Thinking Inside the Box

A Paddocks Sectional Title Lifestyle Blog

What’s in a name?

Homeowner_associations.png

By Anton Kelly

The formal name of a home owners’ association (“HOA”) can contain significant information for owners and prospective owners of properties in the development.

The name of an HOA that is established as a non-profit company – as is most common outside the Western Cape – must comply with certain requirements of the Companies Act, 71 of 2008 (the “Act”).

 While it is possible for an HOA that is a company to be constituted as a ‘for profit’ company, almost all are non-profit companies, and therefore their names must end with the letters NPC. However, their names usually include the expression “(RF)” just in front of NPC, meaning ring fenced. Owners and prospective owners need to understand the implications of the ring fencing provision, which has to do with changing the company’s memorandum of incorporation (MOI).

paddocks_moi_example

The Act provides that the MOI can be changed by a special resolution of the members of the company. In HOAs, the property owners themselves are the members, and so, working together by taking a special resolution, the owners can change the fundamental company documentation that governs the way the HOA is run.

Provisions of the MOI include things particularly significant to members of HOAs, such as how and by whom the levies are set and who can make rules. The conduct/estate rules as well as the architectural and landscaping guidelines, that are features of HOAs, are linked to the MOI in a way that both makes them binding on the members, and caters for their change. So, in theory, a group of owners large enough to take a special resolution can make fundamental changes to their HOA. There is a complicating factor though, and that is ring fencing provisions.

Ring fencing provisions require something in addition to the special resolution to change the MOI. The most common ring fencing provision is the requirement that the local municipality consent to changes to the MOI, a condition the municipality usually makes in its approval of the subdivision of land that results in the establishment of the HOA, but there could be others. The ring fencing provision could limit the possible changes to certain parts of the MOI and exclude others. The implication could be that some provisions of the MOI, for example a rule making entitlement of the directors, or the provisions of the architectural guidelines, are impossible to change.

Whatever the ring fencing provisions, owners need to know about them to fully understand consequent limitations on their membership rights, and prospective owners need to know about them so they can make an informed decision whether or not to buy a property in the HOA and therefore subject themselves to unchangeable terms of the MOI. The expression (RF) in the HOA’s name will alert them to this possibility.

Image source: truepropertysolutionsinc.com

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