Brief Summary

Sectional Titles — Body corporate — Levying of interest on arrears — Applicant sought a declaratory order that the body corporate was not entitled to levy compound interest on arrear levies, asserting only simple interest was permissible under the Sectional Titles Act and its regulations. The applicant, having purchased a unit at auction, contended that the trustees had not properly determined the interest rate and that compound interest was not authorized. The body corporate argued it had the right to charge compound interest and that the applicant had assumed the risk by agreeing to the auction terms. The court held that a body corporate may charge compound interest on arrears if expressly authorized by the relevant statutory provisions, and that the applicant's claims regarding the interest rate determination and the application of the in duplum rule were not substantiated.

Comprehensive Summary

Summary of Judgment

1. Introduction

This matter concerned an application brought on notice of motion for declaratory and interdictory relief relating to the charging of interest by a body corporate in a sectional title scheme. The applicant, Mandy David Mitchell, sought orders directed at the respondent, Die Beheerliggaam RNS Mansions (the body corporate), concerning whether it was entitled to levy compound interest on arrear levies in respect of a unit in the scheme, and whether amounts already paid ought to be repaid.

The application was launched in the North Gauteng High Court, Pretoria, before Murphy J. The applicant sought, primarily, a declarator that the respondent was not entitled to compound interest and could charge only simple interest once trustees had properly determined a rate under the applicable sectional title management rules. By amendment to the notice of motion, the applicant further sought repayment of amounts on the basis of his recalculation of what he contended was lawfully due.

The dispute arose after the applicant purchased a unit at a sale in execution and was presented with a reconciliation indicating a substantial amount owing that included capitalised interest, indicating the application of compound interest. The applicant ultimately paid the amount claimed and later sold the unit, but pursued litigation to challenge the legality of the interest levied and to recover alleged overpayments. The respondent opposed the relief and raised, among other defences, objections based on foreseeable disputes of fact, alleged absence of standing, and the contention that the statutory scheme authorised compound interest and that the National Credit Act 34 of 2005 did not apply.

The general subject-matter of the dispute was the lawfulness and basis upon which a body corporate may levy interest (including compound interest) on arrear levies and related arrear amounts under the Sectional Titles Act 95 of 1986 and the prescribed management rules, and whether the dispute could properly be resolved on motion.

2. Material Facts

On 13 May 2008, the applicant (an attorney) purchased Unit 33 in the sectional title scheme at an auction sale in execution. A clause in the conditions of sale (clause 5(a)) required the purchaser to pay, among other things, “any amount which must be paid in law, levies due to a Body Corporate”.

After the sale, the applicant received a reconciliation reflecting an amount of R180 579,26 owing as at June 2008. The statement reflected that interest had been capitalised, which indicated that interest was being compounded. The applicant disputed the lawfulness of this approach, asserting that the interest charged was irregular and contrary to the in duplum rule, and contending that interest should in any event not exceed the capital amount he identified.

It was common cause on the papers that correspondence followed in which the parties adopted opposing positions that culminated in litigation. It was also common cause that, pending the dispute, the applicant paid the amount the respondent contended was owing and that he subsequently re-sold the unit to a third party.

Certain factual matters were treated by the court as disputed and not capable of resolution on motion. These included whether the trustees had in fact taken the required resolutions (and in what form and circumstances) to determine the relevant interest rate “from time to time” and to authorise capitalisation; how the interest and arrears were calculated; the extent to which the in duplum rule might limit the recoverable interest on the respondent’s calculations; and whether the applicant, by bidding at the auction, had agreed to pay the amount stipulated by the body corporate as owing at the time of the auction.

The court treated these disputes as material to the relief sought beyond the primary interpretive issue, and as foreseeable given the nature of the relief pursued on motion.

3. Legal Issues

The court was required to determine, first, a central question of law, namely whether a body corporate in a sectional title scheme may, under the Sectional Titles Act 95 of 1986 and the prescribed management rules, levy compound interest on arrear levies and related arrear amounts, and if so, under what circumstances and authorisation.

A further set of questions involved the application of law to disputed fact, namely whether the applicant could obtain interdictory and monetary relief on motion where there were disputes as to whether trustees had properly resolved upon an interest rate, whether interest was properly capitalised, and whether the interest and arrears were correctly computed (including any limitation under the in duplum rule). This procedural issue concerned whether motion proceedings were appropriate given the foreseeable disputes of fact.

The court also had to consider a question of law regarding statutory scope: whether the charging of interest on arrear levies by a body corporate fell within the National Credit Act 34 of 2005, including whether such levies and interest could be characterised as an “incidental credit agreement”.

4. Court’s Reasoning

The court approached the matter by first addressing the interpretive question whether the statutory and regulatory framework permitted the levying of compound interest on arrear levies.

In considering the permissibility of compound interest generally, the court referred to judicial pronouncements including Davehill (Pty) Ltd and Others v Community Development Board 1988 (1) SA 290 (A), where the Appellate Division discussed the modern acceptance of interest on interest and the permissibility, in principle, of claiming mora interest on unpaid interest once interest is due and payable. The court contrasted this with earlier authority, including Central Africa Building Society v Pierce N.O. 1969 (1) SA 445 (RAD), where the proposition was stated that, absent special provision in statute or agreement, compound interest is not payable. The court indicated that, in light of Davehill, the earlier formulation could not be treated as a complete statement of modern law, though the court proceeded on the assumption that statutory authorisation was relevant to the present enquiry.

The court then analysed the Sectional Titles Act 95 of 1986 and the prescribed rules. It outlined the establishment and functions of a body corporate under sections 36 and 37, including the duty to establish a fund sufficient for administrative expenses and to levy contributions, and the powers under section 38, as exercised by trustees in terms of section 39. It then turned to the prescribed management rules in Annexure 8 of Regulations GNR 664 of 8 April 1988, and in particular rule 31(5) and rule 31(6).

