The Power of the Embargo – A reaffirmation by the SCA of the Body Corporate’s right to impede transfer of a sectional title unit

Published Date: November 28, 2023

In the recent decision of the Supreme Court of Appeal in the matter between The Body Corporate of Marsh Rose v Steinmuller and Others (149/2022) [2023] ZA SCA 143, the court underscored the inherent right of a body corporate to block the transfer of a property by withholding a levy clearance certificate because of outstanding amounts due to it by the owner of the property being sold. In this article, we delve into the facts of the case and unpack the extent to which this so called ‘embargo’, embedded in Section 15B(3)(a)(i)(aa) of the Sectional Titles Act, No. 95 of 1986 (the ‘Act’), could impact owners and buyers alike.

On 30 January 2018 at a public auction conducted by the Sheriff of Halfway House (the ‘sheriff’), Mr Steinmuller bought a unit in the Marsh Rose Sectional Title Scheme (SS269/2012) for R970 000,00. The sale in execution was triggered by a judgment granted in favour of Standard Bank against the current owner. When properties are sold at auction pursuant to foreclosure proceedings, it is common for the conditions of sale to stipulate that the buyer (and not the owner, as is normally the case) would be liable for charges such as the sheriff’s commission, arrear municipal rates and taxes, and, if the property is situated in a complex or other type of community scheme, all amounts which may be due to the body corporate or the homeowners association.

Section 15B(3)(a)(i)(aa) of the Act provides that the Registrar of Deeds cannot register the transfer of a unit in a sectional title scheme without a conveyancer’s certificate confirming that the body corporate has certified that all amounts owing to it have been paid or that suitable arrangements have been made for payment thereof. This provision entitles a body corporate to withhold the certificate until all moneys owed to it in respect of the property have been paid, thus preventing the registration of the transfer of the property to take place.

Following conclusion of the sale, the Body Corporate of Marsh Rose (the ‘body corporate’) indicated that it required payment in the amount of R312 903,21 consisting of arrear levies, water consumption and sewerage service charges, costs, legal fees, and interest due to it by the current owner before it would be able to issue the required levy clearance certificate. Mr Steinmuller disputed the amounts claimed and when resolution eventually eluded the parties, Mr Steinmuller launched an application to the Gauteng Division of the High Court, Johannesburg (the ‘high court’) for an order compelling the body corporate to issue the clearance certificate. The high court granted the order and ordered Mr Steinmuller to deposit R250 000,00 into his attorney’s trust account as security for any claim which the body corporate may have. The order further provided that the body corporate was to institute an action or refer to arbitration its claim against Mr Steinmuller and any other party in respect of the property, within ten days of the granting of the order.

With leave of the high court, the body corporate appealed to the full court. However, the court dismissed the body corporate’s appeal finding the high court’s order to have been appropriate.

Next, the body corporate turned to the Supreme Court of Appeal (the ‘SCA’). It was at this junction that the National Association of Managing Agents (‘NAMA’) was, with leave from the SCA, allowed to intervene in the matter. NAMA is a voluntary, non-profit organisation which, according to its website, represent more than 500 members across the country consisting of managing agents and other related service providers to the community scheme management industry.

In contrast to the high court’s previous rulings, the SCA, in handing down its judgment on 2 November 2023, unequivocally found in favour of the body corporate. The SCA declared that the high court’s order was not a competent order and it could not stand. Accordingly, the order of the full court was set aside and replaced with an order upholding the body corporate’s first appeal. The initial order of the high court was set aside and replaced with an order dismissing Mr Steinmuller’s application.

In assessing the competency of the high court’s order, the SCA took issue with the fact that the order required the body corporate to “sign any and all papers and take any steps necessary for the transfer of the property”. Yet, the body corporate is not the owner of the property and not a party to the agreement of sale and therefore not capable of facilitating the transfer. Mr Steinmuller’s right to compel transfer lays against the sheriff who is vested with the power to give transfer as if he is the owner of the property. Secondly, in referring to the security payment by Mr Steinmuller, the high court’s order stipulated that the body corporate is to institute a claim against Mr Steinmuller and any other party, yet the body corporate does not have a claim against Mr Steinmuller, nor any other person other than the registered owner of the property.

As in previous cases before the court, the SCA compared the embargo provision against a similar provision found in Section 118(1) of the Municipal Systems Act, No. 32 of 2000 (i.e. that the Registrar of Deeds may not register the transfer of a property without being furnished with a certificate from the local authority confirming that rates and taxes for the two years preceding the application, have been paid up to date). The Section 15B(3)(a)(i)(aa) embargo serves a similar purpose. It assists bodies corporate to recover amounts owed by owners of units in the scheme which ultimately provides protection for the other owners in the scheme who all have a vested interest in the wellbeing and proper management of the scheme.

The SCA referred to the matter of Willow Waters Homeowners Association (Pty) Ltd v Koka NO and Others in which the SCA held that: “It is accepted that these statutory embargoes serve a vital and legitimate purpose as effective security for debt recovery in respect of municipal service fees and contributions to bodies corporate for water, electricity, rates, and taxes etc. Thus, they ensure the continued supply of such services and the economic viability and sustainability of municipalities and bodies corporate in the interest of all the inhabitants in the country”.

It is clear from the SCA’s findings that a body corporate’s right to resist transfer by refusing to issue a levy clearance certificate until all moneys due to it have been paid (or arrangements made to its satisfaction) remain intact. While some may view the embargo as potentially open for abuse, it must be weighed against the value of its protection for community schemes. If the statutory provision were to be diluted, it could seriously jeopardise the financial stability of such community schemes, no doubt to the detriment of owners and the property industry at large.

Although the embargo does not grant the body corporate a preferent claim in the traditional sense, it certainly provides it with adequate leverage for the recovery of an owner’s debt. Here, one could perhaps spare a thought for the financial institution, which, as we have witnessed in this case, has been unable to realise its security even though it ís considered a preferent creditor. It may well be worthwhile for financial institutions to keep a closer eye on the maintenance of levy – and rates payments of non-payers whose properties may eventually become executable. This proactive approach could avert the frustrating situation often encountered in foreclosure proceedings due to vast amounts of outstanding municipal rates and taxes or body corporate levies.

In conclusion, this case serves as a stark reminder to those hoping to enter the property market or expand their property portfolios by acquiring properties through auctions of the importance of giving careful consideration to the conditions of sale and, as far as possible, to conduct a thorough due diligence investigation into the property and potential debts which might come with it.

Contact our team of property law professionals for expert insights and guidance when acquiring or disposing of your real estate assets.

Alicia Heyneke
Senior Associate | Attorney, Notary and Conveyancer

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