PRACTICAL APPLICATION OF THE CSOS STSM ACTS TRUSTEE

PRACTICAL APPLICATION OF THE CSOS & STSM ACTS TRUSTEE WORKSHOP 25 October 2016 1

Note • The introduction of new legislation often entails ambiguities and conflicts between different legislation from the outset, obviously not yet fully tested and clarified through the Courts • Trafalgar has established contact with the CSOS Ombud to escalate queries and uncertainties; initial responses have already been obtained o A channel of communication is now available for any further questions to be clarified o The CSOS Ombud also has a training mandate; FAQ’s have been published; case directives will follow • The views expressed in this seminar are Trafalgar’s interpretation of the new CSOS and STSM Acts, incorporating feedback from the CSOS Ombud, auditors and other relevant industry experts Whilst uncertainties remain, there are clear and actionable registration and • A number of key issues will require case law to be fully clarified and resolved compliance elements to commence 2

INDEX 1. Community Schemes Ombud Service Act (CSOS) § Who does it apply to? § What is a Community Scheme? § The Functions of CSOS § What must be done by Community Schemes? § Fidelity Insurance cover § CSOS levies § What happens if you don’t comply? § Using the CSOS dispute resolution channel 3

INDEX 2. Sectional Title Schemes Management Act (STSM) § Insurance § Levy Collections § Rules § Meetings § Maintenance § Financial Management 4

COMMUNITY SCHEMES OMBUD SERVICE ACT (‘CSOS’) (Act 9 of 2011) Gazetted (published) and effective on 7 October 2016 5

CSOS Act WHO DOES IT APPLY TO? • All Community Schemes WHAT IS A COMMUNITY SCHEME? • Community Schemes are defined as, thereby including, all types of complexes, namely • Sectional Title Body Corporate • Homeowners’ Association (NPC and voluntary association) • Share Block Scheme • Retirement Village An important objective of the CSOS Act is to provide an affordable and efficient dispute resolution service through an Ombud 6

CSOS Act THE FUNCTIONS OF CSOS • Dispute resolution service to all Community Schemes (including collection of arrear levies and other charges e. g. fines) • Regulate, monitor and control schemes’ Governance Documents (e. g. rules, financial statements) • Take custody of, preserve and provide public access to scheme’s Governance Documents • Provide education and information Previous arbitration and legal processes for dispute resolution have not been (cost) effective and buyers into community schemes have, at times, found it • Monitor community scheme governance difficult to source important governance documents 7

CSOS Act ACTION ITEMS FOR COMMUNITY SCHEMES • Appoint an authorised representative • Register with CSOS by (practically) Friday the 4 th November 2016 (form CS 1) • Supply CSOS with the scheme’s Governance Documents (rules, AFS) before 5 January 2017 • Raise CSOS levies monthly from 1 January 2017 (2% of basic levy>R 500, max R 40 per unit per month) • Arrange fidelity insurance cover [adequately covered up to R 20 million by Trafalgar’s fidelity cover in terms of Regulation 15(5) provided said funds remain within the trust environment] • Submit Annual Returns to CSOS (AFS within 4 months of year end) • There are simple and definite next steps that Trafalgar can, and will, assist May use CSOS as an alternative dispute resolution mechanism with if so mandated 8

CSOS Act USING THE CSOS DISPUTE RESOLUTION SERVICE • Dispute may be lodged with the regional CSOS Ombud using the prescribed form available on www. csos. org. za/disputesprocess • Form submitted by email, post or delivery (complaints@csos. org. za) • Application fee of R 50 (conciliation) or R 100 (adjudication) will need to be paid with the application (payment details awaited) noting that there is an exemption for households earning (net) less than R 5, 500 per month • Applications will be initially screened for validity (internal dispute resolution mechanisms must be demonstrated) • Conciliation • Adjudication orders will be enforceable in Magistrate or High Court depending on the quantum and nature of the order 9

