The right way to deal with levy defaulters

High interest rates and the soaring cost of living over the past two years have made it difficult for many Sectional Title owners to pay their levies – and caused major problems for trustees who are trying to run their ST schemes properly without sufficient funds.

It has unfortunately also resulted in some trustees taking illegal action against levy defaulters in a desperate attempt to get them to pay, “but ultimately these usually just cause further damage to the scheme,” says Andrew Schaefer, MD of leading property management company Trafalgar, “so trustees need to be very clear about the process they need to follow to recoup outstanding levies, even when frustration levels are running high.

“It has become apparent that too many ST owners view their monthly levy payments as optional, rather than an essential component of the cost of ownership, and rather than as a vital source of the funding that enables the trustees to pay for the services and amenities that attracted them to their complex in the first place.

“They often also don’t realise how quickly things can deteriorate in an ST scheme as levy defaults mount up and necessitate cutbacks on maintenance and even security, which have a negative effect on the value of all homes in the complex, including their own,” he notes.  

“However, the Sectional Titles Schemes Management Act (STSMA) fortunately does recognise this danger, and clearly sets out the rights and responsibilities that the trustees elected by the body corporate have when owners don’t pay their levies.”

It says that the legal steps that need to be followed include:

• Sending a letter of demand to the levy defaulter that details the overdue amount, any applicable interest, and a deadline for payment or to reach a payment agreement;
• Approaching the Community Schemes Ombud Service (CSOS) for dispute resolution if the defaulter fails to respond positively to the letter of demand; and
• Applying for a Court judgment (as a last resort) to recover the arrears if the defaulter fails to comply with a payment order made by CSOS.

But trustees need to note, says Schaefer, that the standard court-focused legal collections process is a bad option, involving high legal charges, extremely long delays for Court dates in the case of defended matters and big backlogs in certain Courts that make it difficult even to obtain default judgement orders.

“This situation means that it is becoming increasingly common when the matter goes to Court for the levy arrears, interest, debt collection fees and legal costs to mount up to such an extent that they exceed the value of the unit, and for the prospect of an eventual sale in execution to become futile.

“Many schemes also do not have the financial means to appoint attorneys to apply for a judgment against the defaulters, precisely because they are already operating on a constrained income due to the defaulting owners. In view of these factors, we are now strongly advising trustees to prioritise the CSOS dispute resolution process for levy arrears and to obtain a binding CSOS order, which is a low-cost solution with a much faster timeframe than the Courts. 

“This order can later be made an Order of Court if necessary, but in our experience the Ombud is very successful in bringing parties around a table and resolving levy arrear disputes effectively. We understand that the CSOS Act is also to be amended to cater for expedited collection matters, as well as a broadened dispute resolution scope.”

Meanwhile, he says, it is imperative for trustees to act quickly when they see an owner getting into arrears, and not allow empty promises and assurances to delay the collection process. “And, depending on the management rules of their scheme, there may be certain other actions that they can legally take to leverage the payment of levy arrears.”

These could include:

• Restricting access to certain non-essential services or amenities such as use of the pool, tennis courts, guest parking or a clubhouse until the arrears are settled;
• Depending on the facilities management and reticulation of the complex, restricting access to refuse collection, garden maintenance, hot water, DSTV, Internet, or visitor entry may also be viable and practical;
• Charging interest on overdue levies, provided this is stipulated in its management or conduct rules. This interest is usually capped by the Prescribed Rate of Interest Act unless otherwise specified; and
• Adding legal costs related to the collection of unpaid levies to the amount outstanding.

But, Schaefer notes, there are also certain things that the trustees may not – and must not – do if they wish to stay on the right side of the law. These include:

• Cutting off any essential services such as the water or electricity or gas supply, as this violates the owner’s constitutional right to basic services;
• Imposing arbitrary fines, penalties or charges not specified beforehand in the management rules;
• Harassing or intimidating defaulting owners (by naming them in public, for example, or physically threatening them). Such actions could have very serious legal repercussions for the body corporate;
• Physically evicting defaulting owners or preventing them from gaining access to their property. Only a Court order can result in eviction;
• Restricting access to the unit or taking possession of any of the owner’s belongings;
• Preventing the owner from selling the property to try to settle their debt. They can, however, refuse to issue a levy clearance certificate until any arrears are paid in full.