MAKING INFORMAL VERBAL AGREEMENTS WITH HOMEOWNERS ASSOCIATIONS

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1 MONTHLY NEWSLETTE ISSUE 04 MAKING INFOMAL VEBAL AGEEMENTS WITH HOMEOWNES ASSOCIATIONS Many homeowners associations have strict requirements concerning the aesthetic appearance of buildings on the estate. These include fences and other smaller additions that are not always considered by the homeowner to be building projects in terms of the rules, the Memorandum of Association (MOA) or the Memorandum of Incorporation (MOI). The owners then fail to submit plans and/or drawings for formal approval by the trustees or directors of the association. Some homeowners knowingly attempt to avoid the prescribed formal process and merely invite a trustee or director for an informal discussion, explaining with waving arms the envisaged building project, be it a fence or a pergola. The nod of approval by the trustee is then held by the homeowner to be approval of the planned project. What do the courts say? The courts have ruled as follows with regard to the consent granted by a trustee at an informal meeting with the homeowner, where the MOA or MOI of the homeowners association clearly dictates a procedure for approval of any building or improvement: 1. In order for a trustee or director to sign off a plan in his official capacity, a trustee must properly inform himself of the issues which affect the complex as a whole and not simply have regard to his or her inter-personal relationship with the homeowner. In order to be properly informed, a trustee must ordinarily make a decision in committee with the benefit of debate. His decision must consciously have regard to the MOA or the MOI, whichever case it may be, and the long-term interests of the members. Failure by the trustee to do so will imply that the trustee has not applied his mind to all the relevant issues. It may be possible to impute acceptance by a person both in his individual and official capacity. 2. The nature of the relationship established between homeowners under a MOA or MOI to which each subscribes, constitutes an agreement in terms of which each homeowner submits contractually to the decisions of a body of elected trustees to whom they have conferred the right and power to make binding decisions on matters that affect their relationship inter se, or which generally affect the estate. 3. It is also important to take note of whether written consent has been granted by the trustee, as such an action by the trustee would be an additional consideration to establish whether a formal decision will be deemed to have been made. So what if I made a verbal agreement? An informal discussion regarding the building plans of the homeowner can thus not be deemed as a formal

2 decision made by the trustees of the homeowners association, if the homeowner failed to follow the prescribed procedure. In the event that a homeowner indeed deems the informal consent as a decision made by the trustees of the homeowners association, the courts will not interfere with the decision made by a homeowners body save under recognised grounds of judicial review as applied to a voluntary association whose members have bound themselves to its rules, which include the conferring of decision-making functions on an elected body of trustees. Trustees and directors should therefore take care when having informal discussions with homeowners and insist on the due process, in terms of the rules, the MOA or the MOI, to be followed to the letter. ather avoid commenting or voicing an opinion except at the appropriate forum the formal meeting of the trustees or directors where the item is noted on the agenda in compliance with the association s prescribed formal requirements. WHAT IS THE JOB OF A TUSTEE? The Trust Property Control Act 57 of 1988 defines a trustee as any person (including the founder of the trust) who acts as a trustee by virtue of an authorisation under Section 6. A trust that is established by a trust deed is not a legal person it is a legal relationship of a special kind that is described by the authors of Honoré s South African Law of Trusts[1] as a legal institution in which a person, the trustee, subject to public supervision, holds or administers property separately from his/her own, for the benefit of another person or persons or for the furtherance of a charitable or other purpose. Although the trust property vests in each trustee individually they have to act jointly unless the deed of trust provides otherwise. Their individual interests do not waive the requirement that they have to act jointly. The consequence of the validity of an act that has taken place in conflict with a statutory prohibition has been considered in numerous cases, and depends on a proper construction of the particular legislation and the intention of the legislature. The whole scheme of the act is to provide a manner in which the Master can supervise trustees in the proper administration of trusts, and their knowledge of section 6(1) is essential to this purpose. By placing a bar on trustees from acting as such until authorised by the Master, the Act endeavours to ensure that trustees can only act as such if they comply with the Act. What can the courts do? In the Kropman NO vs Nysschen[2] it was held that a court has the discretion to retrospectively validate acts of a trustee that are performed without the requisite authority. This proposition was in later cases rejected persuasively. Locus standi in iudicio on the other hand is something else and does not depend on the authority to act but depends on whether the litigant is regarded by the court as having a sufficiently close interest in the litigation. Although section 6(1) suspends a trustee s power to act in that capacity, he/she could have a sufficiently well-defined and close interest in the administration of the trust to have locus standi.

