Case study: HOA penalty clause for not building in time, unenforceable?

31 March 2023 | Matthew Davidse

The importance of a clause in a homeowners’ association’s (“HOA/s”) constitution or memorandum of incorporation, in motivating owners to commence and complete building work timeously, is not to be understated. A clause of this nature’s enforceability and simple meaning may not necessarily be interpreted by a court in the same way that an HOA’s Trustees or Directors may interpret it. Thus, the value of obtaining specialist legal advice when drafting or amending a constitution or memorandum of incorporation of an HOA is highlighted in this judgment. This blog post is intended to summarise the key points of the case, and is not intended to be a legal opinion on the issues.

Chapman's Bay Estate Homeowners' Association v Lotter and Others (9387/2022) [2023] ZAWCHC 35

In a judgement handed down on 24 February 2023, the High Court (Western Cape division) (“court”) interpreted the wording of a clause in a homeowners’ association’s (“HOA”) constitution that obliged the initial purchaser of an erf in the HOA to complete the construction of a dwelling within a certain period, failing which, penalty levies would become payable by the initial purchaser to the HOA. 

From the plain text of the clause of the constitution, as viewed by the court in context, it appeared that in relation to penalties levied by the HOA, the responsibility to construct a dwelling within the stipulated time period fell on the member who initially took transfer from the developer, and that the responsibility did not automatically flow to the subsequent purchasers of a vacant erf.

Brief facts of the matter:

The respondent in the matter took transfer of a vacant erf in the HOA during early 2021. Accordingly, the respondent became a member of the HOA, and was bound by the provisions of its constitution from the date of the transfer. The respondent was not the first owner of the erf. The erf in question was initially transferred from the developer to the first purchaser in 2017, and the first purchaser later sold the erf to the respondent during 2021. The first purchaser failed to timeously commence or complete construction prior to effecting transfer of the erf to the respondent.

The respondent began, and completed, construction on the erf shortly after taking transfer. The HOA charged the respondent with penalty levies, as construction had not been completed within 3 years from the date of the initial transfer of the erf from the developer to the first owner.

Clause 9.10 of the constitution of the HOA stipulated:

“Penalty levies as determined by the Trustees Committee are payable to the Association if a dwelling on the property is not completed within 3 (three) years from date of transfer of the property from the Developer on the basis that construction of the dwelling should commence within 2 (two) years from date of transfer of the property into the name of the Purchaser, and completed within 1 (one) year from date of commencement of such construction process, which shall be undertaken on a continuous basis, unless an extended time period is approved by the Design Review Committee due to the complexity of the dwelling.”

The respondent disputed the penalty levies charged, with the HOA, and the dispute was eventually referred to the Community Schemes Ombud Service (“the CSOS”) for adjudication.

The CSOS adjudicator subsequently ordered in favour of the respondent (the owner), in that the HOA was to desist in charging building penalty levies on subsequent owners of erven. The matter was then brought on appeal by the applicant (the HOA) to the court in terms of section 57 of the Community Schemes Ombud Service Act 9 of 2011 (“the Act”).

The court noted in its judgement that the proper interpretation of clause 9.10 of the constitution of the HOA was crucial to the determination of the dispute between the HOA and the respondent.

The respondent owner’s argument was that subsequent owners should not be liable to pay penalty levies under clause 9.10 of the constitution, where such subsequent owner was not to blame for the fact that the time period stipulated in the clause had not been complied with by the first owner. 

The HOA argued that clause 9.10 was to be interpreted to mean that the three-year period, to commence and complete construction on a dwelling, was to be calculated from the date of transfer from the developer, to the first purchaser. Thus, irrespective of whether an erf upon which construction has not yet commenced or been completed is acquired by a subsequent owner, if at that stage, the three-year time period has already expired, the subsequent owner may still be held liable for payment of penalty levies. The HOA argued that if the clause was to be interpreted otherwise, the purpose of the clause, namely to encourage the completion of building works in the HOA as soon as possible, would be defeated.

Judgment:

The court noted that the plain text of clause 9.10 of the constitution, when viewed in the context of the HOA’s constitution as a whole, would be the starting point when tasked with interpreting the clause.

The court further argued that, based on the proper interpretation of the actual wording of clause 9.10 of the constitution, should construction on a vacant erf not be completed by the first purchaser thereof, the penalty levies would not attach to the erf itself, but would be based on the obligation of the member who took transfer from the developer to construct a dwelling within 3 years after the date of transfer.

The obligation of the first owner/purchaser would thus not be transferred to the subsequent owner, as the court noted , is acknowledged by clause 7.5 of the constitution, which stipulates that the rights and obligations of members of the HOA are not transferable.

The court argued that it would be impossible for a subsequent owner to comply with the plain wording of the clause, if they took transfer of an erf where the three-year period had already expired, and thus the purpose of the clause would not be served by imposing penalties on a subsequent owner in that case.

The court further referenced, amongst others, clause 9.2 of the constitution of the HOA, which stated that the purpose of the Trustee committee of the HOA in imposing levies upon members was to meet the incurred and reasonably anticipated expenses of the HOA, in respect of the management of the Association and its affairs, and in relation to the facilities and services in connection with the HOA.

In light of the above, the court noted that the imposition of penalty levies on subsequent owners, by reason of the first owner not having fulfilled their obligation under clause 9.10 of the constitution, would have to be provided for in the aforementioned clause expressly, otherwise the Trustees would be acting outside of their scope of powers.

In this regard, where the court is tasked with interpreting the words of a contract, in this case an HOA’s constitution, the court referred to the dictum in Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) at para [18] which stated, “Judges must be alert to, and guard against, the temptation to substitute what they regard as reasonable, sensible or businesslike for the words actually used.” 

The court thus confirmed that a clause in a contract, in this case, the HOA’s constitution, is interpreted on its plain wording, and within the context of the entire document.

According to the court, for the HOA to have validly imposed penalty levies on the respondent, the text of clause 9.10 of the constitution must have provided that once the 3 year period has lapsed, irrespective of whether the erf was transferred to a subsequent owner, penalty levies may continue to be imposed until construction has been completed. Thus, in terms of the actual wording of the clause, the obligation to comply with the provisions of clause 9.10 of the constitution, must have been conferred on the subsequent owners of an erf as well, in terms of the actual wording of the clause.

Thus, the court held that the HOA was not entitled to charge subsequent owners with such penalty levies, based on the plain meaning of the actual words used in clause 9.10 of the HOA’s constitution.

Conclusion:

It is in the interests of all owners in an HOA for building work to be completed within a reasonable time, as referenced in clause 9.10. of the HOA concerned, and thus a provision of this nature is not uncommon in HOA constitutions or memoranda of incorporation. Building work within an estate can be a nuisance, threaten property values in an estate if construction persists indefinitely, cause increased security risks, and the common areas of the estate can be exposed to potential damage due to heavy machinery, increased traffic, etc.

It is clear, however, from the above judgement, that the enforceability of a clause in an HOA’s constitution or memorandum of incorporation only stretches as far as  the simple meaning of the actual words used therein. Thus, unless the clause is comprehensively and accurately worded to reflect the purpose for which it was drafted, the enforceability thereof is limited.

The full judgment can be viewed here. 

Please contact us at TVDM Consultants at info@tvdmconsultants.com or 061 536 3138 if you would like more information, or if you have any questions on the article above. If you have not already done so, click here to sign up to our newsletter.

About the Author:

Matthew Davidse is a community scheme consultant for us at TVDM Consultants.

You can read more about him by clicking here.