A key step in the court’s reasoning was a textual interpretation of rule 31(6), which authorises trustees to charge interest on “arrear amounts” at a rate determined from time to time. The court emphasised that rule 31(5) distinguishes between “arrear levies” and “any other arrear amounts due and owing”, indicating that “arrear amounts” is a broader category. On an ordinary meaning of “arrear” as “outstanding” or unpaid, the court reasoned that “arrear amounts” would include not only unpaid levies but also unpaid interest. From this the court concluded that rule 31(6), on its literal interpretation, permits the charging of interest on unpaid interest (as a form of mora interest), which is the functional equivalent of compound interest. On this basis the court held that the statutory and regulatory scheme specifically provides for such interest, and it rejected the applicant’s submission that only simple interest was authorised.

The court further observed that trustees have fiduciary duties under section 40(2) and a duty not to negligently cause the body corporate loss under section 40(3)(a). The court linked this to the practical and financial context in which a body corporate may invest funds under the management rules (including rules dealing with investment of surplus funds and the use of interest earned), noting that failure to charge defaulting members compound interest—when comparable returns could be earned on investment—could potentially be inconsistent with trustees’ obligations. This formed part of the court’s evaluative justification for construing the rules as permitting compound interest.

Having rejected the applicant’s principal declaratory contention, the court turned to the applicant’s attempt to obtain a prohibitory interdict and, by amendment, monetary relief based on recalculated interest. The court accepted the respondent’s submission that there were material disputes of fact on the papers concerning the actual existence, nature, and circumstances of trustee decisions on the rate of interest and any capitalisation; the correctness of the calculations of arrears and interest; and related issues impacting any in duplum contention. The court regarded these disputes as not capable of resolution on affidavit and as requiring evidence at trial. The court also treated the disputes as foreseeable, and therefore declined to refer the matter to oral evidence or trial within the motion proceedings. The appropriate course, in the court’s view, was dismissal of the application, leaving the applicant free (given the nature of the relief initially sought) to proceed by action if so advised.

In relation to the National Credit Act 34 of 2005, the court rejected the applicant’s contention that the charging of interest on arrear levies constituted an “incidental credit agreement”. The court reasoned that levies and interest were not payable in terms of an agreement but arose by operation of the Sectional Titles Act and its regulations. The court further held that the body corporate does not supply goods or services to its members and does not advance money or credit to members. In this context, the court referred to commentary and also to TS Dlamini v Body Corporate of Frenoleen (KZNP, unreported, AR611/09) as support for the conclusion that the National Credit Act was inapplicable.

5. Outcome and Relief

The court dismissed the application in its entirety, including the application to amend the notice of motion. The court ordered the applicant to pay the respondent’s costs, including the costs occasioned by the application for amendment.

Cases Cited

Davehill (Pty) Ltd and Others v Community Development Board 1988 (1) SA 290 (A)

Central Africa Building Society v Pierce N.O. 1969 (1) SA 445 (RAD)

TS Dlamini v Body Corporate of Frenoleen (KZNP, unreported, case no AR611/09)

Legislation Cited

Sectional Titles Act 95 of 1986

National Credit Act 34 of 2005

Expropriation Act 63 of 1975

Insolvency Act (section 88(1) and section 88(3))

Rules of Court Cited

No rules of court were expressly cited in the judgment.

Held

The court held that, on a proper interpretation of the prescribed management rules under the Sectional Titles Act, the trustees’ power to charge interest on “arrear amounts” includes the power to charge interest on unpaid interest, with the result that compound interest is authorised by the applicable statutory and regulatory framework. The court therefore refused the declaratory relief that would have confined the respondent to simple interest only.

The court further held that the remaining relief sought (including interdictory relief and the proposed monetary claim by amendment) could not be determined on motion due to foreseeable, material disputes of fact regarding trustee resolutions, the rate and capitalisation of interest, and calculations affecting the amounts allegedly owing and any potential application of the in duplum rule. The application was dismissed rather than referred to oral evidence or trial.

The court also held that the National Credit Act 34 of 2005 did not apply to sectional title levies and interest, because the obligation to pay levies and related interest arises ex lege under the sectional titles statutory scheme rather than from a credit agreement, and because the body corporate does not provide goods or services or extend credit to its members in the manner contemplated by the Act.

LEGAL PRINCIPLES

The permissibility of compound interest in this context turns on the empowering provisions of the applicable statutory and regulatory framework. Where the relevant rules authorise interest on a broad category of “arrear amounts”, that category may, on its ordinary meaning and internal textual distinction from “arrear levies”, include unpaid interest, thereby permitting interest on interest.

In construing the prescribed management rules under the Sectional Titles Act, the court treated the distinction between “arrear levies” and “any other arrear amounts due and owing” as materially indicative of legislative intent, and applied a literal and contextual interpretation to conclude that the charging of compound interest is authorised.

Where an applicant seeks final relief on motion in circumstances where material disputes of fact are foreseeable—particularly disputes about the existence and content of trustee resolutions, and disputes about calculations underpinning financial relief—the court may decline to refer the matter to oral evidence or trial within the application and may instead dismiss the application, leaving the applicant to pursue action proceedings.

The National Credit Act 34 of 2005 does not apply to obligations to pay sectional title levies and interest where those obligations arise by operation of the Sectional Titles Act 95 of 1986 and its regulations rather than by agreement, and where the body corporate is not providing goods or services or extending credit in the sense contemplated by the National Credit Act.

Mitchell v Die Beheerliggaam RNS Mansions (34386/08) [2010] ZAGPPHC 44; 2010 (5) SA 75 (GNP) (4 June 2010)