Security and financial considerations are probably the biggest reasons for the growing interest in sectional title units. These gated complexes are mostly well maintained by the Body Corporate and offer an alternative lifestyle. However, before putting pen to paper, you need to be prepared and well informed on exactly what it is you will become an owner of. This “lock-up-and-go” lifestyle you may have always wanted may not be what you thought it would be.
For instance, you would have to abide by certain rules and regulations which never applied to the full title house you may have lived in for 20 years and recently sold. Therefore, make sure you know what is expected from you and what you can expect from your neighbours, the complex and the Body Corporate, levies and managing agents.
- The Structure
Our Act provides for the division of buildings into sections and common property, as well as the acquisition of separate ownership in the sections, coupled with joint ownership in the common property. Almost any building can be divided into self-containing units such as a block of flats, offices or townhouses. Further examples of sectional titles are bungalows and holiday apartments, duets as well as shops and office blocks. It is not necessarily a requirement that all the buildings are physically joined together. It can also be free standing units.
- How does a scheme come into existence?
A property developer bought a large stand in town. He decided to develop it by building two or more housing units on the stand. The stand is too small to be subdivided into separate stands, so he is not able to sell the individual houses as freehold properties. The alternative is to develop a sectional title scheme to sell the individual units or sections.
After planning, preparation and discussions with town planners, the first and probably most important step is the approval from the local authority regarding the use and density zones in relation to the proposed development of property. If there are possible consolidations of (adjacent) property (belonging to the same owner), the consolidation diagrams also need to be drawn up and approved by both the surveyor general and the local authority.
Once this is dealt with and the owner (developer) wishes to divide a building into sections, he/she should consult with an architect to prepare the necessary site layout plan which shows the different units with their garages. Once these plans are approved, the documents for the opening of the sectional title register and the registering of the plan are lodged in the Deeds Registry by a conveyancer who has, while waiting for the approval of the sectional plan, already prepared the application to be submitted to the Deeds Registry. Once the deeds office has opened the sectional title register and registered the sectional plan, a unit in the scheme comes in existence and may be transferred to the new owners.
It is possible for a developer to develop a sectional title scheme in stages or phases. This is done by “reserving the real right to extend the scheme” on the sectional plan and on the application for the opening of the scheme when it is first lodged at the Deeds Registry. If such a right exists, it must be disclosed to any new potential purchaser in the scheme and should also be disclosed in an agreement between the seller and the purchaser. It is the conveyancer’s job to check this and to confirm, in a certificate to the Registrar of deeds at the time of transfer, that the real right to extend the scheme has been disclosed to the purchaser.
What do I actually own in a scheme?
You own a unit, which means:
- You own a specific section of the building; plus
- a share in the common property proportioned to the quota of that unit.
Practically, you own the inside of the property, i.e. the space contained by the inner walls, ceilings and floors of the unit. You are entitled to paint or decorate or undertake alterations as desired, providing such alterations do not infringe on municipal by-laws.
The common boundary between your section of the building and another section, or the common property area is the very middle line of the floor, ceiling, wall or whatever the case may be. Sometimes an apartment can be in one building while the garage belonging to that apartment is situated in another building. You should always make sure exactly what compromises a section. The first place to consult will most likely be the conveyancer who will search the registered sectional plan for that scheme.
- What is a section?
A section means a specific portion of a building as shown as such on a sectional plan.
Section + Share of common property = Unit
- What is “Common Property”?
The Common Property is that part of a scheme which does not form part of any section. It basically comprises of the land on which the scheme is situated. All owners jointly own the land as well as the common property. That will include driveways, gardens, communal washrooms, swimming pools, corridors, roofs, lifts, entrance foyers and the exterior of the buildings. Naturally all the owners of the various sections are the “owners” and therefore entitled to use the common property.
Our current Sectional Title Act in Namibia does not make provisions for Exclusive Use Areas. If owners of a unit in an existing scheme want to reserve certain areas for exclusive use (parking or garden), the best way to do so is by ways of the management rules (see discussion on rules).
- What is your “undivided share” in the common property?
In relation to an owner of a unit, undivided share in the common property means the undivided share of that owner in the common property as determined in accordance with the quota of the section of which he/she is the owner and in relation to a section means the undivided share in the common property apportioned to that section in accordance with the quota of that section. In short, one can say that the owners of the sections are co-owners of the common property. Your share in ownership thereof will depend on your participation quota.
What is your Quota / Participation Quota (PQ)?
