Home Owners Associations and their new veto power
Many estates are governed by Home Owners Associations (HOA) and owners are obliged to become members thereof and to abide by its rules. Title deeds also contain conditions to the effect that the HOA may disallow transfer if levies are not paid up. The position upon insolvency was however uncertain due to two conflicting recent High Court judgments which were later overturned on appeal.
The issue which the Supreme Court of Appeal (SCA) had to determine was whether embargo provisions contained in a title deed of a property preventing the transfer thereof without a clearance certificate from a HOA, constituted a real or a personal right.
In 2006, a couple jointly purchased one of the properties in an estate for a sum of R900,000. The couple caused a mortgage bond to be registered over it as security for a loan of R1,6 million and an additional sum of R320,000 in favour of Firstrand Bank Ltd (the Bank).
In June 2006, the HOA caused them to sign an agreement binding the couple to its rules and regulations. According to this agreement they would, inter alia, submit building plans for the HOA’s approval within two months and finalise the renovation of the immovable property within nine months from its registration.
They further acknowledged that a breach of these timelines would result in the imposition of a fine in accordance with the rules of the HOA. The couple failed to complete the renovations within the prescribed period and also fell behind with the payment of their levies and the penalties imposed by the HOA.
The Articles of Association of the HOA states that: “No member is allowed to transfer his or her property until the board of trustees has certified that the member has at date of transfer, fulfilled all financial obligations to the association”.
Subsequently, the wife was sequestrated in 2009 and her husband shortly thereafter.
The Bank, relying on the security provided by the mortgage bond, had lodged and proved a claim against both estates of the couple. The HOA’s attitude to that claim was that the bond was registered pursuant to the couple’s acquisition of ownership in the property and was therefore registered over the property subject to the HOA’s real right.
Rule of Law
To determine whether a right or condition in respect of land is real two requirements must be met:
- the intention of the person who creates the right must be to bind not only the present owner of the land, but also successors in title; and
- the nature of the right or condition must be such that its registration results in a ‘subtraction from dominium’ (an obligation that burdens the land) of the land against which it is registered.
View of the Association
- The embargo vested it with a real right which diminished the rights of ownership in relation to the property and bound the trustees too, as the couples successors in title;
- The trustees, as successors to the couples’ rights, acquired no greater rights of ownership than those held by the latter; and
- The couples undisputed breach of their obligation to keep their levies up to date under the HOA’s Articles of Association entitled it to withhold the clearance certificate.
View of the Trustees
- There was no evidence showing an intention to create a real right in the land;
- That the true object of the embargo was not to diminish ownership in the land but to achieve specific performance of a contract by a member of the association who also happens to be the owner of the land;
- That the right created by the embargo is a personal one attaching not to the land but only to the current owner of the land, which is subject to the concursus creditorum of insolvency;
- That if a real right is created at all, the envisaged transfer of land is voluntary and not a transfer consequent upon a forced sale under insolvency law; and
- That the matter raises no constitutional issues.
The SCA held that it was accepted that statutory embargoes served 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.
The SCA found therefore that the embargo registered against the property’s title deed ‘carves out, or takes away’ from the owner’s dominium by restricting its ius disponendi (the right to dispose of a thing). Thus, it subtracted from the dominium of the land against which it was registered and was consequently a real right.
What this means
As such, registered title conditions that prohibit the transfer of residential property without a clearance certificate, or the consent of the relevant HOA, are thus enforceable in insolvencies and as a consequence, the HOA is to be paid prior to any secured creditors.
This was previously not the case.
The judgments have now placed HOA’s on an equal footing with municipalities and bodies corporate, who recovered rates, taxes and levies by virtue of the provisions of the Municipal Systems Act 32 of 2000 and Sectional Title Act 95 of 1986.
These judgments have provided greater security to the members of HOA’s, who are no longer at risk of having to contribute to any shortfalls arising from outstanding levies deemed to be irrecoverable resulting from insolvencies.
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