” said Bauer.

Reference:

  • eProperty News

This article 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)

Vacant gardens and property rates

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B3The purpose of this article is to explain the laws and policies that determine how property rates and other services are charged to erven that do not have residential homes on, but form part of the garden of a person’s residence.

Typical Example

The problem discussed in this article most commonly arises where a person’s home is comprised of more than one erf, and only one of the erven has the house build upon it (the other erf or erven being vacant and simply forming part of the garden that surrounds the home). It is necessary to distinguish at this point between situations where all of the erven concerned are notarially tied, as opposed to situations where they are not.

Notarial Ties Explained

A notarial tie is an act of registration that happens in the Deeds Office in terms of which certain erven that are contiguous (i.e. share a common border) and are located in the same township (suburb) are bound together such that they cannot be sold to third parties individually, without the others that they are tied to. In order to create a notarial tie one would need consent from the local authority (the Municipality) and the assistance of a Conveyancer to draft and register the notarial tie agreement against the title deeds of the properties concerned. If the properties are bonded then the consent of the bondholder will also be required before the notarial tie can be registered.

In most cases the registration of a notarial tie agreement against the title deeds of the properties concerned will result in the value of those properties collectively dropping somewhat. This is because the properties are no longer capable of being sold off individually and must be sold together as one big property.

Where there is a notarial tie

If the various erven are notarially tied it is the City of Johannesburg Metropolitan Municipality’s (“COJ”) policy to treat all of the erven concerned as if they were one big consolidated erf. The result of this is that the homeowner will be charged only once for rates (calculated on the cumulative value of all of the erven) in connection with one account (which is usually an account created in respect of the erf on which the house sits), as well as only once (again usually in connection with that same erf) for refuse removal services and water and/or electricity services, and sewer services, at the residential rate.

This precludes the duplication of charges for sewer and refuse services (by the levying of such charges only once, as if the property consisted of one large consolidated erf rather than by the levying of separate sewer and refuse charges for each of the individual erven).

If this policy is not applied and each of the erven were treated individually as if they were not notarially tied together and forming part of one dwelling, each stand would then receive a separate rates account with property rates based only on the value of that stand alone, together with refuse collection charges as well as sewer availability charges.

In extreme cases the municipality will charge the property owner for electricity and/or water services by linking those services to one of the erven that form the garden rather than the erf on which the house sits.

The result of this is often that because the vacant garden erven are classified as “vacant” rather than ”residential” in the municipality’s records, the services will be charged for at the vacant land rate, as opposed to the lower tariff applicable to residential properties.

This can be a very serious problem for a property owner as the charges for rates and sewer based on the vacant land tariff are significantly higher than the charges would have been on the residential tariff.

How to remedy the situation

The first step is to determine whether your properties are notarially tied. If they are then you need to lodge a Section 78 inquiry with the municipality’s Valuation Department asking for the municipality to consider all of the properties concerned as one property and to rate the property and to charge services for that property only on the stand on which the house sits, and all at the residential rate. This should trigger the property appearing on the next property valuation roll, which will allow the property owner to (if necessary) lodge an objection to the manner in which all of these properties are classified (because they will probably be classified as vacant stands because although they form part of the garden, where there is no house built on them they might then be classified on their own as vacant).

Conclusion

The manner in which the municipality charges for rates and services in relation to homes that consist of more than one erf, is relatively complex and there are many reasons why invoices in relation to same may not be correct.

If you are of the view or you suspect that you are being overcharged or otherwise incorrectly charged by the municipality in this regard, contact your attorney for assistance immediately.

The sooner that you take action the sooner the problem will be resolved and your charges will drop, alternatively the sooner you act the more likely it is that you will be able to obtain a refund retrospectively of amounts that you have historically been overcharged (although there is no guarantee in any situation that you will indeed be entitled to or receive a retrospective refund, as whether this is applicable depends on the facts of each case).

This article 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)

Zero-rated VAT for a commercial property transaction

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B2The area of zero-rated VAT for a commercial property transaction can be confusing and must be properly understood if one wishes to avoid confusion and delays. “Previously, it was common industry practice that a brief clause or addendum was utilised with the agreement of sale for a commercial property transaction in order to apply for the zero-rating of VAT,” says Jason Gregoriades, a member of the Rawson Property Group’s Commercial Business Development Team in Cape Town. These previously used methods are, however, no longer acceptable due to a more stringent set of requirements by SARS.

