Most people buying into a sectional title scheme ask the obvious questions - Is the unit the right size? Is the location right? What are the levies? Very few ask the question that matters most: Is this scheme financially solvent?
And most people already living in a scheme don't think about the body corporate's finances at all, until the building starts looking neglected, a special levy arrives, or the lights in the parking garage stop working because Eskom's account hasn't been paid.
Financial distress in a sectional title scheme is more common than the industry likes to admit. And it tends to follow a predictable pattern.
How Schemes Get Into Trouble
It rarely happens overnight. The warning signs are usually there for years before the crisis becomes visible.
The most common culprit is chronic levy under-collection. Either because the levy was set too low to begin with, or because arrears have been allowed to accumulate unchallenged. In a scheme of twenty units, three or four owners who simply stop paying can hollow out the cash flow within months. Without that income, the body corporate starts making choices: which creditors to pay, what maintenance to defer, what obligations to quietly ignore.
The reserve fund is usually the first casualty. Trustees dip into it to cover operational shortfalls. Then the reserve fund is gone, and the next large repair - a roof, a lift motor, a common-area, or pipe failure becomes a crisis with no funding behind it.
From there, the municipality stops receiving payment, hen the insurer. A body corporate that has lost its building insurance is in an extraordinarily dangerous position. Every owner in that scheme is exposed, and most of them won't know it.
By the time the situation becomes unmistakable, the scheme typically owes money to multiple creditors simultaneously - the municipality, the insurer, the managing agent, service providers, and possibly a bank, if there is a mortgage bond registered against common property.
What the Law Says And What It Doesn't
Here is the uncomfortable reality: Sectional title schemes cannot be liquidated in the conventional sense. A body corporate is not a company. It cannot simply be wound up, dissolved, and distributed. The scheme continues to exist as long as the sectional title register exists, regardless of its financial condition.
This is both a protection and a trap.
It means creditors cannot simply foreclose on the common property and leave owners with nothing. But it also means there is no clean exit. A financially ruined scheme is still a scheme. Owners remain bound by it. Their individual units still exist within it. And the obligations -insurance, maintenance, levy collection, compliance with the STSMA , do not pause because the body corporate has no money.
What the law does provide is a framework for rescue, not liquidation.
The Route Out: What a Distressed Scheme Must Do
Getting a scheme out of financial distress is not a single action. It is a process, and it requires honesty, legal compliance, and in most cases, professional intervention.
Step 1: Appoint a competent managing agent immediately
A scheme in distress that is self-managed, or managed by an agent who has been passive about arrears, needs professional administration as a matter of urgency. This is not optional. The STSMA places specific obligations on the body corporate, and those obligations cannot be met by trustees operating without systems or expertise.
Step 2: Obtain a full financial picture
What does the scheme owe, and to whom? What are the current arrears, and who are the defaulting owners? What is the reserve fund balance? Are municipal accounts up to date? Is the building currently insured? Until these questions are answered with precision, no meaningful recovery plan can be developed.
Step 3: Levy arrears recovery must be treated as non-negotiable.
A body corporate has the right to recover arrear levies from owners and under the STSMA, it has relatively effective mechanisms to do so, including the ability to approach the court for a judgment and attach rental income from tenants occupying units owned by defaulting owners.
Trustees who have avoided enforcement action out of awkwardness or sympathy have typically made the problem significantly worse.
Step 4: An emergency special levy is almost always necessary
In a scheme that has depleted its reserves and accumulated creditor debt, the operating levy alone will not be sufficient to fund a recovery. A special levy, passed correctly at a general meeting with proper notice, is the legal instrument for raising capital for specific purposes. It is unpleasant and owners will object but - a special levy to restore the insurance, settle the municipal account, and fund critical repairs is considerably less painful than the alternative.
