Exploring the practice of offering discounts on upfront payment of annual levies

It’s rare for households to pay for anything upfront, especially when it comes to a big expense that can be paid off month to month in the year.

However, a few households are increasingly doing this to save money. For instance, many now pay school fees upfront in exchange for a discount of between 5-10% in January. The same can be done for levies on residential estates. But why should HOAs consider offering such discounts and how much should be given?

Carrot and stick

Many are familiar with the carrot-and-stick approach. Carrots represent the reward, and the ‘stick’ is a reference to the ‘punishment’. HOAs often use the stick approach when levies aren’t paid on time and this can take the form of financial penalties and other measures such as the suspension of voting rights for ordinary resolutions.

However, a carrot approach can also be a good way to avoid all this, and one such “carrot” that HOAs have at their disposal is to offer a discount on levies if they are paid yearly and in advance. But how much are HOAs and body corporates legally allowed to offer?

What does the Act say?

The Sectional Titles Scheme Management Act requires a body corporate to collect contributions (levies) from all members in the scheme. It states that a body corporate must:

“…prepare budges for administrative and reserve funds comprosing itemised estimates of the anticipated income and expenses during the next financial year for presentation at an annual general meeting; provided that such budgets may include discounts not exceeding 10% of a members’ annual contributions if all those contributions are paid on or before the due dates…”

‘So, the body corporate can decide to offer a discount by approving this as part of the budget – but the discount can’t exceed 10% of the annual levy of a unit,’ explains Karien Coetzee, sectional title expert at leading property management company Trafalgar.

Can discounts apply to the following years?

Some have asked if discounts could apply to other years if households choose to pay levies that extend beyond a year. While most HOAs would jump at the chance of seeing such a windfall, the discount extension can’t be applied given the current structure of the rules.

Coetzee adds: ‘Budgets are usually only approved annually, making it practically difficult to allow owners to pay more than one year’s levy in advance as well as receive a discount.’

The moral conundrum

There’s also the moral conundrum. If there are fixed costs associated with the residential development the money has to come from other sources if the discounts are applied. This is why there’s an overall hesitancy to grant discounts.

‘Trustees and owners are normally opposed to discounts for the reason that other owners will effectively have to pay more to allow one owner to pay less,’ adds Coetzee