One of the most popular forms of residential habitation in South Africa is undeniably a sectional title or community Scheme. Over recent years, this property sector has experienced heavy regulation in the form of the Community Schemes Ombud Service Act 2011 (CSOS) and the Sectional Titles Scheme Management Act 2011 (STSM) which came into force in October 2016. The primary objective of the legislation is to protect the interests of all members of the scheme in their capacity as scheme members and property owners.
Purpose of the Act
Section 3 of the STSM Act (Functions of bodies corporate) includes specific directives to the body corporate which aims to ensure successful administration of the body corporate. These include ensuring sufficient funds are available to maintain the property and that the property is comprehensively insured. Failure to comply with any of these directives constitutes breaking the law.
Some of the oldest sectional title properties in South Africa are multi-level blocks of flats located in inner-city areas such as Hillbrow, Joubert Park and Berea in Johannesburg, Sunnyside in Pretoria as well as Albert Park and Point in Durban. In their heyday most of these properties were considered prime residential real estate but that has changed over the last three to four decades, resulting in considerable urban decay and deterioration in quality and value.
With the ever-increasing demand for low cost housing, the inner-city community scheme properties have become a prime source of supply for such housing. The properties are rarely maintained, often over-crowded and basic services are often cancelled due to non-payment of accounts.
Insurance not likely
In terms of the STSM Act, all registered community scheme properties are obliged to take out adequate insurance to protect the interests of the property owners. For some inner-city properties, purchasing property insurance is unlikely as the insurance risks associated with these properties are simply too high for most insurers. The most serious risk factors include abuse of or lack of electrical and water service that increase risk of injury or damage, poorly maintained elevators increasing the risk of injury and death, and long-term lack of maintenance that lead to extensive decay over time. Risk of fire and public liability pose the greatest threat.
A case study
Consider a ten-storey inner-city building being the only building on the block with an insurance policy. The property is better maintained than most of the neighbouring properties but still lacks proper maintenance and compliance with by-laws. There is widespread abuse of electrical and water facilities and most units are overcrowded. Use of candles, paraffin and gas appliances is commonplace and one day, this causes a fire. The fire spreads quickly and causes a mass evacuation of the building. The lack of maintenance has left the fire escape rusty with a deteriorating support structure. Consequently, the fire escape cannot support the mass of panic-stricken people trying to escape the building which causes it to collapse which unfortunately results in a number of serious injuries and some deaths. Before the fire fighters arrive the fire spreads to a neighbouring building where the tragic circumstances of the first building are repeated. The neighbouring building does not have any insurance.
Following the circumstances above, the first building’s insurer is approached to provide compensation for the losses suffered. The fixtures and fitting of the insured property were old and many were non-functional. How does the insurer now reinstate property that was in a state of neglect prior to the fire? Will the landlord have evidence of the building condition prior to the fire and proof of rentals for the loss of rent claims? Most building insurance policies have a condition that insured property must comply with National Building Regulations. If it does not, any claim may be in serious jeopardy. Will the liability insurance be sufficient to compensate the neighbouring property for their losses when they seek compensation from the building where the fire started? Where will compensation come from for those who have died as a result of the poorly maintained fire escape and the spread of fire from one building to another?
Now you begin to understand why the insurance underwriters are not normally prepared to offer terms to these poorly maintained inner-city properties. The financial risks are simply too high.
Insurers are not obliged to accept risk
So, while the STSM and CSOS Acts dictate that insurance must be issued, the insurance industry is not usually willing to underwrite the high risks. The community scheme is therefore placed in a very precarious position being unable to comply with their legal obligations. If the Insurers cannot be compelled to accept a risk that is deemed so onerous it is not worth underwriting, what are the trustees and community scheme to do?
Members have a responsibility
In order to comply with the law and insure their property, community scheme members need to ensure that their property is sufficiently maintained and compliant with all relevant legislation. When this is achieved and maintained, it is reasonable to expect that most insurance underwriters will offer acceptable terms of insurance to an inner-city property.
Achieving this level of maintenance may not be this simple. Underwriters will not only consider the property to be insured but also the area in which it is located. This will include risks imposed by neighbouring properties like some in the inner-city zones where tall buildings are built right up against each other.
Therefore, it is of vital importance for property owners to do whatever it takes to achieve and maintain an acceptable insurance risk profile for their property. Without fulfilling this obligation, no insurer is going to want to underwrite the risk nor are they under any obligation to accommodate the property owners. By not maintaining their property in an acceptable and insurable state, the property owners are in direct contravention of their legal responsibility.
Author: Bruce Gibson
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