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Interest on arrear levies

The Sectional Titles Act, 1986 provides that one of the fundamental functions of a body corporate is to establish for administrative expenses a fund for the repair, upkeep, control, management and administration of the common property and for the payment of Municipality charges.

interest on arrear levies

The Act provides further that any contributions levied under these provisions shall be due and payable on the passing of a resolution by the trustees of the body corporate.
Payment of these contributions (levies) by members is essential in order for the body corporate to meet its financial obligations and for the trustees to execute the duties and functions of the body corporate.

One thing that the majority of bodies corporate have in common is non-paying members. Non-payment of the contributions levied is dealt with in Prescribed Management Rule [PMR] 31 (5) & (6) which rules stipulate:

(5) An owner shall be liable for and pay all legal costs, including costs as between attorney and client, collection commission, expenses and charges incurred by the body corporate in obtaining the recovery of arrear levies, or any other arrear amounts due and owing by suchowner to the body corporate, or in enforcing compliance with these Rules, the conduct rules or the Act.
(6) The trustees shall be entitled to charge interest on arrear amounts at such rate as they may from time to time determine.

PMR 31(6) allows the trustees in the sectional title scheme to determine the interest rate charged on overdue contributions and to recover the interest owed to the body corporate. The Court ruled in the matter of Mitchell v Beheerliggaam RNS Mansions (34386/08) [2010] ZAGPPHC 44; 2010 (5) SA 75 (GNP) (4 June 2010) that compound interest in respect of arrear levies is allowed.

It is clear that the trustees must pass a resolution as to the interest rate that will be charged on overdue contributions. Members often resolve at an AGM that as a directive to the trustees, that interest should be raised at a specific rate. It could be argued that such directive by the members is not allowed as the determination of the interest rate is a discretion reserved for the trustees. The question often arises as to what a fair interest rate would be.

It is by now a well-established fact that the Supreme Court of Appeal in the Dlamini v The Body Corporate of Frenoleen (AR 611/09) [2010] ZAKZPHC 6 (11 March 2010) ruled that a body corporate does not supply services to the owners and therefore that levies charged are not incidental credit and therefore the National Credit Act does not find application. Many Bodies Corporate have been advised that although the NCA does not find application, to make use of the provisions of Regulation 42 to the NCA dealing with the maximum interest rate prescribed by the Minister which can be charged on credit facilities which is the repo rate (currently 5%) x 2.2% + 10% per year and on incidental credit which is 2% per month equaling 24% per year as guidance.

In my view, the administration and management services of a body corporate on behalf of their members, is not a supply of services in the ordinary course of business or for consideration and therefore the Consumer Protection Act (CPA) does not find application. In any event the CPA presently does not contain any provisions as to what rate of interest may be charged.

This brings us to the aspect of the in duplum rule. The in duplum rule has its origins in our common law. It is based on considerations of public policy and is designed to protect borrowers from exploitation by lenders. In essence, the common law provides that the unpaid interest on a debt that is due, but has not yet been paid should not exceed the outstanding capital. As soon as the unpaid interest equals the outstanding capital, interest ceases to run.

The calculation of interest on a debt, in respect of which no provision is otherwise made for interest, is provided for in the Prescribed Rate of Interest Act, 1975. The current prescribed rate of interest is 15,5% per annum in terms of section 1(2) of the aforesaid Act. The Court has however ruled in the matter of the Body Corporate of Lynwood Gardens v Yegi Body 2012 JDR 2116 (WCC) that the aforesaid Act does not apply where a specific rate of interest was determined. The Court held that: “in the present situation it seems clear that the obligation to pay interest at the rate of 10% per month was created between the sectional title holders and for that reason alone Prescribed Rate of Interest Act does not apply [2012 JDR 2116 p6].”

Section 79 of the Strata Schemes Management Act, Act 138 of 1996 (New South Wales Consolidated Acts) deals with interest and discounts on contributions and Section 79(2) provides that a contribution, if not paid at the end of one month after it becomes due and payable, bears until paid simple interest at an annual rate of 10 per cent.

Conclusion:

  • Interest should not be levied as a penalty and the rate should be fair and reasonable.
  • Although there is no limitation on the interest rate percentage which may be levied, a too high rate could be regarded as a penalty.
  • Trustees must determine the rate and may receive guidance and directives from the members in general meeting.
  • If no rate is determined by the trustees the Prescribed Rate of Interest Act, 1975 will find application and shall run from the date on which payment of the debt is claimed by the service on the owner of a demand or summons, whichever date is the earlier.

Izak du Pisanie
EY Stuart Prokureurs
http://www.eyslaw.co.za

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