Adj. Prof. Graham Paddock
Owners and trustees in sectional schemes regularly enquire whether the body corporate can charge money for the grant of exclusive use rights. Typically, the common property involved will be a parking bay, garden area, courtyard, patio or balcony. Sometimes it will be the roof space above an original ceiling, a basement or an open space below the owner’s section.
The question of payment does not always arise, particularly when all owners are being given roughly the same rights at the same time. However, where just one or a few owners are getting new rights, it is not at all unusual for them to be asked to pay money for those rights
We start off from the position that the common property is owned in undivided shares by all owners of sections. Unlike the case of a section extension, in granting exclusive use rights the owners are not losing that ownership, but they are giving up their use rights for that part of their shared property. Perhaps they would never have used the area in question anyway, but it is not unreasonable that they should want to be compensated, particularly if the area could potentially be rented out or turned to account in some other way.
The Sectional Titles Act does not deal with this aspect at all, but after the scheme is established exclusive use rights can only be created by way of an owner resolution, preliminary to other formalities. Owners can and often do take the view that they will not agree to the necessary resolution unless they are compensated, directly or indirectly. So if owners will only vote for the required resolution on condition the owners who will receive the rights agree to pay, that agreement is the basis of the claim for the payment.
There are a number of issues that arise in any such arrangement.
How do you establish a fair price? We suggest that the body corporate obtain advice from an estate agent or registered valuer to determine the value of the rights. Bear in mind that exclusive use rights can only be held by unit owners, so the “market” for these rights is not the general public, but only the owners of units in the scheme.
Will the price be retained by the body corporate to subsidise its operating costs or add to its reserve funds, or will it to be paid to the owners, directly or via the body corporate? If it is to be paid to the body corporate, the trustees should take make sure that there will be no income, capital gains of other form of tax due by the body corporate, or that this liability is taken account of. If it is to be distributed, directly or indirectly, to owners, the trustees must be sure that the payment will be considered to be of a ‘capital nature’, so as ensure that the prescribed management rules permit the body corporate to make those payments.
Is the payout to owners to be calculated be on a pro-rata basis or on the basis of their participation quotas? Will the owner getting the rights be excluded from the payout? These issues should be clear. If more than one owner is to get the exclusive use rights, how will they be obliged to contribute to the price and other costs? Again this liability could be pro-rata, it could be as per their respective participation quotas, or according to some other formula. But again this should be made clear.
Our recommendation is that once a price has been settled and the details have been negotiated, there should be a contract between the body corporate and the owners concerned, setting out the arrangements in detail and annexing the resolutions that are required to give effect to it. If you require further details or assistance dealing with any of the above issues, please contact the Paddocks consulting team at http://www.paddocks.co.za/support/private-consulting.
Adjunct Professor Graham Paddock is the Senior Partner at Paddocks and the Director of Mystrata South Africa.