Misconceptions

Some misconceptions must first be dispelled, with regard to zero-rated VAT transactions, before looking at this subject in any depth. “The structuring of the sale of a commercial property with the VAT rated at 0%,” Gregoriades explains, “is a benefit offered by SARS to the seller and buyer of a specific property, should certain criteria be met to their satisfaction.”

First, it is often presumed that if VAT is applicable to a commercial property transaction, it will be simple to structure the Agreement of Sale in order to qualify for the VAT to be rated at zero percent. Sadly, this is not the case. Second, there is the misconception that if one correctly structures the agreement of sale that the transaction qualifies for a zero-rating of VAT, that there are no additional costs relating to the transfer of the property. This is also most definitely not the case.

Facts

To begin with, a tax clearance certificate is required for the transfer of a property, thus problems and delays may arise in the event where either of the legal entities’ tax affairs are not up to date. Thereafter, SARS has a number of specific criteria which must be met in order for a commercial property transaction to be considered for a VAT rating of 0%.

“The agreement of sale must be property structured,” states Gregoriades, “containing alt the necessary information and specifics. Regarding the other costs applicable to the transfer of the property, such as the Deeds Office fee and the additional respective clearance certificates, these costs will still be applicable and payable should SARS permit the transaction to benefit from a zero-rating for VAT.

SARS Requirement

“SARS‘ current requirements for the transaction of a commercial property sale to be considered for a zero VAT rating, are quite specific and important to know,” says Gregoriades. These requirements include, but are not limited to the following:

  • All necessary information to be provided as part of the original agreement of sale and not as an addendum or annexure.
  • Both parties must be VAT vendors, thus, it is recommended that both parties include in the agreement their VAT registration numbers, a declaration that they are still registered for VAT and that their tax affairs are up to date.
  • The nature of the contract must take the form of a sale of business which includes the property, as opposed to the traditional sale of property only. Both parties must state their agreement that the enterprise will be sold as a going concern and that a zero rating of VAT will be applied. In this case, the business practice is the letting of space within the property and the business itself is often described as a rental enterprise.
  • The entire business, including any part of it which is capable of separate operation, must be disposed of as part of the transaction. In other words, the sale of the enterprise must include the property and all existing contracts must remain in place, such as the cleaning and security services.
  • The business must be an income generating enterprise at the time of sale, with a strong likelihood that this income generation will continue up to the date of transfer and beyond.

The Risk

Should the application for a zero VAT rating be deemed unsuccessful by SARS, they have the authority to effect that the full VAT amount be applicable to the sale. A clause to this end must be included in the agreement, stating that the purchase price will increase to cover the potential addition of VAT to the sale price. “Buyers and sellers must be aware of the implications of this possibility,” says Gregoriades, “should their submission be rejected by SARS for whatever reason.” “One needs a well- constructed agreement of sale, making sure all the boxes are ticked”, suggests Gregoriades. “to take advantage of the zero- rated VAT benefit offered by SARS.” In order to ensure all the criteria are met, it is recommended that you enlist the aid of an experienced commercial agent.

Reference:

  • eProperty News

This article 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)

Engineering contribution figures

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B1Sections 20(2)(c)(i), 48, 63 and Chapter 5 of the Town Planning and Townships Ordinance 15 of 1986 (“the Ordinance”) deal with the levying and payment of engineering contribution figures. These are essentially amounts payable by a person who has applied for rights to change the use of a property, in order to facilitate the upgrading of necessary engineering services (such as roads, sewers, pavements, parks, and any other upgrades necessary to facilitate the proposed use of the property). Engineering contribution figures may also become payable when a property is subdivided. This article explores what they are, how they arise, and the legalities surrounding levying and payment of engineering contribution figures.

Brief explanation – amending land use rights*

A property’s ‘default’ land use rights are contained in the applicable town planning scheme. Each municipality has one (or more) and they only apply to a certain area. These town plainning schemes essentially dictate what uses a piece of land can lawfully be put to. If an owner wants additional rights or different rights to use the land in a manner other than prescribed by the scheme, an application can be lodged to obtain these rights. If this application is granted it will result in an amendment to the ‘master’ town planning scheme, which we refer to as an amendment scheme. Every property that acquires different land use rights by way of an application, thus has its own amendment scheme approved for it, giving it different rights to those prescribed in the applicable town planning scheme.

Application can be made by an owner or a person acting on behalf of an owner to amend land use rights. This would be necessary where the existing land use rights do not cater for the future intended land use. An application can be made for consent use (this is where the existing land rights provide that the land can be used in the manner proposed, if consent is granted) or for rezoning (where the existing land use rights provide that the land cannot be used for the proposed use, and it is necessary to apply to put the land into a completely different ‘zoning’, in order to ensure that the future use of the land for the intended purpose, is lawful). Both of these applications are made on prescribed forms against payment of a prescribed fee and with certain prescribed supporting documentation.