CSOS Act WHAT HAPPENS IF YOU DON’T COMPLY? • Section 34 of the CSOS Act deals with the offences and penalties • It is a criminal offence not to comply with the CSOS Act • The Scheme Executives may be held liable for non-compliance Compliance with the CSOS Act is relatively easily achieved and Trafalgar is equipped to fully support all registration and compliance requirements included in our comprehensive management service ** 10

CSOS Act RESOURCES • www. trafalgar. co. za/newlegislation (includes links to the full legislation documents) • Trafalgar portfolio manager: questions can be escalated if necessary (to CSOS Ombud or Paddocks) • www. csos. org. za – FAQ’s and case directives The CSOS Ombud will be circulating case notes to clarify and address issues as they arise 11

CSOS Act Questions & Answers 12

SECTIONAL TITLE SCHEMES MANAGEMENT ACT, NO. 8 OF 2011 (STSMA) Gazetted (published) and effective on 7 October 2016 13

STSM Act INSURANCE There are only two major changes [in addition to the fidelity requirements as per CSOS Act and also alluded to in Prescribed Management Rule 23 (7)]: The requirement for the inclusion of subsidence cover noting that the Act is not specific on the extent of said cover; • The majority of sectional title insurers all offer limited subsidence cover which arguably fulfills this requirement • Full cover would entail review and acceptance of a geotechnical report (at the Scheme’s cost) • Full cover will likely result in a significant premium increase (approximately double the current insurance premium) • The requirement that all BC’s do a formal and professional valuation at least once every three years – o This links directly to the requirement that there is a restriction of the ‘average’ clause [PMR 23(1)(c)] which practically can only be achieved by the insured ensuring that the risk (BC) is correctly and adequately insured and for the correct value A professional replacement valuation every 3 years and adding subsidence cover are the major insurance related implications of the STSM Act o Worth noting that the Act now specifies a minimum amount of public liability cover, same being R 10 million which is well below all major sectional title insurer limits 14

STSM Act LEVY COLLECTIONS • Levy collections highlights one of the major conflicts of (now) prevailing legislation, that being the new STMS Act and (current) Debt Collectors Act which currently directs levy collection procedures and associated charges recovered from defaulting owners • In terms of Prescribed Management Rule 25(4) the member is liable for and must pay all reasonable legal costs and disbursements, as taxed or agreed by the member (our emphasis), incurred by the body corporate in the collection of arrear contributions or any other arrear amounts due and owing • Prescribed Management Rule 25(5) goes further to direct that no amounts other than a levy or amount due in terms of the Act, body corporate’s rules, judgement or order may be debited to an owner’s account (this clearly highlighting the conflict in now prevailing legislation) • Irrespective of the obvious conflict, it is Trafalgar’s opinion that the Debt Collectors Act still provides a valid legal basis by which to conduct arrear collection(s) but it is our opinion, after also discussing this very point with the Ombud, that all bodies corporate amend and Conduct Rules should be updated as soon as possible to cater for these charges update their Conduct Rules to allow for collection charges (ideally aligned to the Debt and fee structures should be renegotiated with attorneys to minimise the risk of Collectors Act) to be raised on an owner’s levy account monetary loss to the body corporate 15

STSM Act RULES • All rules must be approved by the Ombud and will only become enforceable from the date that it was certified by the Ombud (in the form of a certificate) • With the CSOS registration process, all current rules lodged with the deeds office will be reviewed and revalidated • Rules not approved by the Ombud will require a new special or unanimous resolution to amend, that being conduct and management rules respectively It is essential that Trustees apply and enforce only correctly registered rules. These must be available for review at all meetings. 16

STSM Act MEETINGS • A person must not act as a proxy for more than two members [Section 6(5) ] • The Act now directs that voting for Ordinary resolution be done in value as per the PQ, while Special and Unanimous Resolutions are required to be approved by both value and number – we note the potential conflict and await feedback from the Ombud although such ‘stalemates’ may be escalated to the Ombud or judiciary for relief in related instances • The Act and regulations [PMR 17(10)] make meeting participation more accessible via alternative mediums if so agreed by the Chairman (potentially telephone, Skype etc. ); • Quorum requirements: • When less than 4 primary sections or less than 4 members the quorum requirement is members entitled to vote and holding two thirds of the total votes of members in value • All other Schemes, members entitled to vote and holding one third of the total votes of Quorum requirements, now more stringent, will ensure greater members in value participation 17

