Disadvantages of Share Block Schemes and Steps for Conversion | Legal Articles


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Disadvantages of Share Block Schemes and Steps for Conversion

Share Block Schemes - Tax implications

As a result of SARS getting rid of the tax advantage which comes from buying in a share block in 2002, blocks of flats or group housing schemes are no longer able to benefit from being run as a share block company. 

In fact, because of the new Companies and Intellectual Property Commission (CIPC) it has become even harder to run a share block company in terms of the prescribed requirements. 

It is thus recommended that blocks of flats or group housing schemes be converted to sectional title as soon as possible if they haven’t already done so. 

Share block vs Sectional title - Conveyancing attorneys Cape Town

If the share block company has access to an experienced managing agent and attorney then the conversion process will not be very difficult. 

Having access to these will allow for the share block company to receive the necessary help with the legal aspects of drawing up sectional plans, opening the sectional title register, transferring the new sectional title units to their owners and removing these owners as shareholders of the share block company. 

Converting a Share Block Scheme - Legal Costs

Because of the costs and legal fees involved with the conversion process, some shareholders may prove to be unenthusiastic about the change. 

Since share blocks were introduced to SA, the many laws and regulations which govern them have changed. 

Individuals run the risk of facing some real problems should they decide to not make the changes now. These could also prove to be expensive.

Disadvantages of Share Block Schemes

A few of the problems which could be faced include:

Rates and refuse removal accounts from the local authority won’t be separate. This is because only one municipal account is given to the share block company and it will thus have gather these amounts to be paid through levies. The shareholders will all be in trouble if the share block company fails to pay the council.

Potential buyers will find it difficult to obtain home loans. This is because there are currently only two banks which grant loans for purchasing share block units and they are usually given with a higher interest rate than if you would have to pay on standard home loan. 

And since the period of time to pay back such a loan is much shorter than the prescribed 20 year usually given it can make selling your share block to a potential buyer very difficult since they would most likely need a loan to purchase it from you.

If you were to purchase a share block unit, you will not actually own the that purchased property. This is because buying said unit only gives you the right to use the property, and is connected to the shares which you have purchased in the company that has ownership of the building. 

Another thing worth mentioning is that you are given a title deed that is registered at the Deeds Office when you purchase a sectional title unit. Whereas, if you buy a share block unit you are only issued a share certificate in your name which serves as proof of ownership. 

When you purchase a sectional title or any other immovable property you are afforded the rights to making decisions for your property within reason. 

However a serious disadvantage of a share block is that decisions can be made by management without the shareholders being first consulted. Also, owners in a share block company are not able to use their shares as security on another investment.

Taking all of the above information into consideration it is thus recommended to convert a share block company to a sectional title. The Share Blocks Control Act highlights how this can be done.

The following steps briefly highlight the schedule as set out in the Act:

  • The share block company will draft the necessary documents to inform the members of what the sectional title plan and what rules will be enforced. 
  • Only 30 percent of the owners votes are needed in order to convert the share block scheme to a sectional title. Once this decision has been made, the resolution needs to be supported by half of the owners. 
  • Should a bond still exist on the property, then an agreement to the changeover needs to be made by the bondholder.
  • After this, a sectional title register is opened and transfer of the units can be made to the respective owners. 

Since the owners will have full ownership of immovable property they will thus be able to enjoy the benefits which are afforded as a result. Such benefits include using their property to assist with the purchasing of another property. 

Van Deventer & Van Deventer Incorporated - Real Estate Attorneys

Van Deventer & Van Deventer Incorporated can assist you to convert your Share Block Scheme to Sectional Title. Contact us for expert legal advice.

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