Sectional Title - For-Profit Activity in a Body Corporate

By Prof. Graham Paddock

Image: Prof. Graham Paddock

Sectional title schemes in South Africa are intended to function as non-profit entities, structured to manage and administer common property in the collective interest of all owners. However, in practice, sectional title bodies corporate often face challenges when for-profit motives are introduced—whether through developers, managing agents, or individual owners conducting commercial activities at scale.

Legislative Framework

The Sectional Titles Schemes Management Act 8 of 2011 (“STSMA”) establishes the legal foundation for sectional title governance. Section 3(1) of the STSMA outlines the functions and powers of a body corporate, including financial management, maintenance of common property, and enforcement of rules. Importantly, prescribed management rule PMR 21(2)(c) explicitly prohibits the distribution of profits or gains to members except when they are capital gains.

Despite this, certain circumstances can compromise the non-profit nature of a body corporate, creating recurring tensions in sectional title scheme management:

1. Deviation from the Body Corporate’s Statutory Purpose

A body corporate’s fundamental purpose is the collective long-term interest of sectional owners. When a developer, managing agent, or individual owner pursues profit within the scheme, governance decisions may shift towards commercial gain rather than the common benefit. This can lead to misallocation of resources—for instance, using common property or funds to benefit a specific commercial enterprise.

Scheme funds should not be applied to generate individual commercial gain. Decision-making that prioritises private profits over collective interests conflicts with the statutory objective of non-profit management.

2. Power Dynamics

For-profit stakeholders often possess financial and legal resources exceeding those of ordinary owners. Developers, major investors, or well-established managing agents can exert undue influence over scheme governance, potentially overriding the democratic structures intended to protect all owners. They may buy sufficient units to form a powerful voting lobby or arrange for management rules that give them effective control of member and/or trustee level decisions.

Section 2(1) STSMA establishes the body corporate upon the scheme’s creation, its members being only the current unit owners, and section 2(5) obliges it to manage the scheme “for the benefit of all owners”, which requirement is repeated in section 3(1)(t) in regard to its management of the common property. Section 8(2)(a) obliges its executives, the trustees, to act “in the interest and for the benefit of the body corporate”, and to avoid any material conflict with their own interests. However, if a scheme’s management rules do not include appropriate practical checks and balances to ensure compliance, a dominant commercial entity may manipulate governance processes to its advantage.

3. Financial Flow Manipulation

A for-profit party controlling financial decision-making—such as setting levies, agreeing management fees or appointing service providers—may prioritise arrangements that generate direct or indirect profit rather than serve the owners’ best interests. This can include inflated service contracts or reserve fund misallocations.

Section 3(1) of the STSMA requires the body corporate to manage finances responsibly. Prescribed management rules 21 to 26 require proper accounting practices, which should ordinarily prevent financial exploitation by commercial stakeholders, however these operate on the assumption that the body corporate’s financial mission is to break even over the long term, not to fund any member or third party profits.

4. Regulatory Blindspots

When for-profit interests exert indirect control over a body corporate, regulatory oversight mechanisms may not immediately detect governance abuses. 

Owners, trustees and regulators such as the CSOS staff operating under the Community Schemes Ombud Service Act 9 of 2011 (“CSOS Act”) who check and approve scheme rules often focus on conventional compliance issues—such as levy collection and other ‘due diligence’ and anti-discrimination issues—without scrutinising or understanding sophisticated and complex financial arrangements that subtly benefit commercial actors.

The CSOS Act provides in section 4 that the Service must operate a dispute resolution service, promote good governance of community schemes and monitor community scheme governance. However, effective implementation depends on CSOS staff properly understanding the issues, which requires not only high-level understanding, but also well-documented applications from dissatisfied stakeholders. In addition, CSOS generally refuses to deal with dispute resolution applications against developers, who are the major culprits in this regard. Profit-making commercial actors very often also have the capital to afford extended High Court litigation and to launch appeals to resist interference or oversight, deterring challenges to their influence.

The Companies and Intellectual Property Commission (“CIPC”) and the Companies Tribunal oversee and enforce compliance with the Companies Act 71 of 2008 (“Companies Act”). If a sectional title body corporate is operated with the express intent of making a profit for one of its members, this is a breach of section 8(3) of the Companies Act. However ‘captive consumer exploitation’ arrangements are often based on provisions in many different documents and are difficult to understand and expose.

5. Stakeholder Rights

Sectional owners expect democratic governance and transparency. When a developer, investor, or managing agent secures de facto control, owners may find themselves effectively excluded from key decisions. Sectional owners in a residential scheme also expect other owners to use their units as homes or long-term letting investments, rather than disrupting the social harmony and testing the scheme’s control, security and administrative systems by having a constantly changing parade of occupiers who view the units and facilities much like a hotel or boarding house and have no vested interest in the scheme’s long term community spirit.

Prescribed management rules 15–20 entitle owners to full participation in scheme management decisions and rules 21 to 26 provide for proper financial record-keeping and disclosure. If commercial control distorts these processes so that they do not reflect the full financial picture, it undermines both the spirit and the letter of the law.

ADDRESSING THESE CHALLENGES

A. Strengthening Governance Structures

• Amend management rules to require clear trustee accountability, mandatory conflict-of-interest disclosures, and active owner participation.

B. Enhancing Financial Transparency

• Implement stricter financial reporting standards, requiring detailed budgets, audited statements, and explicit disclosures of related-party transactions.
• Expand Management Rule 26 to mandate full transparency in any service contract where a trustee or connected entity has a financial interest.

C. Limiting Developer/Investor Control

• Where a developer retains long-term control rights, trustees or owners may approach CSOS or the High Court for relief from governance manipulation or unfair management contracts.
• Where an owner uses a residential unit for short-term accommodation letting operations or any other non-residential purposes, the body corporate or any materially prejudiced unit owner can apply to the CSOS or High Court for relief.

D. Leveraging Ombud or Court Remedies

• Owners should always attempt to utilise CSOS’s dispute resolution mechanisms under sections 38 and 39 of the CSOS Act to challenge improper governance practices. 
• The High Court may also provide recourse where for-profit interests undermine the STSMA’s non-profit framework, and may be the only recourse where the CSOS rejects the application or fails to deal properly with the legal issues that underlie the dispute.

E. Protecting Residential Use

• If commercial enterprises within a scheme strain shared resources, bodies corporate may amend conduct rules (under section 10(2)(b) STSMA) to impose reasonable restrictions on commercial use, subject to fairness considerations.

By reinforcing statutory principles—particularly the non-profit and non-distribution principle—sectional title schemes can preserve their cooperative ethos and maintain a balanced and equitable community. Ensuring robust financial oversight, transparent governance, meaningful owner participation and actively addressing challenges will prevent undue commercial influence from compromising the body corporate’s statutory function.

Courtesy: Paddocks 

Article reference: Paddocks Press: Volume 20, Issue 03

Weblink: https://www.paddocks.co.za/paddocks-press-newsletter/for-profit-activity-in-a-body-corporate/

This article is published under the Creative Commons Attribution license.