Where are the Executive Managing Agents?

10 June 2022 | Björn Laubscher

Being a trustee of a body corporate is often a thankless task, but also a position that is seldom occupied by someone deemed to be adequately qualified to carry such tremendous responsibility. Trustees have a fiduciary duty to administer the body corporate’s financials on behalf of its members. Serving as an example, the trustees must ensure that the body corporate is adequately insured and practising preventative maintenance of its capital assets. In terms of their fiduciary obligations, trustees can even be held personally accountable for their neglectful actions or inaction.

The following example demonstrates how trustees could inadvertently land the body corporate, and potentially themselves, in hot water:

In determining an adequate sum insured for the body corporate’s buildings insurance, the trustees appoint a valuer to provide them with a professional replacement cost estimate. 6 months into the policy term, 2 units suffer damage as a result of a fire, leading to a claim for R1 000 000.00 The insurer’s loss adjuster finds that the body corporate is under-insured by 30%, based on the valuer’s erroneous recommendation.

The insurer pays out only 70% of the claim amount, leaving the body corporate with a shortfall of R300 000.00. When attempting to recover this amount by holding the valuer liable, the trustees discover that the valuer does not hold sufficient professional indemnity insurance, and is unable to compensate the body corporate. With no useful recourse against the valuer, the affected owners now hold the trustees accountable for appointing an inadequately qualified service provider.

The trustees refer the claim to the body corporate’s trustee indemnity insurance, but the insurer refutes the claim on the basis that the trustees had acted in a manner deemed to be gross negligence, because it was pointed out to them that a valuer’s level of professional indemnity cover must be a critical consideration during the appointment process.

Although the trustees had meant well by selecting the lowest-priced service provider, they could now be held personally liable for an amount that is far higher than the amount they had supposedly saved the body corporate.

In this respect, many people feel that the legislation is flawed, as it supposedly makes those, who are willing to sacrifice their time for little to no remuneration, vulnerable to serious repercussions. In reality, the legislation aims to prevent mismanagement, and to make would-be trustees think twice about what they are potentially getting themselves into.

What does the law say?

With regard to the trustees’ fiduciary relationship to the body corporate, section 8 of the Sectional Titles Schemes Management Act 8 of 2011 (“the STSMA”) stipulates that a trustee must:

• act honestly and in good faith;

• exercise their powers in the interest, and for the benefit of the body corporate;

• avoid any material conflict between their own interests and those of the body corporate;

• not receive any personal economic benefit, direct or indirect, from the body corporate or from any other person;

• be personally liable to the body corporate for any loss suffered when in breach of their fiduciary duty, or when the they benefit economically from such breach.

Trustees potentially lacking financial skills, a legal background and who are not maintenance savvy, would live up to their fiduciary obligations by either educating themselves and/or delegating the function by appointing suitably qualified professionals. 

Considering that the average committee of trustees oversees assets worth tens or hundreds of millions of Rands, the sectional title legislation aims to discourage the practice of appointing likely inexperienced and unskilled individuals to manage the financial prosperity of the life-investments of millions of property owners across South Africa. Moreover, the STSMA seeks to promote the appointment of executive managing agents (“EMA’s”) who are trained and qualified to perform the functions and exercise the powers that would otherwise be performed and exercised by trustees.

According to Prescribed Management Rule 28, the body corporate may appoint an EMA by special resolution. Alternatively, members with a combined participation quota of 25% may apply to the Community Scheme Ombud Service (“the CSOS”) for the appointment of an EMA.

PMR Rule 28(3) states that an EMA:

(a) is subject to all the duties and obligations of a trustee under the Act and the rules of the scheme;

(b) is obliged to manage the scheme with the required professional level of skill and care;

(c) is liable for any loss suffered by the body corporate as a result of not applying such skill and care;

(d) has a fiduciary obligation to every member of the body corporate;

(e) must arrange for the inspection of the common property at least every six months; and

(f) must report at least every four months to every member of the body corporate on the administration of the scheme." 

The EMA’s report, as referred above, must, as a minimum, include:

(a) proposed repairs to and maintenance of the common property and assets of the body corporate within the next four months;

(b) matters the executive managing agent considers relevant to the condition of the common property and the assets of the body corporate;

(c) the balance of each of the administrative and reserve funds of the body corporate on the date of the report and a reconciliation statement for each fund; and

(d) for the period since the appointment of the executive managing agent or from the date of the last report:

(i) the expenses of the body corporate, including repair, maintenance and replacement costs; and

(ii) a brief description of the date and nature of all decisions made by the executive managing agent.

This begs the question, why are bodies corporate not embracing the appointment of such a professional party more than what we are seeing in the industry, especially in the light of stringent fiduciary duties and personal liability.

The fact of the matter is, that the vast majority of community schemes are in dire need of an EMA, but either they are unaware of this option, or simply unwilling to opt for this route. The likely explanation for why EMA’s are still a surprisingly rare occurrence in the sectional title landscape, is that many trustees and aspiring trustees are either unfamiliar with the legal ramifications or underestimate the true risks. After all, the law and regulations are very clear, and candidate trustees must weigh up the pros and cons, for themselves prior to making themselves available.

For more information and/or if you have any questions with regard to the above, please contact us at TVDM Consultants on info@tvdmconsultants.com or 061 536 3138.

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About the Author: Björn Laubscher is a Managing Director at Mirfin Valuation Services (Pty) Ltd.