Destruction of a scheme

29 September 2011

Section 48 of the Sectional Titles Act 95 of 1986 (the “Act”) provides inter alia that the owners may by unanimous resolution agree to the destruction of the building, comprising a sectional title scheme. Section 49 of the Act, furthermore, provides that where the owners may also by unanimous resolution resolve not to rebuild the building, in which case:

  • the owners shall cease to be separate owners of sections, but shall remain co-owners of the land in undivided shares proportionate to the quotas of the respective sections previously owned by them; and
  • any rights to the extension of the scheme referred to in section 25, together with any mortgage bonds registered over the said rights, shall be surrendered to the registrar for cancellation.

The above two sections, and the effect thereof, could have severe financial implications for holders of real rights of extension and holders of mortgage bonds registered over such real rights.

It often occurs in practice that developers develop a scheme comprising of two, two square meter buildings in order to comply with the requirements for the opening of a sectional title register, and simultaneously with the opening of the sectional title register, reserve real rights of extension in respect of the rest of the common property (providing “land parcels”). These real rights of extension are then sold to buyers who are, more often than not, ignorant of the fact that they are purchasing into a sectional title scheme rather than freehold ownership.

On transfer of the two sections to purchasers a body corporate is established, whereafter such body corporate decides to close the sectional title register and establish a township, whereby freehold ownership will be afforded the owners. However, as previously alluded to only the owners of sections will become co-owners of the land comprising the scheme. The holders of real rights of extension obtain no rights in the land and the bondholders of bonds registered over such real rights of extension also relinquish their security where the buildings are deemed to be destroyed and it is elected not to rebuild the buildings.

It must be mentioned that section 48(1)(b) of the Act clearly provides that a building or buildings can only be deemed to be destroyed “when the owners by unanimous resolution so determine and all holders of registered sectional mortgage bonds and the persons with registered real rights concerned agree thereto in writing.”

It is thus clear that the holders of the real right of extension, as well as the bondholders of bonds registered over such real rights, would have consented to the building being deemed destroyed (see the definition of sectional bond). However, section 49 only requires a unanimous resolution to resolve not to rebuild the building, resulting in the owners ceasing to be owners of separate sections and the land reverting to the land register free from the real rights to extend, and the bond(s) registered over such real rights of extension (see section 49(3)(d) of the Act).

The resolution resolving not to rebuild the buildings could, without doubt, have dire financial implications for bondholders over real rights of extension and possibly also for the holders of real rights as the latter have no security until such time as the co-owners establish a township and transfer an erf to such holder in lieu of the real right of extension, if this was part of the initial agreement.

Allen West
Deeds Training
Pretoria

Source: http://www.ghostdigest.co.za/articles/destruction-of-a-scheme/53939