Extracted from “How to deal with cash in lieu settlements in the sectional title environment” – Blog Article by Addsure – 20 April 2022

https://addsure.co.za/how-to-deal-with-cash-in-lieu-settlements-in-the-sectional-title-environment/

When it comes to an owner wanting to attend to repairs using their own contractor and prefers a cash in lieu settlement, trustees must apply their minds carefully as to what best suits the dynamics of the body corporate. There is a balance between being too autocratic and imposing on a person’s rights relating to their section, versus finding a reasonable way to ensure that insurance claim proceeds are properly applied to reinstatement of the insured areas.

From our experience, and especially during more challenging economic times, some owners may have other, more pressing debt issues or financial commitments which may tempt them to use a cash in lieu settlement for other purposes rather than reinstating damages to their section. Arguably, this could be their right in a normal home environment, but the Sectional Titles Schemes Management Act (STSMA) obliges owners to use the money in the following three ways:

Where owners do not reinstate damages with claim proceeds, damages remain, and the section deteriorates. This could mean rotten cupboards, broken flooring, rotten carpets, or no hot water. If this occurs throughout the complex, all owners will be affected over time as the overall building condition deteriorates from within.

The insurer needs to be satisfied that the repairs and cause of the damage have been attended to. All too often, the same (or similar) event transpires, and the insurer could be settling the same claim twice which will be to the detriment of other owners as the claims ratio and premiums are negatively affected. The insurer may thus be reluctant to insure the building at all in future.

By not seeing to the repairs, the value of any bond holder’s security is diminished. As an alternative to settling a supplier or reimbursing an owner for invoiced work done, one should be settling or reducing the bond of the owner, given the bank’s interest. The trustees have a duty to the bondholder in respect of their interest.

In an ideal world, payments should only be made for an invoice or quote from a supplier to the supplier. However, we realise that there are some circumstances which requires deviation from this.

In the case where the body corporate does decide to allow an owner to take cash in lieu, the managing agent on behalf of the trustees of the Body Corporate, should have an indemnity signed by the owner of the section in the form of a “ Cash In Lieu of Settlement Agreement” where the owner acknowledges that they are fully aware of Section 3.(1)(j) ( Functions of the Body Corporate) of the Sectional Titles Scheme Management Act which states:

Subject to section 17 and to the rights of the holder of any sectional mortgage bond, forthwith to apply any insurance money received by it in respect of the damage to the building, in rebuilding and reinstating the building or buildings in so far as this may be effected.

The indemnity agreement should further state that the owner undertakes to apply the full proceeds of the funds received in this claim disbursement to the repairs and reinstatement of the damages claimed for, takes full responsibility for the workmanship and materials used in this repair, and agrees to provide proof of such repairs, including photos and receipts or other required proof of such work, within 60 days of receiving such disbursement, failing which the body corporate may immediately recover the same amount from me.

The decision to enter into such an agreement is strictly a body corporate management decision, to be taken by the trustees by trustee resolution, It may be done in accordance with the body corporate trustee interpretation of the Sectional Title’s Scheme Management Act (STSMA) Section 3. (1)(j) Functions of the body corporate as stated above. It should not be undertaken lightly but done with all the facts being considered and an agreement with the section owner in place.