3 The essence of the prohibitory phrase in section 6(1), shall act in that capacity only if authorised thereto, must be interpreted to mean that a trustee may not, prior to the Masters authorisation, acquire rights for, or contractually incur liabilities on behalf of, the trust and is not intended to regulate questions of locus standi in iudicio. eferences: [1] 5th ed (2002) by Edwin Cameron with Marius de Waal, Basil Wunsh and Peter Solomon para 1. [2] 1999 (2) SA 567 (T) at 576F. WHAT MAKES A SUETYSHIP VALID? On 29 May 2015, in the case of Dormell Properties 282 CC v Bamberger[1], the Supreme Court of Appeal (SCA) set out the importance of, firstly, expressly pleading a suretyship clause in a plaintiff s particulars of claim and, secondly, ensuring that the contract to which a deed of suretyship is annexed is duly signed by all parties thereto. The case There were two agreements of importance. The first agreement was a written offer to lease agreement concluded between Dormell and Edulyn, duly represented by Bamberger in his capacity as sole director, in terms of which Bamberger undertook to bind himself as surety for Edulyn s obligations under a second agreement, being the agreement of lease.[2] The first agreement The first agreement was properly signed by the parties; however, the agreement of lease was only signed by Bamberger. Annexed to the agreement of lease was a deed of suretyship which Bamberger signed. The deed of suretyship and agreement of lease were annexed to Dormell s particulars of claim as if this suretyship was the instrument that bound Bamberger as surety and co-principal debtor for the fulfilment of the obligations of Edulyn.[3] In the court a quo, Savage AJ found that a contract of suretyship requires a valid principal obligation with someone other than the surety as debtor and the liability of the surety does not arise until this principal obligation has been contracted (Caney [C F Forsyth and J T Pretorius Caney s The Law of Suretyship in South Africa 6 ed (2010)] at 47).[4] In the SCA the appellant conceded that no express reference to the first suretyship clause was made in the particulars of claim, but argued, inter alia, that the omission caused no prejudice to Bamberger.[5] The suretyship clause Dormell s cause of action was based on the deed of suretyship attached to the agreement of lease and not on the suretyship clause in the first agreement. To seek to change this now would amount to an amendment of the particulars of claim and the advancing of a case which was not initially pleaded. Bamberger therefore contended that he was not given the opportunity to raise any defence which he could have raised to the suretyship clause.[6] The SCA set out that the purpose of pleadings is to define the issues for the parties and the court. Pleadings must

