SA Body Corporate - Bulk Water and Electricity Utility Account
When auditing body corporate municipal accounts Schindlers often discovers that the account is still in the name of the developer. Legally speaking this is not correct, and it can cause significant prejudice to all parties concerned when this happens. This article explains why and how this happens, the potential consequences, and how it can be rectified.
Establishment of body corporate
Establishment of a sectional title scheme occurs when the scheme’s founding documents are registered in the Deeds Office. But body corporates of sectional title schemes come into existence on the date that the developer transfers the first
unit in the scheme to a purchaser thereof. Normally the developer will transfer one or more units in the scheme to purchasers simultaneous to establishment of the scheme. But there are instances in law when a sectional title scheme is established, but the developer never sells the units and retains ownership of all of them. In this instance no body corporate comes into existence (until the first unit is sold to a third party).
The account holder of the water and electricity bulk utility accounts should be the entity that is consuming the services provided by the municipality, or alternatively the entity that is responsible for payment of the charges billed for the services consumed. When dealing with sectional title body corporates, this means that the body corporate (rather than the managing agent or the developer) should ideally be the account holder.
Body Corporate accounts in other entities’ names
However, it is not wrong for the managing agent or meter reader to be the account holder – but it does sometimes make it difficult when disputes arise because then the municipality might start questioning who has the power to act in terms of the account. The same sort of legal problem arises when a tenant is allowed to open an account, and either the property owner or the tenant raise a dispute with regards to the charges billed to the municipal account. This is not legally insurmountable and a good attorney will pre-empt this by obtaining consent / powers of attorney before engaging with a municipality in respect of a dispute, but regardless of this, when you get to court, the court itself or the opposition might raise arguments based on the nature of who is cited as a party to the application, and in what capacity, and why.
Schindlers is handling a case in which a property owner (a company) had two accounts with the City of Joburg (“COJ”). The COJ changed the name of the account holder without any authorisation, to reflect the name of a non-existent person. It is suspected that this happened because many years ago someone at the COJ who used to deal with the account, knew a person at the office of the property owner, with the same first name. The second name of the non-existent account holder was the same as the surname of one of the directors of the property owner. Although the property owner had applied to open the account, had been receiving and paying the account for many years, when the property owner took the COJ to court because of an unresolved dispute on the account, the COJ raised as a defence in court that the property owner was not the account holder and therefore had no legal standing to dispute the charges on the account. It is substantially prejudicial to the property owner when something like this happens, because the property owner will have to expend time and legal fees proving to the court that the account in question was or is its and that it should be entitled to approach the court for relief in respect of the account.
Sadly, Schindlers see many cases where managing agents and meter readers cease to exist (inasmuch as they are deregistered or liquidated), or they encounter problems with payment (where their funds are frozen) or even where they simply receive payment of amounts from owners for utilities, but don’t pay those amounts over to the municipality. The body corporate then discovers that its municipal accounts are in massive arrears, and tries to deal with the municipality to arrange a payment plan or stave off disconnection, and is denied this opportunity because the municipality does not recognise the body corporate’s right to act in terms of the account. The body corporate may also be prevented from gaining access to the municipal statements for its own account, because of strict privacy laws that some municipalities enforce, which allow only the account holder access to the accounts.
Unfortunately, this happens. Often. We would recommend avoiding this possibility by simply holding all body corporate municipal accounts in the name of the body corporate directly.
Developer’s liability for all units in scheme – when nobody corporate exists
Where a developer is the owner of all of the units in the scheme and he developed the scheme, then no body corporate comes into existence until the first unit is sold to a third party. This means that the developer can continue to receive services from the municipality for the units in the scheme, and can continue to be charged for these units (as well as rates and taxes) in terms of municipal accounts opened in the developer’s name.
However, because the law provides that the owner of each sectional title unit must be billed for property rates for that unit, the municipality will open a number of rates accounts in the developer’s name – one for each of the units. It is likely that the developer will continue to be billed for the water and electricity supplied to the scheme on its old account number that existed prior to the establishment of the scheme.