The municipality’s Land Use and Management (also known as Town Planning) department decides on the applications after having circulated them for comment to the relevant internal departments that provide services within the municipality’s jurisdiction. A decision is then made to deny or grant the application in whole or in part, sometimes on certain conditions, which may (and often) include the payment of amounts for engineering contributions, or to deny it. An appeal can be lodged if a person is dissatisfied with the initial decision.

When the applicant is happy with the decision, he submits documents called “MAP3’s” which depict what the amendment to the town planning scheme will look like – this is the draft amendment scheme. When the municipality is satisfied that all conditions prescribed by it and by law have been complied with, it publishes a notice advertising to the public that the land use rights applicable to the property have been amended. This is called ‘promulgation’. It is only on promulgation (and in certain instances referred to below only thereafter) that an amendment scheme comes into effect and the additional/different land use rights might be used.

At what point in the process are engineering contribution figures calculated? Ideally this should happen before the applicant is advised of approval, when the municipality advises the application of the conditions upon which the land must be rezoned (which usually includes payment of engineering contribution figures) so that the applicant can appreciate and budget for the financial consequences of going through with the rezoning application. In practice, however, this is not the case, and engineering contribution figures are usually only calculated after approval. However, municipalities are aware that their window to demand payment is small, and so they usually ensure that the figures are ready before promulgation.

Who must pay?

  • The Ordinance provides in respect of engineering contribution figures payable as a result of the approval of consent use, that the person to whom the consent is granted (who might not be the owner) must pay.
  • When a rezoning occurs, the owner must pay.
  • In practice, if a person who is not the owner wants to make an application for amended land use rights, the municipality requires the owner to authorize such person, so where a developer has asked an owner for permission to apply for a rezoning pursuant to an offer to purchase concluded for the property on the condition that it is granted amended land use rights, it is usually the developer who pays, by agreement with the owner.

Who can make a demand for amounts payable?

  • An amount for engineering contribution figures may be levied either in agreement with the applicant or (in the absence of agreement) the amount will be determined by a committee called the Services Appeal Board of the municipality upon the making of an application for same.
  • Where the proposed land use will bring about a higher density of dwellings, then the municipality will determine the amounts payable.

How much can be demanded?

Any amount necessary (as determined by the municipality or Services Appeal Board) to upgrade any/all engineering services to the property, in order to facilitate the upgrading for the proposed land use, can be demanded.

What if the amount demanded is unreasonable?

An appeal can be lodged if the owner/applicant/any interest party is not satisfied with the initial decision.

Who can lodge the appeal, in which circumstances, and to whom the appeal lies, varies depending on what type of application is brought and by whom. The Ordinance provides that any person who is aggrieved by a decision as to the amount of engineering contributions payable in a consent application, or an owner in a rezoning application, can lodge an appeal for reconsideration of the matter. However, an appeal must be lodged within relatively truncated time frames and thus this would not be available to a person who finds out some years after the engineering contribution figures have been levied, that there are amounts owing.

What if the engineering contribution figures make the development too expensive?

  • An owner can apply to the municipality to repeal the amendment of the town planning scheme, in terms of which additional rights for the proposed use the property were approved. This will allow the owner to avoid payment of all amounts claimed for engineering contribution figures.
  • Alternatively the owner can apply again to change the land use rights, by lodging another rezoning/consent application for different land use rights, that will require less upgrades of engineering services, and will thus attract a much lower engineering contribution.
  • Strictly speaking, however, these options are only open for a limited time after the municipality has told the owner what amounts are payable, and so it would not usually be open to an owner who has purchased from someone else and has now discovered that there are unpaid engineering contributions registered against his/her land, to make use of these options.

When and how can payment of engineering contribution figures be demanded?

The municipality can only demand payment of engineering contribution figures in a narrow ‘strip’ of time – within 30 days of commencement of the amendment scheme. In terms of the Ordinance, an amendment scheme commences when the notice is promulgated.

This is subject to the proviso that if there were objections or the approved scheme was subject to amendments, that the amendment scheme will only come into operation on a date not less than 56 days from the publication of the notice. The amounts must be demanded by way of registered post.

When do engineering contribution figures become payable?

