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Cape Royale judgment has lessons for all body corporate members

If you are a member of a Body Corporate, there is much you can learn from the judgment handed down in the Western Cape High Court on 27 May 2013 placing the Body Corporate of Cape Royale under administration.

Alec Geldenhuys, the attorney who represented the investor who brought the successful application, says you could have a case to have your Body Corporate placed under administration if you can prove that the Trustees are reckless in handling your sectional title scheme’s finances.

You should be concerned if your Trustees:

• Refuse to give you information
• Are not transparent about how the scheme is being managed
• Are not holding Trustee meetings
• Are abusing their managerial power
• Have redrafted financial statements to misrepresent the financial affairs of the Body Corporate
• Or have charged levies and/or appointed service providers in an irregular manner

Cape Royale

In the Cape Royale matter, there were four respondents: the Body Corporate, the Chairman of the Body Corporate, a Trustee of the Body Corporate; and an entity owned by the Chairman and performing some of the functions of a Managing Agent. Judge Vincent Saldanha considered serious claims against the respondents.

These claims include:

Lack of transparency

Andries Botha, a part-owner who brought the administration application, said a failure to comply with a request by a fellow owner for information proved that the Trustees lacked transparency and were unwilling to deal openly with owners.

In January 2011, one of the owners lodged a request for access to information in terms of the Promotion of Access to Information Act.  The request was lodged with the information officer at Clint Ridden & Associates (CRA), sectional title administrators appointed by the Body Corporate.

The owner asked for: an up-to-date list of unit holders; a list of units owned by the developer; a list of owners in arrears with their levies, and the amounts due; copies of the Body Corporate’s accounts and financial statements; proof that the developer was paying levies; copies of service provider contracts and invoices; copies of the Body Corporate’s utility bills; copies of income tax and VAT returns filed with SARS; and copies of the minutes and resolutions of Trustee meetings.

In response to the request, the owner was asked to pay R1600, which he did the same day, but he has yet to receive the information he requested.

Abuse of managerial power

The court heard that, at a Trustee meeting held in January 2011, a resolution was passed that had far reaching consequences for the Body Corporate’s financial affairs and the liability of the developer to the Body Corporate.  Paschal Phelan, the developer and the Chairman of the Body Corporate, was the only Trustee present at the meeting.  Also present were Clint Ridden and Leigh Cullen of CRA.

The Sectional Titles Act states that a Trustee meeting cannot be held if only one Trustee is present.  The requirement for a quorum is at least 50 percent of the Trustees, or no fewer than two trustees.

Botha claimed that Phelan derived a direct benefit from this “invalid resolution”, because “enormous amounts” previously owed by Phelan, as the developer, to the Body Corporate were cleared and “the future liability in respect of the units held by the developer was reduced and/or removed.”

No Trustee meetings

Botha claims that no formal Trustee meetings were held for an entire year.  In an affidavit, a former Trustee said he was not informed of any Trustee meetings during his year-long tenure.

In response, Phelan contended that meetings were held by email, although he did not produce copies of such emails in court.

Botha claims this is further proof that Phelan managed the Body Corporate “on his own, to his own benefit”.

The redrafting of audited financial statements

The respondents admitted to the court that the financial statements for 2009 and 2010 did not properly reflect the financial affairs of the Body Corporate, which necessitated a substantial review of the Body Corporate’s finances from its inception in 2008 and a redrafting of the statements for the 2009 and 2010 financial years.

Irregularities in charging of levies to the developer

According to amended management rule 73.8 of the Body Corporate: “(a) The developer shall not pay levies on any unsold or unoccupied residential unit for a period of 18 months after the formation of the Body Corporate. (b) if the result of the arrangement in (a) is that the residential component runs at a loss for the period, the developer will forthwith pay the Body Corporate any shortfall.”

The Body Corporate was formed in July 2008 and the 18-month period expired on 1 January 2010.

According to the minutes of the annual general meeting (AGM) relating to the 2009 financial year, “the developer was charged levies incorrectly in terms of the rules”.

The bulk of the arrear levies reflected in the financial statements arose as a result of the incorrect invoicing of levies to the developer’s units.  Botha says this was done to understate the deficit by as much as R1,5 million.

Judge Saldanha found “There has not as yet been a proper and independently verified reconciliation of the levies for which the developer would have been responsible (if any) and whether an amount (if any) is owed by the developer in terms of rule 73.8.”

Irregularities relating to floor area and levy liability

The court heard that unit 904, which is occupied by the developer (Phelan), enjoys exclusive use of certain units and that the Body Corporate had failed to hold Phelan fully accountable for levies.  The respondents admitted that unit 904 “has not yet been registered in the Deeds Office”.

The irregular assignment of proxies to the Managing Agent

The respondents deny that the Trustees appointed Phelan’s company, Cape Royale Luxury Residence (Pty) Ltd, as the scheme’s Managing Agent, despite the fact that the company was referred to as “the management company” in correspondence from CRA to the owners and in the annual financial statements.

The respondents claimed that the Body Corporate did not have “a formally appointed” managing agent, because “it was never necessary” to appoint one.

In his application, Botha referred to a letter sent to owners of units in the rental pool notifying them of an AGM.  The letter informs them that, in terms of the rental pool agreement, they had each given power of attorney to Cape Royale Luxury Residence to vote on their behalf at all meetings of the Body Corporate, and to sign any documents required by the Body Corporate to put into effect any resolutions taken by it.

With such proxies, Phelan, in his various capacities, secured complete control over the Body Corporate, Botha says. Botha referred to the second AGM, in 2010, at which he tabled a motion to include “an outside” trustee.  The motion was supported by two other owners.  But the minutes record that: “As Mr. Phelan represents 45 percent of the scheme as an owner and in excess of 80 percent when combining the proxies he holds for rental pool holders, the meeting accepted that the Trustees he voted for would be the Trustees for the ensuing year.”

The improper appointment of a service provider

Botha claims that Cape Royale Luxury Residence, of which Phelan is the sole director, collected or received money on behalf of the developer or Body Corporate, and is therefore required to be registered with the Estate Agency Affairs Board and to hold a fidelity fund certificate.

Cape Royale Luxury Residence admits to not having a fidelity fund certificate but “maintained its denial that it was the appointed Managing Agent”.  The respondents claimed that CRA, which has a fidelity fund certificate, was responsible for collecting the levies.

Judge Saldanha says although Cape Royale Luxury Residence was not formally appointed as the scheme’s Managing Agent, “it carried out part of that function”.  It “handled millions of rands” of the Body Corporate’s finances, “settling amounts owed to creditors of the Body Corporate directly from income in the rental pool”.

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