How managing agents and trustees should deal with the schedule of replacement values

The schedule of replacement values (SRV) is a critical document, which is presented at the annual general meeting (AGM) of the body corporate for the owners to approve. Here, we unpack a few pointers on how managing agents, portfolio managers and scheme executives (trustees) should deal with the SRV and what they should be looking out for.

What is required according to legislation?

Prescribed Management Rule (PMR) 23.(4), which forms part of the regulations attached to The Sectional Titles Schemes Management Act 8 of 2011, is very specific and states the following:

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).

From the above rule, we can see that this is a schedule, which must be prepared by the body corporate, and not just a photocopy or scan from the present insurance policy.  The habit of simply photocopying the “policy schedule PQ endorsement” is poor practice and not congruent with the aforementioned rule.

The SRV should be prepared carefully after receiving the latest valuation document, ensuring that the correct figures are used, with particular attention paid to escalation figures which the valuer may include within the valuation figures itself.

What is the SRV’s relationship with the valuation?

In terms of Prescribed Management Rule 23.(3), a replacement valuation must be obtained at least every three years. This should be presented to the AGM.

By having the valuation data summarised together with the SRV (on the SRV document itself), the valuation document’s relationship with the SRV data is easily assimilated along with the figures. Even where summarised, we suggest that a copy of the latest valuation is made available at the AGM for verification, especially for the years in between valuations, so that owners do have a reference point in need.

If the preparation of the schedule is taking place a year or two after the last valuation was attended, the most recent valuation should still be referred to and interim figures obtained. Some valuers provide these interim figures as part of their service. Addsure assists the body corporate by preparing this based on the latest valuation and assumed escalation figures if the valuer’s latest figures are not available.

How to approach EUAs

We suggest that the scheme’s insurance advisor assist with the collation of these figures. Getting these wrong may lead to over-insurance and wasting premium, or under-insuring where not properly accounted for.

Another good reason that a person with an understanding of sectional titles and insurance should assist in the preparation of the schedule, is that exclusive use area (EUA) replacement values need to be stated correctly.

A common mistake is to incorrectly add EUA improvements, such as swimming pools, solar installations, etc. to additional sums, when they are still common area items. For example, if 10 owners enjoy the use of swimming pools in their EUA gardens, these should still be reflecting as common property items. These EUA improvements are still owned by all the owners collectively; to exclude these items from other owner’s unit sum totals effectively waters down the value of their sections. Additional premium for owners with such EUA rights, should be collected via the EUA contribution or separately, but not as an additional sum added to the individual owner.

What other information is required?

Notwithstanding the minimum requirements as set out in PMR 23.(4), we suggest that certain other information is also reflected. These include not only the section number but also the corresponding door number, the square meters, the PQ allocated, the additional sums and the unit total for each.

An owner decides whether improvements made to their own section are adequately covered and if not, should ask the body corporate to increase their sum insured by adding a sum in this column. The additional premium charged will be recovered from that owner.

Where owners permit their bondholders by way of their loan agreements, the banks/mortgagors will also instruct additional sums to be added to cover the bonds over these properties. Owners who are not happy with the additional sum requested by their bank need to engage with their bank to remedy the sum insured. Remember that when an owner signed for their bond, they gave their bondholder the right to increase the sum of your property insurance. If an owner is unhappy about paying unnecessary additional insurance premium, that owner should discuss this directly with their bank. The bank in turn, can instruct the broker or insurer to reduce cover accordingly.

An owner can request the managing agent or trustees to provide a copy of the most recent valuation and SRV which can be provided to the bank for them (bank) to be satisfied that their security is adequately covered.  The insurer or broker may only act on the bank’s instruction as the banks interest has been noted in the policy. By virtue of the mortgage bond and mortgagee clause in the policy, the insurer must respect the mortgagee’s rights.

Summary

In summary, owners should check that:

• The SRV has been properly prepared and not just a policy photocopy.
• The valuation was attended to within last three years.
• Their sections are adequately covered, i.e., that any improvements over and above standard finishes are added.
• The square meters of their section reflecting on the schedule is correct.
• The door number vs section numbers are correct, that EUAs are correctly allocated, and improvements insured.
• Escalations are not included in the sum insured, i.e., that these are not duplicated.