This is a different question to when the amounts payable can be demanded. The Ordinance expressly state that engineering contribution figures are payable before a clearance certificate is issued, or before building plans are approved that would facilitate the amended land use, or the additional or altered land use rights are used. This is significant because this means that the person who applies for those additional rights, should be called upon to pay them by the municipality before the property is transferred to a new owner. In the view of the authors, this is a clear indication that the legislature intended that the person who originally applies for those rights should be called upon to pay them, unless that person makes an agreement with a third party (for example a developer or a purchaser) to take over that responsibility.

Can payment arrangements be made or security be given for payment?

A municipality is empowered to allow payment in instalments for a period up to three years, or to postpone payment for a period up to three years, and in making alternative payment arrangements to impose any other reasonable condition on such arrangement, including the levying of interest on amounts outstanding. Provision is also made for a municipality to accept an undertaking from a purchaser that it will pay the contributions at a later date in certain circumstances, allowing transfer to go through and the rates clearance certificate to be issued before the contributions have been paid.

What are the consequences of non-payment?

If the amounts demanded are not paid, or arrangements for payment/security made, the additional land rights may not legally be used (even if approved and even if promulgated) until the engineering contributions are paid. In addition, building plans should not be approved nor should any clearance certificate to pass transfer be issued. Any person who uses land in contravention of a town planning scheme is guilty of a criminal offence and may be liable to a fine or imprisonment. For every day that a person remains in contravention of the Ordinance, the fine can increase by R 100 and/or the period of imprisonment by 10 days. The municipality can also enforce the provisions of the scheme if the responsible person refuses to, by demolishing buildings if necessary.

Can rezoning be finalized without payment of the engineering contribution figures?

Yes, in fact it must. The last step in rezoning is promulgation, and only after promulgation can a municipality legally demand engineering contributions. This means that the municipality must ‘give’ the landowner the amended rights before demanding payment for them. However, as above, the additional land use rights are not meat to be utilized before the engineering contribution figures levied in connection with same have been paid.

Can transfer be passed without payment of the engineering contribution figures?

Yes, transfer can pass before engineering contributions have been paid. This happens often. There are two typical scenarios. The first is where an owner applies for additional rights, they are approved, but they are never promulgated and so the additional rights never actually ‘kick in’. If this happens and an owner applies for a rates clearance certificate to transfer the property, the municipality will provide the certificate without demanding payment of the engineering contributions applicable, because the time has not yet come at which the municipality is even legally allowed to claim those contributions (this is only permissible on promulgation). If the new owner then wants to use those additional rights, he will have to promulgate the amendment scheme and then pay any engineering contribution figures called for.

Problems arise here if the purchaser bought the land thinking that the seller had already paid all amounts necessary for the additional rights to ‘kick in’. If the seller has represented that this is the case to the purchaser, then the purchaser will have a claim against the seller for a refund of amounts paid for engineering contributions, but if the seller sold the property with the additional rights approved but not promulgated and did not represent to the purchaser that the property carried the additional rights, the purchaser is then able to, at his own cost and in his own time, and if he wants to, promulgate and then use the additional rights. If the purchaser never wants to use the additional rights, he does not have to, in which case he will not attract any liability in the form of engineering contributions for the additional rights because they will never be promulgated and the municipality will never be entitled to demand payment of the engineering contributions.

The other scenario is where a seller has rezoned a property and promulgation has occurred, meaning that the additional rights applied for have already come into force legally. In this case the municipality should require payment of the engineering contributions before transfer can pass to the purchaser, at the stage when the seller applies for the rates clearance certificate to facilitate transfer. If the municipality fails to do this, however, the property will pass to the purchaser and the municipality may then look to the purchaser for payment of these contributions either when the purchaser wants to use those additional rights, or have building plans approved, or wants to re-sell the property. This is where problems really arise because the purchaser is then held liable for amounts that the seller should have paid when the property was originally transferred. In such a case, if the purchaser is forced to pay these amounts, he will have a claim against the seller for a refund.

Do engineering contribution figures prescribe?

There is no law on the issue, but in our view, engineering contributions prescribe after three years, because they are more akin to ’fees’ charged by a municipality for the supply of services or upgrade of infrastructure in order to supply services to a property, than they are to ‘rates’, which are monthly charges billed to all properties of a certain type, based on a cent-in-the-rand ratio. However, this argument has not yet been brought before a court and so we would caution buyers to check whether they will become liable for engineering contribution figures at some stage in the future before they purchase a property to avoid the inconvenience and potential loss that could arise from having to pursue a claim (successfully or unsuccessfully) against a seller for a refund of amounts paid for engineering contributions.

 * For the purposes of this article only the general principles are referred to, so there may be slight variations to what is described above depending on which type of application you make and the internal requirements of the municipality to which the application is made.

This article 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)