1. PROVOCATE
Property development and the building industry in general somehow have a magical
attraction for people that has a bit of money and in some cases for people that think that
they can make a bit of money in those disciplines.
It is therefore not surprising to see major names and major investors trying their hand at
development and initiating major construction projects all over the country. There are
many success stories that can be told as well as many serious failures and the courts
are inundated with the liquidation of property development companies and building
companies.
Many factors play a role in whether a particular development or a particular building
construction project will be successful, not the least being the market driven factors such
as the state of the economy or whether we are experiencing boom times in the property
industry in general and naturally of course the particular needs of a certain community.
There are perhaps as many different kinds of projects that are being undertaken as
there are developers and builders around doing the projects.
As a result of the limited amount of development land particularly in urban areas,
sectional title developments have become a modern and popular trend because of the
higher density that is allowed with these developments.
The Sectional Titles Act and Sectional Title Development in general has its own
problems and challenges and for the uninformed investor or developer or builder can
become a nightmare and can have disastrous effects on anybody’s capital and cash
flow.

2. One often hears the humoristic comment that to be able to make a small fortune in
farming one has to start with a big fortune. Sectional title developments may just as well
be classified in the same way.
The writer of this article has spent the greatest part of his legal career in the property
industry within corporate organizations. In the process I have been able to see and to
experience the law operating in the practical environment and in developments in
general and in particular in the sectional title industry.
One such project that I have been associated with over many years, in fact from its
inception, is the Harbour Island development in Gordons Bay which consists of a man
made marina surrounded by about 600 hundred residential units, most of which are
sectional title buildings.
One such building is a rather large four star hotel, previously known by the name as the
Harbour Edge Villa Via Hotel in Harbour Island. The original developer in this particular
development was one Mr. Cas Scharrighuisen better known for his listed companies in
Gauteng under the name of Scharrig Developments Limited.
I will be writing a number of articles in the next few issues dealing in particular with the
enormous problems and the incredible amount of legal expenses that had been
expended on this particular project and I will try and give the readers not only a historical
overview of this particular development but in particular the legal problems that were
encountered by the various sectional owners in this development over the past
seventeen years of its existence.
I will not be exaggerating if I state that the legal expenses in this building over the past
15 or so years exceed the amount of about R20 million, in fact I think I am very
conservative in that estimate. I will endeavour to show in the articles that will follow and
in this particular one just how things can go wrong, in fact, I will show the readers how
rather than the Sectional Title law applying in this particular development, it was
Murphy’s Law that found application.
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3. I state this somehow tongue in the cheek but it is so true that anything that could
possibly have gone wrong in this development had gone wrong. The first question that
one would ask is but what went wrong, how did it go wrong and why did it go wrong?
Without laying blame at anybody’s door, I can state without a doubt that the problems
with this particular development started at the very planning stages of the development
and the way in which it was introduced into the market and I think that this particular
article would then focus mainly around that aspect.
The Harbours Edge Villa Via Sectional Titles Scheme came into existence on the 19th
of
September 1997. At that date the body corporate was created with the standard
management rules in terms of Section 35(2)(a) of the Sectional Titles Act. In terms of
Section 26(1)(a)(i) and Section 28(2) of the Management Rules and Section 37(1)(r) the
control, management and administration of the common property is reserved by law
solely to the trustees of the body corporate.
The scheme was originally undertaken by a company known as Casisles as the
developer of the immovable property in Gordons Bay situated in the Stellenbosch
Division of the Western Cape.
Mr. Casper Scharrighuisen was the corporate controller, sole member and the director
mind of the Casisles. Mr. Scharrighuisen was also the sole director and shareholder of
the holding company.
The hotel building was part of an extensive development better known as Harbour Island
Waterfront Development in Gordons Bay. The development included the construction of
a harbour and commercial infrastructure as well as several residential units, some of
which were single title and many of which were sectional title.
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4. The Villa Via Hotel was a mixed used building having several residential units but
consisting mainly of units that were equipped as hotel suites and the scheme was
operated as a four star hotel through a rental pool agreement that was signed by all the
individual owners of the scheme.
Each of the hotel suites or apartments in the building constitute a section in the scheme
and together with its exclusive use area and its pro-rata share in the common property,
comprises a unit in the scheme.
Much more will be said in further articles about the whole aspect around common
property in a sectional title development but suffice to say at this stage that the common
property became a major headache in this particular development.
