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How to deal with cash in lieu settlements in the sectional title environment

cash in lieu

When it comes to an owner wanting to attend to repairs using their own contractor and prefers a cash in lieu settlement, trustees and portfolio managers must should apply their minds carefully as to what best suits the dynamics of the body corporate. There is a balance between being too autocratic and imposing on a person’s rights relating to their section, versus finding a reasonable way to ensure that insurance claim proceeds are applied to reinstatement.

From our experience, and especially during more challenging economic times, some owners may have other, more pressing debt issues or financial commitments which may tempt them to use a cash in lieu settlement for other purposes rather than reinstating damages to their section. Arguably, this could be their right in a normal home environment but this section of the Sectional Titles Schemes Management Act (STSMA) obliges owners in the following three ways:

  1. Where owners do not reinstate damages with claim proceeds, damages remain and the section deteriorates. This could mean rotten cupboards, broken flooring, rotten carpets or no hot water. If this occurs throughout the complex, all owners will be affected over time as the overall building condition deteriorates from within.
  2. The insurer needs to be satisfied that the repairs and cause of the damage have been attended to. All too often, the same (or similar) event transpires and the insurer could be settling the same claim twice which will be to the detriment of other owners as the claims ratio and premiums are negatively affected. The insurer may thus be reluctant to insure the building at all in future.
  3. By not seeing to the repairs, the value of any bond holder’s security is diminished. As an alternative to settling a supplier or reimbursing an owner for invoiced work done, one should be settling or reducing the bond of the owner, given the bank’s interest. The trustees have a duty to the bondholder in respect of their interest.

In an ideal world, payments should only be made for an invoice or quote from supplier, to the supplier. However, we realise that there are some circumstances which requires deviation from this.

In the case the body corporate does decide to allow an owner to take cash in lieu, as a managing agent, we would be inclined to have an indemnity signed that looks something like this:

_______________________________________________________________________________________________________

CASH IN LIEU SETTLEMENT AGREEMENT

I / We, ……………………………………………………………., the owner of Section ………. of the body corporate of ……………………

 ………………………………………………………………..,  accept that this payment is in full and final settlement of all claims and

related costs, in the amount of: R…………………………………………………….

(in words………………………………………………………………………………………………………………………………………………………..)

I understand and acknowledge that the insurer has fully discharged their duties in respect of this claim by settling with the body corporate, financially.

Furthermore, I acknowledge that I am fully aware of Section 3.(1)(j) of the Sectional Titles Scheme Management Act which states:

Subject to section 17 and to the rights of the holder of any sectional mortgage bond, forthwith to apply any insurance money received by it in respect of the damage to the building, in rebuilding and reinstating the building or buildings in so far as this may be effected.

I undertake to apply the full proceeds of the funds received by me in this claim disbursement to the repairs and reinstatement of the damages claimed for.

I take full responsibility for the workmanship and materials used in this repair.

I agree that I shall provide proof of such repairs, including photos and receipts or other required proof of such work, within 60 days of receiving such disbursement, failing which the body corporate may immediately recover the same amount from me.

Dated this ………………….    day of  ………………………………………………………… 2022

…………………………………………………………………………………….

(signed by) Owner

_____________________________________________________________________________________________________

It is important to reiterate, that this draft is to assist portfolio managers and trustees; it is not in any way to be seen as an Addsure standard or direction. This matter is strictly speaking a body corporate management decision to be taken in accordance with the body corporate’s own interpretation of the Sectional Title’s Scheme Management Act (STSMA) Section 3.(1)(j) Functions of the body corporate which reads:

Subject to section 17 and to the rights of the holder of any sectional mortgage bond, forthwith to apply any insurance money received by it in respect of the damage to the building, in rebuilding and reinstating the building or buildings in so far as this may be effected.

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.