AA - Jan 2021

Author: Lamees Daniels
28 January 2021

WHAT IS INVOLVED WHEN A SHARE BLOCK COMPANY CONVERTS ITS PROPERTY INTO A SECTIONAL TITLE SCHEME

Although registering a new development as a share block scheme is nowadays not a frequent option chosen by property developers, there exists a number of complexes that are based on a share block system of participation in the residential units that make up the scheme. What one sees more of in the real estate arena are developments erected as sectional title schemes.

Does ‘ownership’ in a share block scheme differ from ownership in a sectional title scheme?

Ownership of shares in a share block company is regulated by the Share Blocks Control Act of 1980. An individual wishing to acquire rights to occupy a unit in a building that is owned by a share block company, will enter into an agreement in terms of which shares in the company are bought. To be exact, a bundle of shares grouped together, constituting a block of shares, are bought.

The purchaser is also required to enter into an additional agreement with the company in which details of the purchaser’s rights to the use and occupation of a part of the building, are set out. This is referred to as a “use agreement”.

The shareholder is thus the owner of shares in a company that owns immovable property, and he or she does not acquire ownership of immovable property itself.

When a purchaser buys a unit in a sectional title scheme, he or she acquires immovable property and will receive a title deed to the property upon registration of the purchase transaction in a deeds registry.

Banks do not grant mortgage loans to assist the purchasers of shares in a share block scheme. For a purchaser in a sectional title scheme, mortgage financing is available. This is a major advantage to purchasers of units in a sectional title scheme as opposed to those purchasing shares in a share block company.

How does a levy allocation work in a share block scheme?

Similarly to sectional title schemes, in share block schemes, a shareholder’s levy contribution amount is calculated according to the number of shares held by the individual. The levy amount is usually fixed according to this calculation and the levies received are used for the upkeep, maintenance, repair and building insurance of the scheme.

In sectional title schemes the levy amount each owner is liable for is calculated in accordance with their participation quota in the scheme. The reasoning behind this calculation is the fact that owners in a sectional title scheme own a share in the common property over and above their individual unit and the higher your participation quota, the higher your share in the common property and liability in respect of levies.

Circumstances under which share block schemes may be converted to sectional title schemes

There are two instances where a share block scheme may be converted into a sectional title scheme. The first is when 30% of the shareholders have agreed to the conversion. The second is when the directors of the share block company pass a resolution to convert the share block scheme to that of sectional title.

In the first instance, a meeting of shareholders is called wherein the vote in respect of the conversion is taken. The Share Blocks Control Act lists a number of requirements to be met in order for the shareholders resolution to be valid. This includes that: a notice detailing the meeting must be sent to every shareholder; the notice must contain details of the proposed sectional title scheme and must notify the recipient that the rules which will govern the scheme together with the sectional title plans will be made available for viewing to every shareholder.

Once the resolution has been validly passed, notice of the approval must be given to all affected parties ie every shareholder of the company, every creditor (owed more than R500 by the company) and any person entitled to a share in the company by way of pledge, within 21 days of the resolution being taken. Notice of the resolution must be sent by way of registered post to the last known residential or business address of the shareholder or the address reflected in the company’s share register.

The notice of approval must state that the company intends applying to the Surveyor General and local authority for the approval of the development and opening of a sectional title register in respect of the property owned by the share block company. The notice must further call for any objections to be provided in written form within one month of the notice having been dispatched.

Registration in the deeds office of the conversion

Once the company is satisfied that all objections have been dealt with and that there are no pending court applications, proof must be provided to the Companies and Intellectual Property Commission (CIPC) that all requirements listed above in order for the conversion to take place, have been met.

After this notice, the company may instruct a land surveyor to draft the necessary sectional title plans and further instruct a conveyancer to apply to the deeds office for the opening of a sectional title register in respect of the land.

Once the sectional title plan has been registered at the Deeds Office and the sectional title scheme opened, all units in the scheme will be registered in the company’s name until such time as the units are transferred to each individual shareholder.

The Transfer Duty Act provides that in the event transfer duty was paid on the acquisition of shares by the shareholder, on conversion to sectional title and eventual transfer, no transfer duty will be payable.

For more information on the process involved in Share Block to Sectional Title conversions kindly contact our Senior Associate and Conveyancer, Lamees Daniels on lameesd@stbb.co.za

The original article can be viewed here