Homeowners’ Associations can be constituted in one of two ways.  Either as a Non-Profit Company (“NPC”) in terms of the Companies Act (“the Act”)[1], in which case the HOA will have a Memorandum of Incorporation (“MOI”).[2] Alternatively in terms of common-law whereby two or more persons formally agree that the HOA is to be established.  There is no formal registration process in the common-law, but the Constitution of the HOA sets out its terms of reference which is then signed by the founding members.

In both instances, the HOA creates a legal entity independent of its members.  This allows the HOA to own the communal property and do what is necessary to manage the complex as the owners of the individual properties may change from time to time.  The HOA will remain the owner of (for example) the communal roads, the entrance area and gardens, whilst the individual properties are to be transferred from the developer to the new owners, binding such owners to the HOA. The condition of belonging to the HOA mandates the new owner to abide by the HOA rules contained in the MOI or Constitution, whichever is applicable, and makes the owner liable for levy payment to the HOA.

Regular Monthly Levies

Property owners who buy a home in a HOA will be charged monthly levies which are over and above municipal rates and taxes.

These levies are used towards the operational costs of the HOA such as repairs and maintenance, building insurance cover, security and so on.  The levy contribution amount and the date of payment by each owner is agreed upon at a properly constituted Annual General Meeting and made a Resolution by the HOA as set out in the MOI or Constitution.  The interest rate that will be applicable in the event of a default payment will also be decided and included in such Resolution. 

Reserve Funds & Special Levies

Unlike Body Corporates, where there is legislation that governs the manner in which levy funds are administered, specifically in terms of managing a separate reserve fund, there is no such legislation for HOAs. It is good practice for a HOA to secure a capital reserve fund separately from the day-to-day operational funds in order to allow for a long-term maintenance plan.  This will assist the HOA in saving a reserve rather than requiring the imposition of a special levy to cover unforeseen but necessary costs that cannot be delayed.

Punitive Levies:  Fines

Some HOAs opt to include punitive rules with related levies (fines) within the HOA’s Code of Conduct or House Rules. These levies (or fines) will be charged of owners in the event of breaching a particular rule of the HOA.  Such transgressions may relate to excessive noise after a determined hour or speeding within the confines of the HOA, for example.  The determined list of fines may be added to the monthly levy statement if so defined within the HOA’s Code of Conduct or House Rules, and if such rules have been clearly communicated to all owners within the HOA. Fines charged as levies are valid if provision has been made within the HOA’s MOI or Constitution.

Penalty Levies

A further important and substantial levy to be aware of is penalty levies.

Buying a plot of land and planning to build a home directly from the developer allows purchasers the freedom of building their dream home in a secure residential setting.  It is however crucial that buyers be vigilant in scrutinising the content of the Offer To Purchase and peripheral documentation signed and agreed to at the time of purchase.

Frequently the purchaser unwittingly agrees to commence building within a fixed timeframe, failing which the purchaser is subject to severe penalty levies which can be as high as 4 to 10 times higher than the regular monthly levies imposed by the HOA. 

In other instances, failure to build could lead to the purchaser being forced to transfer the property back to the developer, at the purchaser’s expense.

The penalty levy wording has been found in many Title Deeds to property as well as the Purchase Agreement and the HOA’s MOI or Constitution, Minutes of Meetings and its Resolutions, thereby making knowledge and acceptances of the Penalty Clauses irrevocable and binding on purchasers to build or risk losing high value investments.

The substantial penalty levies have been upheld in the de Wet[3] High Court precedent.  A summary of the judgment is provided herein.

1. The Water’s Edge Home Association (“the HOA”) is a homeowners’ association that forms part of a large homeowners’ association, the Big Bay Beach Estate Property Owners Association (“BBOA”).  The HOA had imposed penalties on owners who failed to commence building on their erven within the HOA within the time period stipulated in the HOA constitution.
2. Salient points from the judgment are cited in italics herein below:

[12]     Clause 9 of the respondent’s constitution expressly incorporates clause 8 of the BBOA constitution.  These clauses relate to the start of construction which is 1 (one) year from “the commencement date” which is defined in clause 8.2.3 as the date of registration of transfer into the name of the owner concerned.

[13]     Should construction not commence timeously the developer has the option to require re-transfer of such an erf to it on certain terms and, should the developer not exercise this option, the “association”- which the appeal court found includes the respondent - is entitled in terms of clause 8.6 “to impose whatever penalties it deems appropriate in its sole discretion” on the owner concerned… 

[25.1]  In terms of the resolution passed on 22 September 2010, all owners who had failed to commence construction by 1 January 2011 would be liable to pay penalty levies equivalent to 2 x the normal levy monthly until construction commenced;

[25.2]  On 31 July 2014 this was increased to 3 x the normal levy with effect from 1 September 2014;

[25.3]  On 5 September 2016 this was increased to 4 x the normal levy with effect from 1 December 2016; and

[25.4]  On 12 April 2018 this was again increased to 5 x the normal levy with effect from 1 June 2018.

1. The aggrieved, non-compliant owners argued that the penalty was ultra vires and that the penalties were exorbitant and had to be reduced in line with the Conventional Penalties Act.[4] 
2. The HOA’s claim against the aggrieved owners amounted to a cumulative sum of R1,5 million plus interest and costs.
3. The Court considered a reduction of penalties in accordance with all the elements of Section 3[5] of the Conventional Penalties Act, meaning that the party claiming a reduction would need to allege and prove that the penalty is disproportionate to the prejudice suffered by the creditor, for example that:

• If all or most of the owners had acted in the same manner as the aggrieved owners did, the HOA would suffer material prejudice due to security issues of the ongoing building projects, escalated insurance premiums, building nuisance, devalued property prices.
• Serve to discourage homeowners from speculating with properties / act as a deterrent in place by the HOA, for owners not to purchase properties only to later sell the vacant land at a higher price.
• The penalty levies had the desired effect on the majority of owners as most completed building timeously. The HOA was considered an “ultra-luxury” estate with one of the aggrieved owners admitting that he could afford to pay the penalty levy but failed to do so “on principle”.[6]  It can therefore be said that if the HOA had imposed lower penalty levies, the same persuasive sting would not have been achieved.
• The aggrieved owners were not the only members who had penalty levies imposed on them.  to reduce the penalty imposed, would open the door to administrative claims from those “whose claims have not prescribed, reclaiming the penalties paid (with interest).”[7]

       4. Accordingly, the Court held that a partial and/or full reduction of penalty levies was found to be unwarranted, and the appeal of the aggrieved owners was dismissed with costs.

With the growing trend of people in urban areas moving into secure complexes it is important to have a good grasp of the complexities of “complex living”.  If you need assistance in Sectional Title Schemes or Homeowners’ Association matters, please feel free to contact us.