Establish a reserve in body corporate

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18 Jun 2013

Trustees have to ensure that the levies of the body corporate are sufficient to cover operational expenses and provide for future repairs and maintenance.

Once the Sectional Titles Schemes Management Act is in force, body corporates will be obliged to provide both for the operational as well as the future expenses of the scheme.

However, they also have to ensure that the levies, and any increases, are not prohibitive.

Martin Bester, managing director of Intersect Sectional Title Services says that currently, the Sectional Titles Act requires the body corporate to establish a fund “sufficient in the opinion of the body corporate for the repair, upkeep, control, management and administration of the common property (including reasonable provision for future maintenance and repairs)”.

However, in Bester’s opinion the latter part of the above statement is relative and vague and he wonders what constitutes as reasonable.

He says that at Intersect they have advocated the establishment of a reserve or sinking fund for years, as they believe this to be good practice. "Now, several years on in certain cases, we are able to fund certain repairs and or maintenance items without impacting on ordinary levies and without requiring special levies or, at least, reducing the quantum of same.”

At some stage the Sectional Titles Schemes Management Act (STSMA) will be enforced and, essentially, replaces the management aspects of the Sectional Titles Act - which will all be repealed - with a more user friendly and simpler format.

Section 3 of the STSMA differentiates between an ‘administration’ and a ‘reserve’ fund. The latter providing “to establish and maintain a reserve fund in such amounts as are reasonably sufficient to cover the cost of future maintenance and repair of common property but not less than such amounts as may be prescribed by the Minister”.

According to Bester, what amounts the Minister may prescribe is yet to be seen, but once the STSMA is in force, body corporates will be obliged to provide both for the operational as well as the future expenses of the scheme.

He says now is a good time for trustees to be considering the reserve or sinking fund as it will become prescribed. Bester says that he is often asked how much should be in a reserve or sinking fund and says no benchmark and no crystal ball exists. "So in the absence of both, Intersect suggests to our clients that foreseen major repairs and or maintenance expenses, such as repainting, be priced at current rates and escalated by a time factor."

Bester says this will indicate the quantum of the resources that will be required in the future at a specific point in time and will be good starting point for calculating how best to achieve it. He says the fund should, at any point in time, be able to cope with at least 20 percent of annual expenses so as to deal with the unforeseen expenses or reasonable contingencies.

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