Understanding the risks faced by HOA Directors for non-compliance with the CSOS Act.
By Marina Constas, Director of BBM Attorneys and board member of the Community Schemes Ombud Service (CSOS)
I have always maintained that a Homeowners’ Association (hereinafter referred to as an HOA) constituted under a Memorandum of Incorporation, is a rather clumsy vehicle to manage a property development. If you own a unit in a Sectional Title scheme, there is specific, tailor made legislation, under the Sectional Titles Schemes Management Act, which makes compliance and regulation far easier.
With the advent of the Community Schemes Ombud Service on the 7th of October 2016, there was speculation amongst owners in HOAs as to whether or not the Service applied to these developments. There have, in fact, been legal challenges already from certain large schemes which feel that the Service should only govern the Sectional Title community. The Ombud service will have none of that and cites Chapter 1 , Section 1 of the Community Schemes Ombud Service Act 9 of 2011, which defines a Community Scheme as follows:
“any scheme or arrangement in terms of which there is shared use of and responsibility for parts of land and buildings, including but not limited to a sectional titles development scheme, a shareblock company, a home or property owners’ association, however constituted, established to administer a property development, a housing scheme for retired persons, and a housing co-operative as contemplated in the South African Co-Operatives Act.”
Consequently, it is clear that HOAs must register with the Ombud’s office and will face penalties on interest should they fail to pay the quarterly CSOS levy. The CSOS legislation faces imminent amendment to include a peremptory compliance certificate for governance documentation(rules)
As Directors of Lots of Loot Equestrian Eco Estate, what would Advocate Tshepo “Hot Shot” Mjali, Sharon “Know-it-All” Sheridan-Pierce, Emilio “Mediator” Massimiliano and Eddie “Hot Head” Perumal Naidoo need to know in order to limit their risks as Directors. As a first, they will be happy to know that in terms of the Regulations of the CSOS Act, Chapter 4, they will henceforth be promoted to “Scheme Executives”. They may not be as excited to know that, in terms of the very same chapter, they are obligated to:
- Take reasonable steps to inform and educate themselves about the community scheme, its affairs and activities and the legislation and governance documentation in terms of which the community schemes operate;
- Take reasonable steps to obtain sufficient information and advice about all matters to be decided by the scheme executives to enable them to make conscientious and informed decisions;
- Unless excused by the chairperson of the scheme executives on reasonable grounds-attend all meetings of the scheme executives and attend the community scheme’s annual general meeting if it holds such a meeting;
- Exercise an active and independent opinion with respect to all matters to be decided by the scheme executives;
- Exercise due diligence in relation to any business of, and necessary preparation for and attendance at meetings of, the scheme executives or any committee to which such scheme executive is appointed.
For me, the crucial part of the Act is Chapter 4 which states that all the above obligations are in addition to and do not derogate from the fiduciary obligations of a scheme executive in terms of the Common Law or any applicable statute. Our fearless foursome group of Directors will have to take their fiduciary duties really seriously. This duty is the duty of care and skill in dealing with the affairs of the scheme. Breaches of fiduciary duties could lead to personal liability. So when Eddie “Hot Head” Perumal Naidoo blurts out at a meeting that this Directorship business is just his side job, or, Sharon “Know-it-All” Sheridan Pierce is still relying on the MOI alone, not having realised that the CSOS Act has come into effect, owners in the Estate must decide whether or not they can afford to have Directors who do not understand their increased onus and responsibilities.
Another area to highlight for our intrepid leadership team in terms of the new legislation is fidelity insurance. An Estate/HOA may be vulnerable to loss of money occasioned by theft or fraud. The Directors have to insure the scheme against risk or loss of money by the dishonest conduct of a scheme executive (themselves), an employee or agent of a community scheme who has control of the money, a managing agent or a contractor who has access to the monies of the scheme. Chapter 4 of the CSOS Regulations goes as far as to set out that the minimum cover in respect of the fidelity fund insurance must be the total value of reserves and investments at the end of the last financial year together with 25% of the Community Scheme’s operational budget for the current year. If Emilio “Mediator” Massimiliano should possibly pipe up that everyone involved in the running of the Estate’s monies is of impeccable standing and would never contemplate theft or fraud, it would become necessary to point him to the current statistics that increasingly indicate a trend towards dishonest behaviour, possibly caused by a tight economy.
Finally, if there is any doubt at all about Directors’/Scheme Executives’ compliance with the Community Schemes Ombud Service Act, allow me to point out Chapter 2 Section 34 of that Act. The clause deals with offences and penalties.
Any person who-
- Fails to provide access to any books, accounts, documents or assets when required to do so under this act:
- Fails to comply with a directive under this act
- Fails or refuses to give data or information
- Intentionally refuses to perform a duty or obstructs any person in the exercise of a power or performance of a duty
- Accepts any unauthorised fees or reward, either directly or indirectly as a result of a person’s position with the Service
- Uses the name, logo or design of the Service without authority is guilty of an offence.
If convicted, that person would face a fine or imprisonment up to 5 years, or both. A second offence would attract a fine or 10 year sentence or both. Advocate Tshepo “Hot Shot” Mjali, realising the impact of the legislation is thus quick to persuade his merry band of men, and one woman, to hand over the minutes of meetings when required to do so by CSOS, during an investigation of a complaint by owner, Gustav Finkelstatten, who has constantly complained about the dampproofing problem at the common property stables, housing his Black Percheron Mare.
Having served on the CSOS Board last year, I have been privy to the operations of the Service, which is becoming resourced and more powerful. As a result, compliance will be a priority this year, with the appointment of inspectors, playing a bigger role in checking that all Community Schemes fall squarely within the letter of the Law.