PQ = Floor Area of your section to the nearest square meter (divided by)
Total Floor Area of all the sections in the building to the nearest square meter
The PQ is a percentage expressed to three decimal places. This calculation is done by the land surveyor/architect who prepared the sectional plan and shows on the last sheet of the plans. Although a Body Corporate can make rules, shareholding is fixed and cannot be altered unless the building is altered.
- Why is PQ important?
- It determines the size of the owner's undivided share in the common property.
- It determines the value of the vote of an owner of a section (in the case where the vote is reckoned by value).
- It determines the amount of the owner's levy towards the Body Corporate.
- It determines the amount a particular owner can be held liable for in the payment of a judgment debt of the Body Corporate.
- Who controls the Common Property?
Once a sectional title register is opened, the scheme functions in an orderly fashion and owners and occupiers must comply with rules that govern the day-to-day aspects of living in a sectional title scheme. The common property is controlled by the Body Corporate. There are no exceptions to this rule. This means that even though parts of the common property are designated exclusive use areas, these areas are still controlled by the Body Corporate and are therefore subject to the rules of the scheme. These rules might prohibit a "braai" in an exclusive use garden or balcony, control the type of fence or wall erected around a garden, or prevent the installation of a plunge pool or spa bath without first obtaining the consent of the trustees.
Who is “The Body Corporate”?
The Body Corporate is not some mysterious group of outside rulers that acquire power over sectional title schemes. It is rather a collective name given to all the owners of units in a scheme. It comes automatically into existence as soon as the sectional title register is opened and the first unit is transferred to a new owner. All registered owners of units in a scheme are members of the Body Corporate.
The Body Corporate has perpetual succession and shall be capable of suing and of being sued in its corporate name in respect of:
- Any contract made by it;
- any damage to the common property;
- any matter in connection with the land or building for which the Body Corporate is liable or for which the owners are jointly liable; and
- any matter arising out of the exercise of any of it is powers or the performance of any of duties under this Act or any rule.
The Body Corporate manages, controls and runs the scheme. Major decisions regarding the scheme are made by the Body Corporate, usually at the Annual General Meeting (AGM), or at a Special General Meeting (SGM). At these meetings, matters which affect the scheme are discussed, budgets are approved, rules can be changed and trustees are appointed – these are often accompanied by lively discussions!
Each member of a Body Corporate is entitled to vote at these meetings, providing that the member is not in arrears with levy payments or in serious breach of the rules. Members (who are basically the owners of units) in default can only vote in certain circumstances.
Duties and powers of the Body Corporate
The Body Corporate shall carry out the duties and exercise powers as assigned and conferred in the Act.
- Main Duties:
- Insurance and maintenance of the building, plants and common property
- Main Powers:
- To establish a fund for the above duties, determine the amounts needed and require the owners to make contributions to this fund by ways of levies and open accounts for that fund.
- To appoint such managing agents and employees as it may deem fit.
What is the “levy”?
The costs incurred in running a scheme that has to be paid by the Body Corporate. These costs could include:
- Rates and taxes
- Water and electricity used on the Common Property
- Insurance premiums for the Common Property
- Repairs and maintenance of the Common Property
- Wages and salaries of the cleaners and other staff
These costs are paid by individual owners in the form of a monthly levy, calculated in accordance with the participation quota for their unit. Some costs incurred in the upkeep of Exclusive Use areas can be recovered from the user of that area. Paying of a monthly levy is not an option for owners; it is a mandatory obligation by law. Failing to pay such levies could result in summons.
In addition to the above, the Body Corporate is obliged to establish a fund for future maintenance and unexpected expenses. The size of this fund is not specified in the Act, but a wise Body Corporate will make sure that the fund is adequate for the size of the complex and present condition of the property. If the fund becomes excessively large, the Act does not allow any part of the excess to be refunded. However, the excess can be used to subsidise future levies or to improve the common property.
Before transfer of a unit to a new owner can happen, a clearance certificate must be obtained from the Body Corporate stating that all levies for the seller to the Body Corporate is fully paid-up.
- How is the levy calculated?
At the inception of a scheme and again before every AGM, the trustees have to prepare a budget for the following year. This budget is then presented to all members of the Body Corporate at the AGM. The Body Corporate can either accept the budget or can ask for changes to be made. Once the budget has been accepted, the total annual cost is divided into a monthly amount. Each owner is then "levied" a monthly amount, which is his/her share of the common budget.
The amount is calculated in accordance with the Participation Quota (PQ) of the owner unit. Larger units have a higher PQ than smaller units and the amount paid by each owner will vary accordingly. The members of the Body Corporate may by unanimous resolution make rules whereby a different value is attached to make contributions.
