Thinking Inside the Box

A Paddocks Sectional Title Lifestyle Blog

What can sectional title trustees do when scheme budgets prove insufficient?

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By Graham Paddock

Budgeting is not an exact science. This article will concentrate on the various processes the trustees can follow when they find that they don’t have enough money for a particular budgeted expense.

By way of background, it is not unusual for owners at an AGM to impose a restriction on the trustees to the effect that they must not spend more than a stated amount on a particular expense, or perhaps on any expense, without first coming back to the owners and getting their permission, or at least telling owners that the limit needs to be exceeded and giving them an opportunity to give input or require a general meeting to discuss the issue. In addition, the prescribed management rules contain a “built in” limitation on the trustees’ spending power.

In practice, once a year at the AGM, owners in a sectional title scheme approve a budget for the administrative fund. The budget comprises a number of different expense items, each with an allocated amount. The trustees are then bound to spend funds according to that budget. PMR 9 (c) requires that the trustees must spend body corporate money in accordance with budgets that are approved by owners. They are not automatically entitled to do what has been called “bandit budgeting” by spending funds budgeted for one expense on another expense.

The trustees can, of course, raise a special contribution, defined in section 3(4) of the STSM Act as one that does not arise from the budget that owners approve at the AGM, but PMR 21(3)(a) restricts their right to do so in situations where additional income is required to meet a necessary expense that cannot reasonably be delayed until provided for in the budget for the next financial year. Even if these requirements are met, special contributions are very unpopular.

If a special contribution is not necessary, because there is sufficient money in the budget overall, and the problem the trustees face is that there is not enough money allocated to a particular expense, even though the prescribed rules do not specifically cater for the adjustment or revision of an approved budget, there is a way they can get the authority to effectively “transfer” money budgeted for one expense item to another.

Section 7(1) of the Act which allows the owners to give trustees directions as to how they must exercise their power and functions. The trustees can convene a general meeting and ask owners to give them a direction, by majority vote, to reallocate a portion of the budget approved for one particular line item to another line item.

This owner decision will authorise the transfer of the excess amount to the expense account where it is needed and bring the trustee decision to spend that money on the different expense within the scope of the limitation in prescribed management rule 9(c).

Should you require any advice on this subject, or wish to discuss any related matter with a specialist community schemes attorney, don’t hesitate to contact our consulting department at consulting@paddocks.co.za for a no-obligation quote to provide the necessary legal assistance.

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This entry was posted on August 28, 2019 by in AGM, Financial, Legal, management, Trustees, Uncategorized and tagged , , .

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