Sectional title under administration

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20 Nov 2012

The worst thing that can possibly happen to a sectional title scheme is for it to be placed under administration. 

The worst case scenario is that the scheme stays under administration indefinitely, the property values might drop and investors move in bulk to take over the scheme, says Bauer.

This is according to Michael Bauer, general manager for IHFM, the sectional title management company, who explains this happens where a creditor applies to the courts for the scheme to be placed under administration as the scheme is insolvent, badly managed or is not fully functional.  The courts would decide who the administrator would be and the administrator effectively takes the place of the trustees.  

The problem here is that the administrator could then appoint a managing agent and receive the administration fee every month but is not bound to report back to the courts nor the owners on the progress of the recovery of the sectional title scheme’s financial health.  

What has happened in the past, too, is unscrupulous managing agents have gotten schemes placed under administration purposely, in order to reap the benefits of management fees paid to them every month for no service.  

The worst case scenario is that the scheme stays under administration indefinitely, the property values might drop and investors move in bulk to take over the scheme, says Bauer. 

There have been other cases where schemes do not have enough trustees and then are forced to have an administrator appointed to manage the scheme. 

Section 46 of the Sectional Title Act makes provision for the appointment of administrators and if one reads through the provision it is clear that when a scheme is placed in this position, it is very difficult to get this reversed. The power is placed fully in the administrator’s hands and the owners have to get the court order lifted to get the administrator removed, says Bauer. 

A recent court case mentioned (Grundler NO v Body Corporate Flamingo of Lot 2371 Flamingo Heights and Others) shows that in some cases the courts have found in favour of the owners, even though inexperienced in the running of their scheme, rather than keeping or appointing an inefficient administrator.  

In this case Grundler was initially appointed as administrator for the scheme, Flamingo Heights, as applied for by the local municipality because of the amount of outstanding rates and taxes due. The appointment was for 36 months but the original order provided for early termination if the rehabilitation plan was implemented satisfactorily. However, this term could also be extended if need be. 

The administrator applied for an extension, his reasoning being that the body corporate was still substantially in arrears and that the scheme was not able to run with its own management. 

The body corporate and some owners then accused Grundler of underperforming as an administrator and opposed the application.  

The courts found in favour of the body corporate and the owners.  

In most cases such as these it has to be asked, says Bauer, whether the interest of the body corporate has been served by the administrator and whether there shouldn’t be a regular monitoring period (perhaps quarterly) where the administrator must report back to the courts on improvements or lack thereof, and the reasons why. 

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