Follow the rule and your body corporate may never need a special levy ever again!
All Bodies Corporate in South Africa must have two (2 ) separate and compulsory funds that they must establish and administer:
- An administrative fund to cover the day-to-day maintenance and operating costs of the scheme; and
- A reserve fund to cover the anticipated cost of future maintenance and repairs to the common property at the scheme and,more particularly, to cover the cost of the compulsory ’10-year maintenance and repair plan’ (MRRP), which every body corporate must now have.”
A frequently asked question is: “How is the reserve fund calculated?
Fortunately, the Legislator has taken the guesswork out of the equation. Regulation 3 to the Sectional Titles Schemes Management Act (the “STSMA”) tells you exactly how to calculate your body corporate’s reserve fund for a financial year, (except if it’s the first financial year):
Start by looking at the amount of money that was in the body corporate’s reserve fund at the end of the previous financial year Management Rule 22 to the STSMA states that it is compulsory for the Body Corporate or Trustees to prepare a written maintenance, repair and replacement plan for the common property. It also sets out what must be incorporated in the plan. Owing to the requirements requiring specialised knowledge that the Trustees probably don’t have, it is not unusual for Trustees to obtain the assistance of professionals in their respective fields, such as engineers, plumbers and electricians. it is well worth it in the interests of sustainability.
If the Body Corporate can afford the expense of contracting with professional persons to assist in providing a MRRP, it may be prove to be a fruitful investment because it will form a long-term base on which to work from. These items must be included in the in the common property repair and replacement plan in terms of Rule 22:
- All major capital items that are expected to need maintenance, repair and replacement in the next 10 years – a ‘capital item’ is the building and/or equipment that services the building or buildings, such as an elevator or a gate motor, to name but a few;
- The current condition of these capital items;
- The expected time when these items (or the components of these items) will need to be maintained, repaired or replaced;
- The estimated cost of the maintenance, repair and replacement of those items or components;
- The expected life span of those items (or components) once maintained, repaired or replaced; and
- Any other information that the body corporate considers to be relevant.
The 10-year MRRP takes effect on approval by members of the Body Corporate in a general meeting. The beauty of the plan is that because the Trustees must report back to the members on its implementation at every AGM, members can monitor the state of their building visá-vis the state of the reserve fund as the years progress.
If properly implemented and monitored, the compulsory reserve fund required in terms of section 3(1)(b) of the STSMA, with the minimum amount as set out in Regulation 3, and implemented by the Trustees and members in terms of Management Rule 22, the Body Corporate should (barring emergencies!) NEVER NEED A SPECIAL LEVY EVER AGAIN.
With this in mind consider the following 3 possible scenarios:
If the amount the reserve fund at the end of the last financial year is less than 25% of the total levies collected by the body corporate in the last financial year, then:
The budgeted contribution to the reserve fund for the current year must be at least 15% of the total budgeted contribution to the administrative fund.
If the amount in the reserve fund at the end of the previous financial year is the same as or greater than 100% of the total contributions to the levy fund for the previous year then:
There is no minimum contribution to the reserve fund.
If the amount of money in the body corporate’s reserve fund at the end of the previous financial year is more than 25% but less than 100% of the total levies paid by the members for the previous financial year; then
The budgeted contributions to the reserve fund must be at least the same amount that the body corporate has budgeted to be spent on normal repairs and maintenance during the year! (i.e. take the budget for repairs and maintenance and DOUBLE IT!!!!)