Here’s a scenario that is unfortunately a real risk these days –
- You are a member of a Home Owners Association (HOA),
- Your HOA is struggling to recover arrears levies from other homeowners who have fallen into financial difficulty.
If the arrears aren’t recovered, you and the other homeowners will have to chip in and to cover the shortfall.
The liquidation risk revisited
The High Court judgments last year exposed HOA members to an increased risk of this happening in cases where the defaulting member’s estate is liquidated or sequestrated.
Fortune has however smiled on HOAs and their members in the form of two recent Supreme Court of Appeal decisions which have made collection of these arrears a whole lot easier.
In a nutshell – when the liquidator/trustee of an insolvent owner’s estate sells the property, the HOA can block transfer to the buyer until the arrears levies and paid. The arrears, held the Court, have to be paid to the HOA as a “cost of realisation of the property” – in other words, before bondholders and other creditors are paid. With the happy results that (provided of course the sale price is high enough) the HOA will be paid in full.
HOAs – your checklist
Ensure that your HOA is protected in this regard by title deed conditions obliging all owners –
- To become and remain members of the HOA and to be bound by its constitution (with rules and regulations requiring prompt payment of levies), and
- To obtain a levy clearance certificate before transferring ownership to a buyer, who must in turn be bound to join the HOA.
In any event, prevention being as always much better than cure, insist that your HOA-
- Keep a close eye on any levy accounts going into arrear.
- Acts immediately to collect outstanding levies, taking legal action if necessary. Slow, ineffective debt collection processes will not only put unnecessary strain on the HOA’s finances, but they ultimately risk a defence of prescription being raised by the debtor.
Bondholders – your risk just increased!
There is a lot at stake here. The overall problem is a huge one – the Court heard that “just 35 members of NAMA (National Association of Managing Agents) are owed fees in excess of R28 million in respects of members whose properties were subjected to forced sales”. And where the liquidation sale price is low and the arrears high, you could be writing off a substantial debt.