4 set out the cause of action in clear and unequivocal terms to enable the opponent to know exactly what case to meet. Once a party has pinned its colours to the mast, it is impermissible at a later stage to change those colours. [7] Furthermore the court found that Dormell should have expressly alleged a valid contract of suretyship (i.e. that the terms of the deed of suretyship were embodied in a written document signed by or on behalf of the surety which identified the creditor, the surety and the principal debtor). Dormell had to allege the cause of the debt in respect of which the defendant undertook liability as well as the actual indebtedness of the principal debtor.[8] In the Dormell case the deed of suretyship was invalid and enforceable because it was annexed to an agreement of lease which wasn t signed by Dormell, and therefore the suretyship was in respect of a non-existent obligation. Dormell conceded that the suretyship pleaded was invalid, but argued that Bamberger would not suffer any prejudice if Dormell was allowed to rely on the suretyship in the first agreement instead. The court found that although it does have discretion regarding keeping parties strictly to their pleadings, it does not agree that this discretion reaches as far as to place a party in the disadvantageous position of not being permitted to raise any legal defence.[9] In deciding the above, the court looked at whether Bamberger would have conducted his case materially differently, had Dormell s case been pleaded properly. The court found that he would have, in that he would have been in the position to raise the defence of non-excussion (i.e. that Dormell should have first claimed the outstanding amounts owed from Edulyn and only if they could not pay this amount, should Dormell have claimed from Bamberger).[10] He had not raised this defence in his plea or at the trial because the deed of suretyship annexed to the agreement of lease in terms of which he had waived the defence of non-excussion (which was not signed by Dormell) was relied upon.[11] Conclusion The SCA therefore found that Bamberger would suffer prejudice if it were to allow Dormell to rely on the suretyship clause in the first agreement which was not relied upon in the particulars of claim.[12] It is therefore crucial to, firstly, expressly plead the details of a valid suretyship clause in a plaintiff s particulars of claim and, secondly, to ensure that the contract to which a deed of suretyship is annexed is duly signed by all parties thereto. If you do not do you may find yourself in a situation where the courts will not allow you to enforce a valid suretyship. eferences: [1] (20191/14) [2015] ZASCA 89 (29 May 2015) [4] Dormell Properties 282 CC v Bamberger (20191/14) [2015] ZASCA 89 (29 May 2015) para 8 [9] Dormell Properties 282 CC v Bamberger (20191/14) [2015] ZASCA 89 (29 May 2015) para 15 QUICK GUIDE AS TO WHO PAYS SAS WHEN SELLING O BUYING IMMOVABLE POPETY IN SOUTH AFICA 1. TANSFE DUTY In terms of the Transfer Duty Act 40 of 1949, when a purchaser transfers property ( land, shares, members interest into his/her name, he/she will be liable to pay transfer duty. It is payable within 6 months of date of contract, failing which, interest at 10% per annum on each completed month will be charged until the duty is paid. SAS calculates the duty payable, on a sliding scale:

5 VALUE OF POPETY and above ATE 0% 3% of the value above % of the value above % of the value above % of the value above % of the value above VALUED ADDED TAX: In the event that the seller is registered for VAT (ie VAT vendor), the purchaser will not pay transfer duty, but instead VAT will be levied on the purchase price, at 14% (usually included in the purchase price). The seller will be responsible to pay the VAT to SAS. Should the purchaser also be registered for VAT, then the VAT payable could be levied at 0%, in the event that the asset (property) is sold as a going concern. NO TANSFE DUTY IS PAYABLE WHEE VAT IS PAYABLE, AND VICE VESA 3. WITHHOLDING TAX The buyer of immovable property must withhold a certain percentage of the purchase price if it exceeds 2 million, in the event that the seller is a non-resident in South Africa: 7.5% where the seller is a natural person 10% where the seller is a company; and 15% where the seller is a trust. The transferring attorney will withhold this tax on behalf of the purchaser and pay it over to SAS. This withholding tax is not a final tax but an advance payment of tax on the seller s actual account of normal tax liability. 4. CAPITAL GAINS TAX (CGT) This is tax payable on profit made on the sale (disposal) of a capital asset, assessed and levied differently from tax on profit (income tax) realized from sale of goods or services in the normal course of a business. The table below sets out the annual exclusion. Person Annual exclusion for a year of assessment 2017 and to and and earlier years Natural person Natural person in year of death Special trust for a person with a disability Deceased estate Insolvent estate

6 4.1 Primary residence exclusion The first 2 million of any capital gain or loss on the sale of primary residence is excluded from CGT. A home will not constitute a primary residence unless: It is owned by a natural person ( not a trust, company or close corporation); and The owner or spouse of the owner must ordinarily reside in the home as his/her main residence and must use the home mainly for domestic purposes. If the capital gain on the sale of the primary residence exceeds 2million, the portion that exceeds 2 million, will be subject to CGT. The exclusion will also not apply to the portion of a capital gain that relates to any part of the residence that is used for the purpose of trade, for example, if you use your study as an office for business purposes or if you let the residence. However, there are certain exemptions to these. In the event that the primary residence is held jointly by spouses, the 2 million exclusion is divided equally between them. That is, each will qualify for an exclusion of 1 million but each will still be entitled to the exclusion. 4.2 Indicated below are the current percentages by which CGT is calculated 18% for individuals and specified trusts 22.4% for companies 36% for non-specified trusts THIS NEWSLETTE IS COMPILED IN-HOUSE BY BYON WHITE OF ESI ATTONEYS. Please contact ESI Attorneys at or Byron White at byron@esilaw.co.za should you have any further queries and/or would like to make suggestions for future property related articles!