South Africa: Can A Share Block Company And A Body Corporate Co-Exist In One Sectional Title Scheme?

Last Updated: 1 July 2010

Share block schemes have been around since the 1950's. It wasn't, however, until the Share Blocks Control Act, 1980 was passed that theses schemes were specifically regulated.

In essence a share block scheme comes into being when a company acquires or develops buildings and issues shares to individuals who, by acquiring those shares, are entitled to the use and occupation of a portion of that building, without actual ownership of any part of the building.

Because a share block scheme does not provide its share holders with title to the immovable property, and because it is not easy to access finance on a property where one has no ownership, conversion from share block schemes to sectional title became popular after the Sectional Titles Act, 1971, became law.

Any conversion must afford protection to the interests of creditors of the share block company and the interests of the shareholders who do not want to convert, The Share Blocks Control Act accordingly has mandatory conversion procedures that must be adhered to.

Firstly, in order to convert, the company must own the property on which the building stands. Secondly, at the meeting of the shareholders, conversion must be approved by a special resolution or by 50% in number of the shareholders having right to attend and vote at any meeting of the company and they must hold not less than 30% of the total votes held by all the shareholders of the company.

Once the company has complied with all the statutory requirements and supplied all the necessary information to the registrar of companies, it then applies for the opening of the sectional title register in which all the units in the scheme are registered in the name of the company which then transfers them to individual share holders at their request. Once the sectional title register has been opened and the first unit is transferred to an individual owner, the body corporate is deemed to have been formed. The body corporate takes over control of the land and building from the share block company. The company is thereafter liable to the body corporate to pay, out of the company's levy fund, the contributions levied on the units not transferred.

The Share Blocks Control Act does not compel a shareholder to take transfer of a unit he occupies. This is good news for those shareholders who may have objected to the conversion, since it allows them to remain shareholders in the share block company although the sectional title scheme is in place. Until such time as a member has opted to take transfer of a unit he occupies, his rights and obligations against the company remain unchanged, in other words he remains a shareholder and his occupation and use of the unit is controlled in terms of the Share Blocks Control Act.

The body corporate is therefore separate from the share block company and the levy fund of the body corporate is separate from that of the company.
In the event of a conflict between the rules of the body corporate and the memorandum or articles of a share block company or its use agreements, where both sets of rules regulate the same subject matter, the rules of the body corporate prevail and are deemed to be incorporated in the memorandum or articles of the company.

This issue was dealt with in the case of De Villiers v Kinsale Properties Shareblock Ltd 1988 3 SA 943. De Villiers (D) was the registered holder of 14 shareblocks in Kinsale Properties Shareblock Ltd (K). K resolved to open a sectional title register in respect of the property. Not all shareholders elected to take transfer of the units to which their share blocks related and D was one of them. The result was that K operated side by side with the body corporate, in regard to the building.

K convened its annual general meeting and D attended the meeting intending to exercise his voting rights. When he attempted to vote, he was informed that he was in arrears with his levies and thus not entitled to do so. D disputed this ruling and left the meeting.

D subsequently brought a High Court application seeking that the above mentioned ruling be declared invalid. K's articles of association did not provide that a member who was in arrears with levies could not vote at the annual general meeting. The rules of the body corporate did, however, have such a provision.

K opposed the application on the basis that there was a conflict between the rules of the body corporate and the articles of K, and therefore, the rules of the body corporate had to prevail and be deemed to be incorporated in K's articles.

The Court held that, it was not the intention of the Share Blocks Control Act to render the rules of the body corporate applicable to the administration of a share block company whenever the company's rules differ from those of the body corporate. It is only when the rules of the two bodies regulate the same subject matter that there can said to be a conflict, and the rules of the body corporate must prevail. In this case, the articles of the company regulated the right of its members to vote in its general meetings irrespective of whether they had paid levies. On the other hand the rules of the body corporate regulate the rights of its members to vote at its meetings in the event of their not having paid levies due to it. Therefore the provisions of rules of the body corporate had no application to the proceedings at the meeting of shareholders of K.

Subject, therefore, to the absence of conflicts in their respective rules, a share block scheme can amicably exist together with a sectional title scheme in respect of the same property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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