STSM Act MAINTENANCE The Act now requires all bodies corporate to prepare a formal 10 year maintenance, repair and replacement plan, for the common property for all major capital items as defined The major capital items encompass all facets of the common property maintenance including, but not limited to, water proofing, painting, wiring, lifts, plumbing, electrical etc. The above maintenance plan needs to make specific note of the estimated costs of each and every item, whether general maintenance or replacement, and at what date over the said 10 year period the related cost is envisaged This maintenance plan is intended to link to the reserve fund requirements by a specific formula being [estimated cost – past contribution / expected life] (Note: Regulation 2 indicates minimum annual contributions to the reserve fund and it is our opinion that the rule (PMR 22 of the STMS Act) governing the maintenance plan is the actual contribution that needs to be made to the reserve fund Interestingly, financing large maintenance projects technically results in a negative or reduced reserve requirements Curasure Standard CAP Report Sample, The AGM agenda has been amended to include the presentation of the maintenance plan as 201608, FN. pdf well as to provide annual updates to all members 18

STSM Act FINANCIAL MANAGEMENT Historically the owners, as directed by the trustees, decided on the quantum of contingent and reserve funds based on no defined scientific basis The new Act specifies minimum reserve requirements which link directly to a legislatively required maintenance plan The Act further requires the formation of two separate funds, same being the Administrative Fund and the Reserve Fund • The Administrative Fund • This is akin to the body corporate’s typical annual budget (less any budgeted contingency or reserves) • The Reserve Fund • • This is not indifferent to the current investment fund(s) of bodies corporate but, is governed directly by the new legislation which requires same to be a separate ringfenced account; Given this requirement, it is our view that all bodies corporate have at least two separate investment accounts, one for The Reserve Fund and the other for typical operational surpluses The legislation, per the above, requires the Reserve Fund to be separate to operational funds and ring-fenced and, by definition, specified on the balance sheet; The Reserve Fund needs to be budgeted for separately, linking to the maintenance plan, and with minimum legislated contributions 19

STSM Act FINANCIAL MANAGEMENT If the funds in the Reserve Fund at the end of the previous financial year are less than 25% of the operating fund (total annual levy income), a minimum contribution of 15% of the total budgeted contribution to the Administrative Fund (total annual levy income) must be made to the Reserve Fund If the funds in the Reserve Fund at the end of the previous financial year are more than 25% but less than 100% of the operating fund, a minimum contribution of the current budget in the Administrative Fund must be made equal to the (reactionary) maintenance budget If the funds in the Reserve Fund at the end of the previous financial year are equal to or greater than 100% of the operating fund, there is no minimum contribution to the Reserve Fund Previously It is Trafalgar’s view that these are minimum contributions to the Reserve Fund and that 3 month’s of levy income was deemed sufficient as a reserve fund. The new Act implies a minimum reserve fund of 12 months of levy income the actual contributions to the Reserve Fund are directed by Rule 22 and the associated maintenance plan of the body corporate 20

STSM Act FINANCIAL MANAGEMENT…example Curasure Standard CAP Report Sample, 201608, FN. pdf 21

STSM Act FINANCIAL MANAGEMENT The new legislation still makes provision for trustees to raise Special Levies [PMR 21(3)(a)] Trustees may still by resolution increase levies automatically by a maximum of 10% without member approval which will remain effective until members receive notice of the levies due by them for the next financial year, that being after the AGM [PMR 21(3)(b)] The new legislation, more specifically PMR 26 1 (e), allows for discounts of up to 10% of a members’ annual contributions if those are paid on or before due dates, same which would need to be passed at an AGM and, if passed, obviously budgeted for Interest on overdue levy amounts may be charged at a rate not exceeding the maximum interest rate per the National Credit Act, that being incidental credit agreements limited to The 2% per month compounded being an effective annual rate of 26. 82% legislation still makes provision for immediate remedial action with respect to the Body Corporate’s finances 22

Questions & Answers 23