- Can the levy be changed at times?
Yes. In an emergency, the trustees can impose a special levy to cover expenses of an unforeseen nature. These expenses may be to cover “extras or additional” projects such as fitting new electric gates, fencing, pool expenses, etc.
- Can an owner be summoned by the Body Corporate for levies in arrears?
Yes, the Body Corporate has the power to approach the court of law to issue summons against an owner for not paying the levies.
- The personal liability of various owners:
The Sectional Title Act provides that a judgment creditor can recover debt from the owners of sections on a pro-rata basis, in proportion to their prospective quotas, in respect of an unsatisfied judgment against the Body Corporate. Therefore, a local authority is empowered to recover any rates and taxes levied by it from the Body Corporate and in default thereof, from the owners on a pro-rata basis. Owners who made payments directly to the judgment creditor can be refunded by the Body Corporate.
Trustees (of the Body Corporate) and the Sectional Title Management
A Sectional Title life-style brings together people from diverse backgrounds, age groups, interests and philosophies. Often, the only common factor is ownership of a unit in the scheme in which they live. Inevitably, integrating such diverse backgrounds into a stable, happy and successful scheme presents problems.
The success or failure of most schemes rests almost entirely with the trustees, who are normally owners in a scheme, who have been entrusted by the Body Corporate to “look after the scheme”. At an annual general meeting of all the owners, trustees are elected to carry out the day to day running of the scheme. The role of a trustee is not an easy one. It is time consuming, often frustrating and requires sensitivity, patience, wisdom and occasionally, the hide of a rhinoceros! A trustee is a manager, negotiator, mediator and peace-maker. A trustee needs to understand the Act and must be able to interpret the rules and guide the Body Corporate. A trustee must be able to understand and control budgets and accounts. Most trustees are laymen without a legal or accounting background, so their task is tremendous.
Ideally, a trustee should possess skills or qualities which will be of benefit to the scheme. Accounting or legal knowledge, organisational abilities, knowledge of electrical or mechanical matters, the ability to type or bookkeeping skills are much in demand and can save the Body Corporate a lot of time and trouble! It is permissible to appoint as trustee someone who does not own a unit in the scheme, although this not common practice. At all times, the majority of trustees must be owners in the scheme.
In order to perform their functions or duties, trustees are endowed with certain powers. These powers are not unlimited and are strictly circumscribed by the Act and the Rules, as well as by instructions or restrictions imposed by members at a General Meeting:
- Appoint agents and employees, including a managing agent.
- Borrow funds for the performance of their functions and give security for such loans, including the cession of levies.
- Purchase or rent items such as lawnmowers, tools, etc. needed for the Body Corporate.
- Establish recreation facilities, gardens and lawns on the common property where practical.
- Invest funds not immediately required.
- Obtain services by contracting with various service providers.
- Provide services by contracting with owners and occupiers.
- Let parts of the common property to owners and occupiers.
- Gain access to sections and exclusive use areas for maintenance purposes.
- Delegate powers and duties to individual trustees.
- Buy, sell, mortgage and let sections if essential for the performance of their functions.
Trustees must perform the following functions necessary for the good management and administration of the Body Corporate:
- Determining, collecting and administrating levies on time.
- Raising special levies when unforeseen expenses occur.
- Opening and maintaining a bank account.
- Insuring all building improvements including sections (but not their contents).
- Maintaining common property (including common use areas) and the body corporate assets and affairs and also insuring it to the replacement value.
- Running the sectional title scheme efficiently.
- Keeping and administrating all records, including financial records of all Body Corporate transactions.
- Keeping a record of the current Rules.
- Making sure owners and tenants comply with the schemes rules and provisions of the Sectional Title Act.
- Arranging and conducting the annual general meetings and, when necessary, special general meetings and keeping minutes of those meetings.
- Preparing the documentation to be presented at each AGM, including the Budget and audited financial statements.
Who are the Managing Agents?
As a poorly managed sectional title scheme can actually end up losing value rapidly, most Body Corporates, particularly of larger schemes, appoint or “outsource” certain functions to a managing agent who specialises and has the knowledge of sectional title administration. The appointment of a managing agent can hold distinct benefits for a Body Corporate. By improving the standard of management, the presence of a managing agent can result in overall cost savings.
