Raising Special Levies as a Last Resort 

Introduction 

Over the last ten plus years I have often been asked when and how special contributions (or “special levies”) can be legally raised. There are so many misconceptions and misunderstanding in regard to special levies. I have been told that:  

1. A special resolution is required to authorize a special levy.  

2. Special levies can only be raised in special general meetings. 

In this article I will clarify what special levies are, and when and how special levies can be legally raised such that they can become due and payable. 

Budgeting for the administrative and reserve fund 

One of the compulsory agenda items at every AGM of the body corporate is the approval of the budgets for the administrative and reserve funds for the scheme for the next financial year. In terms of PMR 26(1)(e) a body corporate must prepare budgets for the administrative and reserve funds. The budgets must comprise itemised estimates of the anticipated income and expenses during the next financial year for presentation at the annual general meeting (“AGM”). 

Administrative fund 

In terms of PMR 24(1) the administrative fund must only be used to fund the operating expenses of the body corporate for a particular financial year. Operating expenses include items such as rates and taxes, electricity, insurance, management fees and security costs. The trustees must make sure that they follow the restriction on spending from this fund set out in PMR 24(4) which states that money may be paid out of the administrative fund in accordance with:  

• trustee resolutions, and  

• the approved budget for the administrative fund. 

Reserve fund 

In terms of PMR 24(2) the reserve fund maintained must be used for the implementation of the maintenance, repair and replacement plan of the body corporate. In this way the reserve fund is connected to the compulsory ten year maintenance, repair and replacement plan. The trustees must ensure that the money that goes in and comes out of this fund is in line with the rules set out for this purpose. 

In terms of PMR 24(3) the following amounts must be paid into the reserve fund: 

(a) any part of the annual levies designated as being for the purpose of reserves or the maintenance, repair and replacement plan; 

(b) any amounts received under an insurance policy in respect of damage or destruction of property for which the body corporate is responsible; 

(c) any interest earned on the investment of the money in the reserve fund; 

(d) any other amounts determined by the body corporate, and all other body corporate income must be paid into the administrative fund. 

The trustees must make sure that they follow the restriction on spending from this fund set out in PMR 24(5) which states that money may be paid out of the reserve fund: 

(a) at any time in accordance with trustee resolutions and the approved maintenance, repair and replacement plan; or 

(b) if the trustees resolve that such a payment is necessary for the purpose of an urgent maintenance, repair or replacement expense, which purpose includes, without limitation 

(i) to comply with an order of a court or an adjudicator; 

(ii) to repair, maintain or replace any property for which the body corporate is responsible where there are reasonable grounds to believe that an immediate expenditure is necessary to ensure safety or prevent significant loss or damage to persons or property; 

(iii) to repair any property for which the body corporate is responsible where the need for the repairs could not have been reasonably foreseen in preparing the maintenance, repair and replacement plan; or 

(iv) to enable the body corporate to obtain adequate insurance for property that the body corporate is required to insure; provided that the trustees must report to the members on any such expenditure as soon as possible after it is made. 

In terms of PMR 24 (6) expenditure for urgent maintenance, repair or replacement: 

(a) must not exceed 

(i) the amount necessary for the purpose for which it is expended; or 

(ii) any limitation imposed by the body corporate on expenditure; and 

(b) must comply with any restrictions imposed or directions given by members. 

How to fund unbudgeted expenses 

Special levies should therefore not be raised to pay for routine maintenance expenses, or even for expenses that form part of the ten year maintenance, repair and replacement plan. Projects such as painting the scheme should never be funded by raising a special levy. However, if the need for maintenance arises which has not been included in the annual budget, it may become necessary for the trustees to levy members with a special contribution in circumstances where additional income is required to meet a necessary expense that cannot reasonably be delayed until provided for in the budget for the next financial year.  

What is a special levy? 

Prescribed Management Rule 3(4) describes a special levy to mean any contribution levied other than contributions which arise from the approval of the estimate of income and expenditure at an annual general meeting of a body corporate, determined to be a contribution to be levied upon the owners during the current financial year. 

How to raise a special levy? 

Prescribed Management Rule 3(3) provides that any special contribution becomes due on the passing of a resolution in this regard by the trustees of the body corporate levying such contribution and may be recovered by the body corporate by an application to an ombud, from the persons who were owners of units at the time when such resolution was passed. 

Upon the change of ownership of a unit, the successor in title becomes liable for the pro rata payment of such contributions from the date of change of such ownership. 

In terms of Prescribed Management Rule 21(3)(a) the body corporate may, on the authority of a written trustee resolution levy members with a special contribution if additional income is required to meet a necessary expense that cannot reasonably be delayed until provided for in the budget for the next financial year. 

Therefore, in order for a board of trustees to legally implement a special contribution, and for that contribution to be legally due and payable there are three requirements that need to be met:  

1. The trustees need to pass a written trustee resolution to raise the special levy. 

2. The special levy has to be required to meet an expense that is necessary. 

3. The special levy must be required to meet an expense that is urgent. 

Conclusion 

Effective financial management requires that the trustees budget for current and future expected as well as unexpected expenses. Raising a special levy should therefore only be done for urgent emergencies.  

WRITTEN BY DR CARRYN DURHAM