Penalty fees/charges and sectional title bodies corporate

Penalty fees/charges and sectional title bodies corporate
19 Jan 2018

In this article we look at the legality of different kinds of penalties and legal fees imposed by sectional title bodies corporate against defaulting owners in terms of the Sectional Titles Schemes Management Act 8 of 2011 (“STSMA”) and the Regulations thereto, the Conventional Penalties Act 15 of 1962, the National Credit Act 34 of 2005 (“NCA”) and the Regulations thereto and the Uniform Rules of the High Court of South Africa.

Penalty Fees

In terms of prescribed Management Rule 25(5) (which is included in the Regulations to the STSMA, and which would apply unless the body corporate has taken a unanimous resolution to amend it as per Regulation 6(6)) a body corporate may not debit an owner’s account with any amount that is not a contribution or a charge levied in terms of the STSMA. Apart from ordinary and special levies and interest thereon, legal fees, and a reasonable photocopy fee for the inspection of documents, no other types of charges are provided for in the legislation itself.

This means that any penalty fee or “administrative” fee or “debt collection” fee charged by a body corporate to an owner, is not authorized by law and would thus be unlawful, unless they are authorized in terms of the scheme’s Conduct or Management Rules. In order for a fine or penalty to be enforceable by a body corporate, it must have been lawfully adopted by the body corporate after the taking of the appropriate resolution, and the amendment to the rules to adopt that fine or penalty must have been registered at the Deeds Office.

There are also rules relating to the way in which the fine is imposed – for example, the imposition of the fine must be reasonable and systematic – the trustees must treat everyone in the scheme equally – and the person being fined must also be given a fair opportunity to state their case to the trustees/managing agent as to why the fine should not be imposed (or else the imposition would not be regarded as reasonable).

Interest

In terms of prescribed Management Rule 21(3)(c) (contained in the Regulations to the STSMA, and which would apply unless the body corporate has taken a unanimous resolution to amend it as per Regulation 6(6))) the trustees of a sectional title body corporate are entitled to charge interest (as they may determine from time to time) on arrear amounts. This interest may only be charged on the authority of a written trustee resolution, and the rate may not exceed the capped rate prescribed by the National Credit Act 34 of 2005 (as amended) (“the NCA”). This interest may be compounded monthly in arrears.

It was held in the case of Dlamini v The Body Corporate of Frenoleen[1] that the NCA finds no application to sectional title bodies corporate because the body corporate is not supplying a service to the owner of a unit and that the relationship between an owner and the body corporate is not an ‘incidental credit agreement’.

However, with the coming into law of the STSMA (particularly Regulation 21(3)(c)) the maximum interest rates prescribed by the NCA has now been expressly made to apply to the charging of interest by a body corporate. The problem is, however, that the STSMA does not explain how exactly the NCA applies.

In terms of section 101(1)(d) of the NCA (which applies to credit agreements) interest may be charged on an account in arrears and may not exceed the maximum prescribed rate determined in terms of section 105 of the NCA. Section 105 allows the Minister to prescribe maximum interest rates for different sectors of the consumer credit market. These maximum interest rates are set out in a regulation known as the “Review of Limitations on Fees and Interest Rates Regulations”. The limits are determined with reference to the type of agreement set out in Table A.

The obvious problem is that the court (as per Dlamini) has held that the relationship between the body corporate and an owner is not an incidental credit agreement. However, the relationship between a member of a body corporate and the body corporate could hardly be any other type of credit agreement provided for under the NCA. As such, it is now unclear which of the categories of credit agreement (if any) applies to the body corporate/owner relationship, and thus it is not clear to what extent (if any) interest rates charges by trustees is limited at all.

It is submitted that for the purposes of determining what the maximum permitted interest rate by sectional title schemes is, that the Dlamini case must be ignored. The writers hereof are of the opinion that the only possible category that the relationship between a body corporate and an owner could fit into in terms of Table A, would be “incidental credit agreement”, meaning that the legislature intended to override the court’s decision in the Dlamini case when it legislated prescribed Management Rule 21(3)(c). The authors are thus of the view that the maximum interest rate which affects sectional title bodies corporate is 2% compounded in any given month.

Interest may only be imposed if the consumer is in arrears and may not exceed the principal debt in value (section 103(5) of the NCA). However, the trustees will be subject to any other limitations on the maximum amount of interest imposed by the body corporate’s rules. As such, the trustees should ensure that they comply with whatever restrictions are placed on them by the rules as well as the legislation when it comes to the imposition of interest.

Legal Costs

Should any of the owners fall into arrears on their account, prescribed Management Rule 25(4) (contained in the Regulations to the STSMA, which will apply unless amended by the body corporate by unanimous resolution) states that an owner of a section will be liable for all reasonable legal costs that the body corporate incurred in recovering the money owed to it by the owner (as taxed or agreed between the body corporate and the owner).

Unfortunately, the STSMA does not explain whether ‘taxed’ means taxed by the Law Society of South Africa or a provincial Law Society, or taxed in terms of the Uniform Rules of the High Court. There is thus some controversy in our law relating to which method of taxing will satisfy the requirements set out in the NCA.

The Conventional Penalties Act 15 of 1962 (“the CPA”)

It is questionable whether this piece of legislation applies to bodies corporate at all, because it appears that it can only apply to a contractual scenario where there is a penalty imposed. As above, prescribed Management Rule 21(3)(c) seems to indicate the legislature has classed the relationship between bodies corporate and their owners as being “incidental credit agreements”, which would render the CPA applicable. However, this flies in the face of the Dlamini finding.

Section 2(1) of the CPA provides that a creditor cannot recover both damages and penalty fees, or claim damages in lieu of a penalty. It has been held by our courts[2] that interest charged on overdue amounts (such as levies) is a form of damages. As such, if the CPA applies (which it might not) a body corporate cannot lawfully recover both interest and penalty fees for the same breach of the legislation or rules. The above, however, does not apply where a creditor relies on an express provision of an agreement entered into by himself and a debtor. In the absence of such a provision, then a body corporate may only be able to recover interest.

Conclusion

  • Sectional title bodies corporate can charge interest, provided that it is a maximum of 2% per month compounded and that the trustees have approved the rate in writing (and if necessary the relevant body corporate rules have been amended properly to authorize the levying of such interest) and that the interest charged does not exceed the capital debt or exceed the capital amount;
  • should legal action be taken by the body corporate to recover the money owed to it, legal fees can only be recovered if such costs were reasonable and agreed to by the defaulting owner, or if the bill was ‘taxed’ (presumably in terms of the Uniform Rules of Court or by a law society or other body with the jurisdiction to tax such bills (such as the Legal Practice Council or one of its provincial councils));
  • sectional title bodies corporate cannot lawfully impose any other types of charges apart from levies and special levies other than the interest and legal fees referred to above, unless they are authorized by the body corporate’s rules, and they are reasonable, constitutional and applied systematically to everyone. Any other type of charge would be unlawful;
  • sectional title bodies corporate will most likely be found by our courts not to be subject to the CPA.
(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
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