These managing/administrative agents must be registered with the Estate Agent’s Board and hold a valid Fidelity Fund Certificate. It is important to require references to ensure the proposed managing agent is reputable. It is equally important to remember that the one with the cheapest quote may not necessarily be the one to render an efficient service, which could easily cost the Body Corporate more in the long run. The trustees have the discretion to appoint a managing agent. Or the members may, by ordinary resolution, decide to appoint a managing agent and the trustees would then be compelled to do so. The duties and compensation of the managing agent should be negotiated between the trustees and the candidate in fine detail, and must be recorded in a written contract. The Management Rules contain a number of requirements in this regard and should be consulted and applied by the trustees.
Once appointed, the agents normally send out monthly statements to collect levies and other monies due to the Body Corporate. They would basically fulfil the duties and responsibilities of the Trustees. They have to keep books, recover debts, prepare budgets and arrange for repairs and maintenance, as well as other administrative duties on behalf of the Body Corporate. Good managing agents should normally have a good understanding of the Act and also act in good faith towards the Body Corporate and owners.
Changes to Units or Grounds
In the interest of keeping uniformity, minor changes may be approved (in writing) by the trustees. Consent is thus needed for all external changes, i.e. aerials, satellite dishes, awnings, enclosures, changing of exterior colour schemes, air conditioners, paint work, window fittings, etc.
An owner, who wishes to extend his/her section, either by the addition of an extra room or the extension of an existing room, must get a unanimous resolution from the Body Corporate (as any alterations may change the look of the property, or increase the insurance) approving the extension before approaching the local authority for planning approval. In addition to the cost of effecting the extension, the owner whose section is to be extended will be responsible for the costs occurred by surveyor to get the sectional plan amended by re-calculating participation quotas and have the amended sectional plan registered. This applies to any extension which infringes onto common property and can include balconies, patios and terraces, and vertical extensions. According to section 18 (1) of our current Act, should any participation quota of a section which is mortgaged be effected by the amendment on the sectional plan, consent from mortgagees will be required.
Rules of the Complex
- Who makes the rules?
An original schedule (as provided in the Act as Schedule 1 and Schedule 2) setting out the rules shall accompany the application for the opening of the sectional title register at the Deeds Registry.
- Can rules be changed?
Although a developer is free to design new rules from scratch, the Sectional Title Act contains as an annexure a standard set of rules which developers may adopt with or without amendments.
Section 27 of the Act also authorises members to put proposed changes to the Body Corporate at a General Meeting, at which members will be able to discuss the proposed changes before being asked to vote for or against them. To change schedule 1 rules a unanimous resolution is needed, and for schedule 2 rules a special resolution is required.
Unanimous Resolution: A resolution passed unanimously at a general meeting of which at least fourteen days’ notice specifying the proposed unanimous resolution has been given and at which all owners of sections are personally present or represented by proxy.
Special Resolution: A resolution passed by a majority of not less than three-fourths of the votes (reckoned in value) and not less than three-fourths of the votes reckoned in number of all the owners of sections, at a general meeting, of which at least fourteen days’ notice specifying the proposed special resolution has been given.
According to Section 27 (3) of the Act, no addition or amendments to, or repeal of any rules shall be of any force or effect until the Body Corporate has lodged with the Registrar a notification in the prescribed form and the Registrar has made reference thereto on the schedule to the relevant sectional plan.
Rules of a sectional title scheme are divided into two broad categories;
- Management rules
- Conduct rules (Commonly known as House Rules)
The Schedule 1 (Management) rules deal with the following important aspects of management:
- Trustees of the Body Corporate: How many there may be, how they shall be elected, how voting shall take place, how vacancies shall be filled, choosing a chairman, calling of meetings, how to determine a quorum, how to keep minutes and proper books and accounts relating to levies, money and expenses, if and when to make these books and accounts available to owners and new owners, signing authorities, etc.
- Regarding general meetings of owners: Frequency, notice, proceedings, quorum, votes and proxy thereof, as well as electing of a chairman for the meetings.
The Schedule 2 (Conduct/House Rules) rules determine what is permissible in terms of conduct of owners, occupants and their guests:
- The rules will specify for example: the specific use or purpose of a section, rules regarding common property, whether pets are allowed, the appearance of units, etc.
Sale and transfer of a Sectional Title Unit
In a new development, the developer may even start to sell the proposed sections long before the sectional plans have been drafted and even before the sections have been built. It could be time well spent to ensure, from the sectional plans, what the correct number is of the unit a client is buying. These numbers can often change from the developer to the architect and differ from the legal number that is being registered on the sectional plan. Therefore most contracts make provision for the fact that numbers could change.
Any deposits paid by the purchaser in regard to the buying of units must be held in trust by the conveyancer and the earliest that the developer may use these funds is when the sectional title register has been opened in the Deeds Registry.
