In terms of The Sectional Titles Schemes Management Act 8 of 2011 (STSMA), specifically, Prescribed Management Rule 23.(3),
A body corporate must obtain a replacement valuation of all buildings and improvements that it must insure at least every three years and present such replacement valuation to the annual general meeting.
Following this professional replacement cost valuation, a report together with the latest figures will be presented to the trustees. What should happen?
Prescribed management rule 23.(4) follows and is very clear:
A body corporate must prepare for each annual general meeting schedules showing estimates of –
(a) the replacement value of the buildings and all improvements to the common property; and
(b) the replacement value of each unit, excluding the member’s interest in the land included in the scheme, the total of such values of all units being equal to the value referred to in sub-rule 4(a).
It is no coincidence that sub-rule 23.(4) follows sub-rule 23.(3) in close succession.
It is our view that once a formal valuation is received, the body corporate should take steps to prepare a fresh (draft) Schedule of Replacement Values (SRV) which can be presented at the next AGM.
It would be sensible for a specialist sectional title insurance advisor to assist in preparing this document so that aligns with the risks that may need to be shown separately, for example, retaining wall structures or exclusive use area panels.
It makes sense that step one would be to analyse the figures and report and prepare a fresh draft Schedule of Replacement Values (SRV).
If the replacement value is now higher, we would immediately instruct the broker/insurer to increase the sum insured accordingly, also taking the previously arranged additional sums* into account.
*The additional sums are the increased values that owners have requested, or their bank bondholders have instructed.
The draft SRV is then ratified at the next AGM.
If the values have decreased, the body corporate trustees should take a view on the course of action which might follow one of the following courses of action:
- If the valuation undertaken reflects a relatively minor adjustment downwards, say 2% or 3%, then depending on the impact on premium, i.e. if a lower premium is achieved (by way of quotation on lower figures), then being a small amount, the trustees could reduce the sum insured and premium but should notify all owners of this in writing.
- If the valuation undertaken results in a much lower figure than the present sum insured, say 10% or more, then the sum insured should not be reduced until the next AGM (if imminent) or an SGM is called to deal with the matter. This also assumes that a substantial premium saving is involved, otherwise, it is pointless even reducing the sum insured.
- If the body corporate is small, or all owners can be responsive, i.e., if all owners otherwise agree, then the writer does do not see any reason not to then, and only then, reduce the sum insured, i.e. if all owners have agreed to this.
It must be remembered that the previous AGM would have agreed to and voted on the previous higher figures and there now may be owners and/or banks relying on these higher sums. Hence the importance of dealing with a reduction carefully.
We have various further articles and videos on the subject of valuations and SRVs. A specific video explainer on the reduction of values following a valuation can be found here.
Author: Mike Addison
Addsure is South Africa’s leading sectional title insurance brokerage. Obtain fit and proper advice from advisors who understand sectional title. Contact our head office, Cape Town (021) 551 5069 who will put you directly in touch with one of our nationwide advisors.