Does your body corporate have a 10 year maintenance plan?
15 September 2020 | Lariska Burger
On 7 October 2016, the new Sectional Titles Scheme Management Act of 2011 (better known as “STSMA”) come into operation and changed a lot of things in the conveyancing industry.
Due to this new legislation, a body corporate are now compelled to make provision for a reserve fund on an ongoing basis over a period of 10 years. This means that this reserve fund is a second additional fund that must be managed together with the Administrative Fund.
Levies are paid by the owners of a Body Corporate on a monthly basis to cover various costs such as maintenance, repairs, building insurance, rates and taxes and other local municipality charges. These levies must be allocated into the two separate funds namely the administrative fund and the reserve fund.
What is the difference between an administrative and reserve fund budget.
- The administrative fund referred to in section 3(1)(a) of the Act must be used to fund the operating expenses of the body corporate for a particular financial year.
- The reserve fund maintained in terms of section 3(1)(b) of the Act is an additional fund to cover unforeseen maintenance and repair costs, which have not been budgeted for. Therefore it is now the responsibility of the trustees of the Body Corporate to prepare this 10 year maintenance, repair and replacement plan.
The abovementioned two funds will be manage by the appointed trustees of the Body Corporate. The trustees must keep record of all the Sectional Title finances and must act in good faith. The benefit of such a reserve fund is that the owners of the Body Corporate are guaranteed not to pay a special levy, if the funds are well-managed.
A frequently asked question is: How is the reserve fund calculated?
The answer lies in Regulation 3(1)b of the STSMA.
Firstly if the amount of money in the reserve fund at the end of the previous financial year is less than 25% of the total contributions to the administrative fund for that specific previous financial year, the budgeted contribution to the reserve fund must be at least 15% of the total budgeted contribution to the administrative fund;
Secondly if the amount of money in the reserve fund at the end of the previous financial year is equal to or greater than 100% of the total contributions to the administrative fund for that previous financial year, there is no minimum contribution to the reserve fund;
Lastly if the amount of money in the reserve fund at the end of the previous financial year is more than 25% but less than the 100% of the total contributions to the administrative fund for the previous financial year, the budgeted contribution to the reserve fund must be at least the amount budgeted to be spent from the administrative fund on repairs and maintenance on the common property in the financial year being budgeted for.
Tip for the new owner or existing owners of a body Corporate: Levies are vital contributions for a well-managed Sectional Title. The levies vary and depend on what the Sectional Title can offer the owners. If you are considering buying in a scheme with a swimming pool, clubhouse and entertainment area etc you can expect to pay a higher levy rate. In the light of the above before you buy a property in a Sectional Title scheme, ensure that you understand exactly what the Sectional Title offers and what you are paying for, in order to budget correctly.
Existing property owners must ensure that their reserve fund levies are correctly calculated.