An existing scheme: When interested in a unit;
- Obtain a copy of the rules (management and House Rules) governing the scheme. This can easily be obtained from the trustees who must provide it to prospective purchasers, or alternatively by a deed search done by a conveyancer.
- At the same time it is good to get the names of the trustees and, if possible, the contact information of the managing agents appointed by the Body Corporate to manage the complex. If possible obtain financial statements of the Body Corporate and information regarding the extent to which the Body Corporate has made provision for future maintenance to the scheme.
- You also need to find out what the amount of levy payable each month and if there is any “special levies” in the pipeline.
- Also acquaint yourself with the schedule 2 “house rules/conduct rules” like pets and other day to day arrangements. This information can be obtained from the trustees or the managing agent, or again from the deeds office.
If there is a large open area of land within or adjacent to the scheme, it might be that the developer or Body Corporate may have the right to extend the scheme by way of building more units. This “right” which may be reserved, must be recorded as a clause in the sales agreement of each unit as a “real right to extend the scheme”. If this clause does not appear in the contract it is voidable at the option of the buyer.
Make sure to use the correct contract for sectional title purchases. Besides the requirements for a regular Deed of Sale/Offer to purchase, it should have the correct property description. It is also wise to put the amount of levy payable with an explanation on the contract what the terms Body Corporate, rules and levy means.
An estate agent can also contribute positively to the process by assisting to obtain a Body Corporate Clearance Certificate which is required from the conveyancers to do the transfer of ownership. Once all the requirements are in place (necessary declarations are signed, transfer duty and stamp duty are paid) and after fulfilling of the suspensive conditions, a conveyancer will sign a certificate in terms of section 11 (4) in terms of which all the facts of the transaction is stated and, on the basis of that certificate the Deeds Office will endorse the transfer of ownership on the Certificate of Registered Sectional Title. This will happen simultaneously with the cancellation of old bonds and registration of any new bonds over the property.
Sectional Title as a Buy-to-let Investment
Sectional Titles as a Buy-to-let investment remain a popular option for a wide range of investors. However, as you can see from the above and also the following matters, one has to carefully consider before going ahead. The following will briefly outline what factors, benefits and pitfalls need to be taken into account when an investor chooses to go down this route:
Management: The better managed a sectional title scheme is, the more its value will appreciate - and values in such schemes will always tend to rise faster than those of other residential property. The reality is that a poorly managed sectional title scheme can actually end up losing value rapidly – and when this happens the downward spiral can be never-ending.
Price/Income: Establish a realistic price. The best way to do that is to find out what similar units have been selling for in the same complex or in the neighbourhood, or perhaps what the previous price was for the unit. This is useful and wise to relate the value to the rental the unit earns or could earn.
Assume that your property is worth N$ 400 000.00. On properties valued at under N$1m, the rent is usually 0,7% to 0,8% per month of the total value of the property. This equates to 8,4% to 12% per annum and property investors here can, therefore, expect units in this category to deliver N$ 3,500 to N$ 4,300 per month net rental. If, therefore, you can borrow at 9% and can achieve a 10% or more income yield per annum, you can break even in the first year. The net rental is what is left over after paying the levies, rates and insurance. If it is possible to bill these separately, the tenant in most cases remains responsible for the more direct municipal costs such as water and electricity, many of which depend on his consumption.
On properties above N$1m, the return typically drops to 0,5% to 0,65% of the market value. Serious property investors should, therefore, take note that the lower priced units are currently the best to invest in if you wish to maximise your return. Obviously such returns are seldom sufficient to cover the full bond repayment unless a very high deposit has been paid. Full bond repayment is typically achieved only after five to six years of rental increases.
Nervous investors should consider taking advantage of low interest rate periods such as those which currently prevail to fix their bond interest rates for 12, 24, 36 or 48 months to protect them in future against rising interest rates.
Property investment is not for the faint hearted. Nevertheless, it is increasingly attractive to Namibian investors who right now are returning to the buy-to-rent market in the belief that the current housing shortage, partly caused by the difficulties in getting bonds and the lack of new developments, will result in rentals rising fast in the near future.
The danger is that when the market begins to appreciate, as it is now doing, the less experienced will leave their purchases until the price cycle is nearing its peak. This inevitably means that they will get a lower percentage return and may have to ride out a period in which there is very little appreciation at all.
Indeed, property is not for the quick-buck, in-and-out investor. In the past investors made profits on new property developments bought off-plan and sold shortly after completion, but those days are over.