For many years bodies corporate have, with specific regard to legal costs, enjoyed the protection of the Sectional Titles Act, Act 95 of 1986 (“STA”).
Prescribed Management Rule 31(5) (Annexure 8) – Now repealed – stipulates that:
“An owner shall be liable for and pay all legal costs, including costs as between attorney and client, collection commission, expenses and charges incurred by the body corporate in obtaining the recovery of arrear levies, or any other arrear amounts due and owing by such owner to the body corporate, or in enforcing compliance with these rules, the conduct rules or the Act”. (own underlining)
The importance of the now repealed PMR 31(5) is that it entitled bodies corporate to recover legal costs on the higher scale and therefor bodies corporate could recover all of its legal costs from a defaulting owner.
The following table provides a brief comparison and description of the different legal costs scales.
Party and party scale costs:
• costs are awarded against an unsuccessful party in litigation on a party and party scale in the absence of legislation (in this case the “STA”) or an agreement between the parties providing for costs on the higher scale.
• less than attorney-and-client scale costs.
• taxed in accordance with the prescribed tariff of the relevant Court.
Attorney and client scale legal costs:
• costs are awarded against an unsuccessful party in litigation on attorney-and-client scale where legislation or agreement between the parties provided therefor.
• higher than party and party scale costs
• higher tariffs are allowed by the taxing master – as opposed to those on a party and party scale
• items not provided for / allowed on a party and party scale may be allowed by the taxing master
As a result of the protection afforded to bodies corporate i.r.o. legal costs many attorneys were willing to render collection services on the basis that the attorney would recover his/her legal fees directly from the defaulting owner.
Action instituted against a defaulting owner was a low risk. If an owner failed to pay his levies and legal costs, the owner’s unit could, as a last resort, be sold on auction to recover the legal costs (and any other amounts due and owing to the body corporate).
With the Sectional Titles Schemes Management Act, Act 8 of 2011 (“STSMA”) we enter a new era where the extent of the protection previously afforded to bodies corporate (with specific reference to legal costs) are substantially limited.
Prescribed Management Rule 25(4) and 25(5) (Annexure 1 of the Regulations) stipulates that:
25(4) "A member is liable for and must pay to the Body Corporate all reasonable legal costs and disbursements as taxed or agreed by the member incurred by the Body Corporate in the
collection of arrear contributions or any other arrear amounts due and owing by such member to the Body Corporate, or in enforcing compliance with these Rules, the Conduct Rules or the Act. [Own underlining]
25(5) A Body Corporate must not debit a member’s account with any amount that is not a
contribution or charge levied in terms of the Act or these Rules without the member’s consent or the authority of a judgment or order by a Judge, Adjudicator or Arbitrator.” (own underlining)
PMR 25(4) provides only for “reasonable legal costs” and therefor bodies corporate are no longer automatically entitled to legal costs on the higher scale (attorney client costs).
The former practice of debiting untaxed legal costs, or legal costs that was not consented to by the member, against the owner’s levy account is now specifically prohibited in terms of PMR 25(5).
Bodies corporates transgressing this provision will have to face the consequences, which may include applications to the Community Schemes Ombud Service.
Once a cost order is granted against a defaulting owner the legal costs are subject to taxation by the taxing master. It is the taxing master that would determine what would be allowed as being ‘reasonable”.
Although PMR 25(4) provides for legal costs to be “agreed” by the member, owners are - in our experience - usually reluctant to agree on a reasonable amount i.r.o. legal costs and legal costs are therefor, more often than not, taxed.
Bodies corporate are therefor no longer in the comfort zone where all of its legal costs could be recovered from the defaulting owner, as the taxed “reasonable legal costs” are in many instances far less than the attorney and client fees charged by attorneys. In practice bodies corporate will have to finance the “attorney-client” fee component of legal costs.
The security which bodies corporate previously enjoyed to receive payment and to recover all arrear levies and legal costs, also fell away due to new case law, where bondholders enjoy preference and where it is not always possible to sequestrate a defaulting owner.
Prudent Trustees should, in our opinion, provide for legal fees in their budget/s.
Should the amount set aside for this purpose not be utilised, it may simply be added to the reserves for the following year.
Provision for legal fees assists to make the financial stability of the body corporate sound and to ensure that those defaulting owners themselves contribute to the legal fees through their pro-rata contributions.
Provision for legal fees will enable a body corporate to obtain adequate legal advice if required and also to bridge the gap between “reasonable legal costs” recoverable from an owner and the “attorney client” costs payable by the body corporate.
Annelize Joubert - Associate