When Mr. Scharrighuisen originally started the marketing of the various sections in the
development he was unfortunately not well informed and indeed made certain basic
errors which later became major issues ending up in the Supreme Court of Appeal in
Bloemfontein, more about that later.
Simultaneous with the concluding of the various agreements of sale in respect of the
different units in the hotel that was sold to prospective purchasers, the purchasers were
required to sign a rental pool agreement. In terms of the rental pool agreement, each
purchaser agreed to make his unit available for the purposes of conducting the four star
hotel business and for occupying by the prospective guests at the hotel. Each of the
deeds of sale concluded with purchases was in incidental terms and the rental pool
agreements were concluded on standard and identical terms.
The deeds of sale and the rental pool agreements envisaged that a management
company would lease units from their respective owners and include them in the hotel
apartment business conducted by it. The owners would derive rental income after the
deduction of an operating levy imposed by the management company to cover the cost
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5. of the hotel business. The management company would in turn contract with a suitable
expert hotel operator, and the latter would effectively run the hotel business.
As a result of many factors amongst others the overspending on the project and the bad
market conditions the developer, Casisles were liquidated on the 15th
of June 1999.
Mr. Scharrighuisen’s personal estate was placed under a provisional order of
sequestration on the 10th
of October 1999, which was made a final order on the 15th
of
December 1999. The judgment in that case was supported as ABSA Bank versus
Scharrighuisen (2000) 1 All SA 318 (C).
The fun and games in the development and the enormous legal fees that followed upon
all the legal actions that then ensued was started when the purchaser of one of the
units, a company called Wimbledon Lodge, represented by a Mr. Tony Cuninghame,
concluded that the developer of the scheme, Casisles, which had sold the sectional title
units prior to the construction of the building and the opening of a sectional title register,
had acted in fraud of the rights of the purchasers by creating sections from parts of the
building that in terms of deeds of sale, was common property and transferring those
sections to itself and to an associated company namely Casisles Holdings.
This aspect which formed the basis of many court cases to follow resulted as a
consequence of the fact that the company that did the marketing of the original
development drafted an over hastily document which set out the various participation
quotas of the hotel rooms contained in the development. This document that on the
face of it was nothing more than a marketing tool eventually became the destructive
force in the entire development.
I state this because although the developer Casisles had made it specifically clear in the
deeds of sales that were signed with the various owners that the developer would hold
back and keep out certain portions of the development for its own purpose and to
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6. conduct commercial operations from, the original participation quota presented to the
various purchasers however did not make provision for the commercial sections.
What the developer therefore initially used as nothing more than a marketing tool
eventually became such an important document that the Supreme Court of Appeal ruled
that certain sections that were originally registered as sections had to be converted to
common property resulting in the fact that the purchasers of those sections lost their
ownership of those sections due to what the Supreme Court of Appeal found as
fraudulent conduct of the original developer.
This all sounds astonishing if one considers that basic provisions in the Constitution that
nobody may be deprived of the ownership of property except in terms of law of general
application, and no law may permit arbitrary deprivation of property.
However, what had happened in this particular case was that when the original
developer went into liquidation and at the time of the various sections that were still in
the possession of the developer being put up for auction, the auctioneer included a
paragraph in the conditions of sale stating that the purchaser of a certain units that came
up for auction acknowledged that a third party has claimed ownership to those sections
and that that third party may bring a court action to confirm the ownership of those
section to the body corporate as common property.
This provision at the end of the day was ruled to be sufficient by the Supreme Court of
Appeal as notification for a prospective buyer to have prior knowledge of the right to
ownership of another party and that it was therefore justified to simply rule that the
sections be converted to common property and that the registered owner in that case
lost ownership over his property without any compensation whatsoever.
The consequences of what I have so far laid out in this article are wide and severe. In
the first place any potential developer has to realise that what they may see as only
marketing material may eventually come back to haunt them when a development is
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7. completed. Before any sales people are put out to go and market sections in a sectional
title development, the developer must first ensure that the t’s are crossed and the i’s are
dotted as far as the development is concerned, in particular as far as the participation
quota is concerned. The identification of specific areas for other purposes other than
sections should also be clearly defined and indicated and great care should be taken
that what may initially be seen as common property by a potential buyer should not later
be converted to sections resulting in a potential buyer being prejudiced by such a
conversion.