Step 5: Engage creditors with a plan
Municipalities, insurers, and managing agents are accustomed to dealing with distressed schemes. A body corporate that approaches creditors proactively, with a concrete recovery plan, demonstrable levy collections, and a realistic timeline is far more likely to negotiate a payment arrangement than one that goes silent and waits. Silence is almost always interpreted as absence of intent to pay.
Step 6: Consider the Community Schemes Ombud Service
The CSOS has jurisdiction over financial disputes within community schemes. In cases where the body corporate's governance has broken down, or where a dispute between trustees and owners is preventing recovery, the CSOS can intervene as a neutral adjudicator. This is considerably less expensive than litigation, and often faster.
Step 7: In extreme cases, seek a court-appointed administrator
Where the body corporate has completely lost the ability to govern itself, where trustees have resigned, arrears are catastrophic, and no AGM has been held in years, an application can be made to the High Court for the appointment of an administrator.
An administrator assumes the powers of the trustees and the members of the body corporate for a defined period, with the mandate to stabilise the scheme.
This is a last resort, but it is a resort. It is the closest thing the STSMA provides to a rescue mechanism for a scheme that has lost the ability to help itself.
How to Verify a Scheme Before You Buy
The time to discover that a scheme is financially distressed is before transfer, not after.
Once a property is registered in your name, you are a member of the body corporate, and you inherit everything that comes with that, including its creditors.
Due diligence on a sectional title scheme is not complicated, but it requires asking the right questions and insisting on proper documentation.
Request the last three years of audited financial statements
Not management accounts, audited statements. If the body corporate cannot produce audited financials, that is itself a serious red flag. The STSMA requires annual audits, and a scheme that has not been audited is a scheme that may be hiding something, or may simply have been run without adequate governance.
Check the reserve fund balance against the scheme's maintenance plan
The STSMA requires body corporates to maintain a ten-year maintenance plan and to fund their reserve accordingly. A scheme with a large, ageing building and a near-empty reserve fund is a scheme with a large, unfunded liability.
That liability will eventually arrive as a special levy - potentially a significant one.
Ask for a levy clearance certificate and check what it covers
A levy clearance certificate confirms that the seller's account with the body corporate is current. It does not tell you anything about the body corporate's own financial health - those are two completely different things.
Request the current levy schedule and the most recent AGM minutes
The AGM minutes will show you what was discussed, what resolutions were passed, what complaints were raised, and how trustees responded.
A scheme with well-documented AGMs and clearly passed resolutions is a scheme with some governance in place.
A scheme with no recent AGM minutes, or minutes that reveal ongoing unresolved disputes, warrants careful scrutiny.
Ask whether there are any pending special levies
The seller is not always required to disclose this proactively. Ask explicitly if a special levy has been approved but not yet invoiced, or is under discussion - you need to know before you buy.
Check the municipal account
A conveyancer conducting the transfer will obtain a rates clearance certificate from the municipality, confirming that the municipal account in respect of the unit is clear. But the body corporate itself may owe the municipality money for common-area water and electricity.
A direct inquiry to the managing agent or municipality about the scheme's bulk account can reveal this.
Talk to other owners in the scheme
This sounds informal, but it is often the most revealing step. Owners who live in a scheme know things that do not appear in any document. If multiple owners express frustration about maintenance, mention a managing agent who is difficult to reach, or refer to special levies in the recent past, take that seriously.
A Final Word for Buyers
A well-run sectional title scheme is a sound investment. A distressed one can become a financial trap that is very difficult to exit, because the value of your unit is directly linked to the health of the scheme around it, and because you cannot simply resign from a body corporate that is bleeding money.
The information needed to make this assessment is legally available to any prospective buyer. The question is whether you ask for it.
**Van Deventer Dowlath & Marx Incorporated (VDM) assists buyers, owners, trustees, and body corporates with sectional title due diligence, levy recovery, scheme governance, and CSOS proceedings. If you are buying into a scheme or dealing with a distressed body corporate, speak to us before the problem becomes yours to solve.