Sectional Title schemes in trouble: How EMAs can help

Sectional Title schemes that are experiencing financial difficulties should appoint an executive managing agent rather than seeking to have the scheme placed under administration.

That’s the word from Andrew Schaefer, MD of leading national property management company Trafalgar, who says many ST owners seem to be under the impression that schemes which are technically insolvent or struggling with cash-flow issues should be placed under administration, as if that is equivalent to the business rescue process.

“However, this is not the case at all, and it is much quicker and less expensive to appoint an executive managing agent (EMA). This choice also offers the members of the body corporate much more transparency about what actions are being taken to get their scheme back on track.”

The process of applying for the scheme to be placed under administration is set out in Section 16 of the Sectional Title Schemes Management Act (STSMA). This provides for any owner, any bank holding a mortgage on one or more units in the scheme, or any creditor of the body corporate who believes that the way the scheme is being run could lead to foreclosure or to the physical deterioration of the buildings to apply to the Magistrate’s Court to have an administrator appointed.

But if this application is approved, he notes, the administrator will take over all the functions and powers of the body corporate, to the exclusion of the members and their trustees. “Administrators report only to the Community Schemes Ombud, and have the power to unilaterally increase levies, raise special levies, authorise repairs, enforce rules, declare disputes and start legal proceedings against levy defaulters. Their decisions also apply to all owners in the scheme, which can be particularly unfair to those who have never defaulted on their levy payments.”

In addition, the Court decides on the conditions of the appointment and the fees that may be charged by the administrator. These fees will also be paid by all members of the body corporate according to the participation quotas of their sections. What is more, once an administrator has been appointed, only the Court can terminate or amend the appointment.

“Administration under Section 16 is thus an extreme and expensive measure and we believe it should be a ‘last resort’ to be considered only when a scheme is deeply in debt and the body corporate so fragmented that members really cannot agree on any other option.”

By contrast, says Schaefer, the appointment and remuneration of an EMA is completely at the discretion of the owners in the scheme, in terms of Prescribed Management Rule 28 of the STSMA.

“This provides for the owners who make up the body corporate to make such an appointment by special resolution, or for the owners who collectively hold 25% of the scheme’s total participation quota to apply to the Community Schemes Ombud for the appointment of an EMA. It also states that the EMA must essentially fulfil the same functions and exercise the same powers as ST trustees usually have in terms of the STSMA – and must report back to all the members of the body corporate every four months on the decisions taken with regard to the management of the scheme and its finances, as well as the balance of its reserve and administrative funds.

“In addition, though, the EMA is obliged to manage the scheme with a professional level of skill and care and will be liable for any loss suffered by the body corporate as a result of not applying such skill and care.

“In other words, appointing an EMA is like having a ‘super-trustee’ working full-time to manage the scheme, and for this reason it is not only a good option for ST schemes that are struggling financially, but also for those which are struggling to find members of the body corporate willing to act as trustees. And that is a problem now in an increasing number of ST schemes, owing to the complex and time-consuming nature of what is essentially an unpaid, after-hours and often thankless job.”

He does caution, though, that an EMA needs specialist knowledge, resources and systems to fulfil this role properly. “So ST owners should be careful not to make or allow random appointments, but ensure that they obtain professional assistance from an established and reputable property management company such as Trafalgar.”

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