In the Villa Via situation a particular example was the fact that the developer originally
wanted to keep ownership of the underground parking in the development for himself
and had therefore not registered the parking as common property but as a separate
section. This in itself caused major headaches for the developer and when he had gone
insolvent the subsequent purchaser of that section because as a result of the mere size
of the underground parking, it carried a participation quota of nearly 30% of the building.
This meant that the underground parking which had a relatively small income and which
as a rule should not really be very expensive to maintain had to foot the bill of about
30% of the entire expense to maintain and keep up a four star hotel.
This brings us to another aspect that I think we should deal with in perhaps another
article around the whole issue of participation quotas in sectional title developments and
in particular what a potential developer or a potential investor should be on the lookout
for as far as participation quotas are concerned.
For those people that do not really understand what a participation quota is, it is also
referred to as the PQ of a building. It is the percentage that any particular section
represents in the overall development expressed a four digit figure and totaling up to a
full 100% in a building. For example, if a section represents about 1% of the entire
building it would normally carry a participation quota of 1.000.
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8. The participation quota is very important because that would represent the amount or
the percentage that any owner would be responsible for as far as the maintenance and
upkeep of the building is concerned.
The participation quota further determines the voting rights of a sectional title owner in
any particular development.
Be that as it may, the participation quotas in this particular development caused other
serious problems that I will write about in a follow up article and which need special
attention and in particular from those people that want to start a sectional title
development or anybody that wants to invest in a possible development.
As a result of Mr. Cuninghame’s allegations that certain sections in the development
were promised to be common property and had been unlawfully converted to sections,
he attempted to procure that the body corporate pass resolutions necessary to institute
action for the recovery of these sections, but the requisite resolutions were defeated by
the votes of the liquidators of Casisles who held a controlling vote by virtue of the
sections registered in the name of the insolvent companies, the company having being
wound up in the interim.
On the 20th
of July 2000, Wimbledon Lodge therefore launched an application in terms of
Section 41(2)(b) of the Act for the appointment of a curator to the body corporate as a
necessary precursor to an action for the recovery of the disputed sections. The
respondents in that application were the body corporate and the liquidators. The body
corporate did not oppose the application and elected to abide by the decision of the
court.
The application was refused in the Western Cape Division of the High Court but on
appeal was granted by the Supreme Court of Appeal on the 31st
of March 2003 and a
curator ad litem was appointed on behalf of the ____________. The entire issue around
the appointment of a curator in matters like this is yet another subject that would require
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9. full discussion in a separate article however, what had happened in the meantime was
that a company by the name of Meridian Bay had acquired ownership of certain of the
disputed sections and as I have stated earlier in this article with the knowledge of the
fact that proceedings for the recovery of those sections might be instituted by a curator
ad litem in due course.
The recovery of the sections by the curator followed its course through the court in the
Western Cape High Court and eventually ended up in the Supreme Court of Appeal
which ruled that the sections should be converted to common property. This judgment
is with all due respect a medley of contradictions and extremely confusing if one
considers the provisions of the Sectional Title Act and the history of sectional title
through the courts. This is yet another issue that would justify an article on its own
however, it would be very technical by nature and would perhaps be best suited to be
written in some legal magazine or may even form the subject of a thesis on the issue.
The action of the curator ad litem also triggered a number of other issues. All of a
sudden there was conflict of interest between the room owners that wanted to recover
the sections that belonged to the commercial enterprise in the building and this led to
tension and a legal feud that developed between the two groups, mostly as a result of
the curator’s action but later in particular as a result of an application that was brought to
court by the liquidators of the original developer for the appointment of an administrator
in the building in the sectional title development. If ever a nightmare was envisaged by
the appointment of an administrator in a sectional title development, in this case it
resulted in a horror story.
The appointment of an administrator in a sectional title development is such a
controversial issue and has such serious ramifications for the development that I will in
the following article deal with all the aspects surrounding the appointment of an
administrator and in particular what can go and will go wrong and the ramifications for
the various individual owners, in particular the fact that it can cost owners millions to pay
for the fees of an administrator and with little or no positive result or effect.
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10. Not all stories have a good ending and I don’t want to jump to the end of this story
because that should follow later but suffice to say that from the pictures which also form
part of this article it can be seen that the development is currently in a major state of
refurbishing and repair and as a result of a takeover by one individual owner the amount
of about R120 million is being spent at the moment on the upgrading and restoration of
the hotel which will in future be known as the Krystal Beach Hotel in Gordons Bay. More
about that in the next issue.
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