However, two things need to happen to ensure that the developer’s accounts will all be correct. The first is that the property description of the old account (on which it is most likely that services will be billed) must be amended, because from the date of the establishment of the scheme the underlying erf on which it was built, no longer exists (legally speaking). This is problematic for developers because municipal systems require that meters be linked to properties, and if there is no underlying erf in existence (so to speak) then they will technically not be able to link the meters to anything, and they will not be able to charge the developer. One option is to link the meters to any one of the units, and this would be 100% legally correct, but more often than not the municipality simply allows the property description to remain the same and no change is made. Although not ideal, this practical solution does alleviate the administrative burden on the developer – because if his water and electricity meters needed to be moved to another account (for example, one of the rates accounts for one of its units) then the developer might be required to sign new consumer service agreements and put down new deposits for the supply of these services. In addition the old account (which was for the underlying erf which ceased to exist, and which no longer links to the meters) would need to be closed. This is a further administrative burden for the municipality. Sadly, there is no simple solution to this problem and it is suggested that until the systems that municipalities use are updated to deal with this problem specifically, the best solution is for a developer to continue paying for bulk services on an account linked to a non-existent property.
Body Corporate uses Developer’s Account
What happens when the developer finally sells at least one of the units to a third party? A body corporate comes into being. Let’s consider what happens when a body corporate fails to open its own account in its own name with the municipality for the supply of services, and simply continues to receive services billed to the developer’s account. The municipality will continue to supply the services to the property and to bill for these services on the developer’s old account, which is linked to the underlying erf on which the scheme was built (and which erf no longer exists). Presumably the developer will forward the bills to the body corporate for payment, and the body corporate will make payment (to avoid being cut off or another form of credit control action following non-payment of the account). This will go on until there is a dispute (a) between the developer and the body corporate as to how much of the charges on the account are for the account of the respective parties; and/or (b) a dispute arises between the body corporate and the municipality, or between the developer and the municipality, regarding the charges on the account. Most often the latter kind of dispute triggers investigation into what the disputed amounts on the developer’s account consist of, and it is discovered that part of those charges relate to the period before the scheme was established, meaning that part of those charges are the developer’s liability, and the rest are the body corporate’s liability. This often leads to the former kind of dispute arising between the developer and the body corporate.
Consequences of Body Corporate using Developer’s account
In such a situation an apportionment of the liability on the account must be done by a suitably qualified person who is knowledgeable in the manner in which the municipality bills for service charges. This kind of reconciliation is often complicated by the fact that the municipality may still be charging sewer and rates and refuse charges to the account based on the assumption that the property still exists in an undeveloped form. Another common complication is where developments are completed in phases, and the municipality has not been advised as to how many units are at the property at any given point in time.
Between a rock and a hard place
But the municipality won’t adjust the developer’s account to provide that there are multiple units at the property, because it will insist on the Body Corporate opening up its own account, putting down its own deposit, and billing the Body Corporate for the services it consumes on an account opened in the name of the Body Corporate. So the parties are at an impasse – unless they can employ someone who can calculate not only what the charges on the municipal account should legitimately be, but also the split of what the Body Corporate owe as opposed to what the developer owes, the developer is unlikely to give the Body Corporate power of attorney to deal directly with the municipality in respect of the account. And this means that it is the Body Corporate that is subject to cut off for the ‘arrears’, because the account is linked to the property, even though the account is not in the Body Corporate’s name. This is despite the fact that the Sectional Titles Act expressly states that the Body Corporate may not be held liable for any debts of the developer in relation to the scheme, because in the situation we are describing, at least some of the debt on the developer’s account is actually the Body Corporate’s debt.
Is there a solution?
The facts of each case will have to be examined very carefully to determine the most effective way of resolving the problem. Ideally, the Body Corporate should have its own account and should be billed in its own name, and only for charges incurred by the Body Corporate itself after the scheme was established and after the Body Corporate came into existence.
To avoid a situation where a Body Corporate disputes its liability to the municipality, but is precluded from being able to deal with the municipality directly because the account is in the developer’s name, or the situation where a Body Corporate disputes its liability to the developer of the scheme in relation to charges billed to the service account for services consumed pre-establishment of the scheme, it is best for Body Corporates to open their own bulk service municipal accounts immediately after establishment of the scheme and further to hold that account in their own names, rather than allowing their meter readers or managing agents to hold the accounts in their own names.
Source: Chantell Gladwin, Partner and Ramon Pereira, Associate
Courtesy: The EAAB - Estate Agency Affairs Board