A reader has put his sectional title unit up for sale, but wants to ascertain the financial status of the complex and whether he is entitled to any refund from the portion he has paid to the reserve fund.
He says the body corporate has not made the financial reports of the previous financial year available.
See the reader’s question here.
The reader has also questioned the purpose of the reserve fund.
A reserve fund differs from the administrative fund of a sectional title scheme.
An administrative fund is to be used for the operating expenses of a body corporate for a particular financial year.
The establishment of a reserve fund is a must for a body corporate under the Sectional Titles Management Act.
This act states that the body corporate must establish and maintain a reserve fund which is reasonably sufficient to cover the cost of future maintenance and repair of common property.
The reserve fund is to be factored into the replacement plan.
This is a plan prepared by the body corporate that considers the state and future maintenance, repair and replacement of major capital items forming part of the common property over the next 10 years.
Once the amounts are paid over, they vest in the body corporate for the intended purpose and cannot be withdrawn as one might do in respect of funds held in a bank.
If a withdrawal was possible, it would imply that the purchaser would immediately, upon purchase, have to pay over a lump sum to the body corporate to ensure the financial integrity of the scheme’s budget.
Withdrawing funds would entail an administrative burden on those concerned.
That is not to mention the additional funds an interested purchaser would have to cover, together with the other expenses, when purchasing the section.
However, that is not to say that the funds paid over but not expended have no bearing on the reader’s envisaged sale.
The amounts paid by the reader – theoretically to his credit – could be taken into account in the determination of the purchase price as the purchaser steps into the shoes of the previous owner and thus has an interest in the sums already paid.
An annual general meeting, subject to certain exceptions, is to be held within four months of the scheme’s financial year-end.
The audit of the financial statements is also required to be completed in this period.
One of the items to be dealt with at this meeting is the approval of the annual financial statements.
The body corporate must also make any of the books of account and records available for inspection and copying.
Thus, if someone was not provided with a copy in anticipation of the annual general meeting, he is able to request a copy of the financial statements.
A prospective purchaser is not permitted to request a copy of the financial statements in accordance with the act.
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