Scores of sectional title property owners are faced with hefty levy hikes if their body corporates haven’t made provision for the requirements of new legislation that recently came into effect. Bodies Corporate are now required to have a reserve fund, implied by the regulations to be maintained equal to 25% of the scheme’s total annual levy budget.

Although the amendment to the Sectional Titles Schemes Management Act was signed into law in October, it was approved way back in 2011 and efficient, well-established body corporates will have taken advantage of the five-year gap to get ahead and begin accumulating the necessary surplus.

“Rainy day” funds

The aim of this portion of the legislation amendment is to ensure schemes create “rainy day” funds and shield home owners from the special levies that body corporates demand from time to time when major repairs or refurbishments take place. Once-off special levies are usually hefty and aren’t in most cash-strapped home owners’ budgets, often plunging households into debt to service them.

While numerous developments have already created their required level of reserves or are well on the way to doing so, there are also many schemes that have not used the grace period to add small top-up increases to annual levies and home owners in those schemes now face the prospect of substantial levy hikes next ye ar while trustees play administrative catch-up.

In real terms, though, what does this mean for existing owners and prospective buyers of sectional title properties?

The reality is that property owners could see their levies increase by up to 25% initially until adequate reserves have been accumulated. This is in addition to the standard fixed annual increases required to cover the rising costs of maintaining the development.

Once the reserve fund has been adequately est#ablished, provision has been made for lower contributions, but owners can expect reserve fund levies to be charged, unless the value of the reserve fund is equal to 100% of the scheme’s total levy budget.

Regulation 2 of the act also stipulates that, if the reserve fund is less than 25% of the previous year’s maintenance contributions, at the start of a new financial year, the owners in the scheme must add 15% to their total levy budget for the coming year as a contribution to bolster the reserve fund.

If, at the end of the financial year, the remaining reserve funds are less than 100% but more than 25% of the value of the past year’s administration fund contributions, then the contribution to this fund must be at least equal to the repair and maintenance budget which has been formulated for the coming financial year.

Separate records, budgets and bank accounts are mandatory for the general levy and the reserve fund, and they must be independently audited every year by an impartial person or company not involved in the scheme’s financial administration.

Trustees must also prepare a detailed written 10-year plan for the use of the reserve fund, and report back to owners annually on its progress and implementation.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein.

Always contact your legal adviser for specific and detailed advice.