Levies decided by majority vote in a Communal Scheme

We recently had cause to deal with an adjudication before the Community Schemes Ombud Service (CSOS) in Johannesburg, in which our client was the homeowners association of a residential development (the estate), which comprises 328 residential units, including various types of property being:

• more than 200 full title residential erven
• two sectional title schemes comprising over 100 units – being schemes within the scheme.

As is often the case, the sectional title owners in the 101-unit scheme (whose units are relatively small, as compared to the freehold homes) became dissatisfied with the obligation to pay what they saw as two levies – one in terms of the sectional title laws, and one under the MOI of the estate, within whose boundary the sectional title schemes exist.

As the dispute dragged on, the sectional title scheme withheld its levy payments, and the estate instructed us to proceed with recovery of the arrears before CSOS.

Ignoring (in our view) an appreciation of the difference between the two types of levies, the sectional title owners applied to CSOS (in a counterapplication responding to our application for payment) for an Order declaring that that a contribution levied on owners or occupiers, or the way it is to be paid, is incorrectly determined or unreasonable, and an order for the adjustment of the contribution to a correct or reasonable amount (in terms of Section 39(1)(c) of the CSOS Act) and for a consequent order for the payment or re-payment of a contribution or any other amount (section 39(1)(e) of the CSOS Act). Our client, the estate, is a non-profit company, duly incorporated, whose directors are empowered to impose levies, and whose members approve the same at every AGM of the members.

As a result of the perception that the sectional title homes were smaller, and of less value, the estate (and its members) resolved to discount the levies payable by the sectional title owners, as compared to the freehold owners.

The upshot of the hearing was that, despite discounting the contributions of the sectional title schemes by some 50%, as compared to freehold owners (the sectional title owners make up one third of the owners, but they paid only 20% of the levies), the CSOS Adjudicator found that the levies should be further reduced to a correct or reasonable amount of only 10% of the total levies.

This decision completely changes historical budgets – budgets used to plan income and expenditure – after the fact, and after the income planned has already been expended in the interests of all the members. It comes as a complete blindside, and it was not possible to foresee this happening when the budgets were approved and voted, and the monies collected and spent by the estate. Our client has no way of adjusting that year’s expenditure to the reduced income, once the Order has been granted.

This prospect should trouble any board member/trustee/manager of a residential community.

We have taken the decision on review under the Promotion of Administrative Justice Act (Act 3 of 2000) for several reasons.

However, we are advised by counsel that an additional constitutional issue is to be raised, which we are doing, namely that: section 39(1)(c), read with section 39(1)(e), is unconstitutional insofar as it affords an adjudicator the power to:

1. declare that a contribution levied is ‘unreasonable’
2. grant an order for the adjustment of a contribution to a ‘reasonable’ amount
3. grant an order for the payment, or repayment, of a contribution pursuant to a declaration that a contribution levied is ‘unreasonable’.

In our proceedings we will be applying to declare section 39(1)(c), read with section 39(1)(e) of the CSOS Act, unconstitutional insofar as it affords an adjudicator the above powers.

We will be arguing inter alia that:

1. An association cannot know how to determine contributions (or the way they are to be paid) to avoid a finding that such are ‘unreasonable’ – as there is no guidance in the legislation. It therefore cannot regulate its conduct to avoid such relief.
2. In the event of a dispute, an adjudicator is also not guided as to the criteria s/he should use to exercise the section 39(1) (c) power.
3. The unconstitutionality follows from the requirements of the rule of law, enshrined in section 1(c) of the Constitution of the Republic of South Africa, which inter alia requires that legislation must be written in a clear and accessible manner, so that it indicates with reasonable certainty to those bound to the legislation what is required of them so that they may regulate their conduct accordingly.

It is not just the scheme within a scheme issue that is regulated by this law, but all levies, of all schemes. It should be of interest to all boards of directors/trustees, as levies voted and passed in prior years (sometimes several years back, as happened to our client) are vulnerable to attack in terms of these provisions of the CSOS Act.