What happens in the case of sequestration / liquidation of an owner?

Conflicting High Court cases in the past posed a higher risk on HOA members in the case of liquidation or sequestration of neighbouring owners. Luckily, two recent Supreme Court cases changed that, and lead to collections in these cases to be much easier.

In short, when an insolvent owner’s estate is sold, the HOA can block transfer to the buyer until the arrebar levies are paid.  The arrears, held the Court, have to be paid to the HOA as a “cost of realisation of the property” – in other words, before bondholders and other creditors are paid.  If the sale price is high enough, the HOA will be paid in full before preferential creditors are paid.

Judgments previously delivered: 

The SCA held it was accepted that statutory embargoes served a vital and legitimate purpose as effective security for debt recovery in respect of municipal service fees, including contributions to bodies corporate for electricity and water, and rates and taxes etc.

The SCA found therefore that the embargo registered against the property’s title deed ‘carves out, or takes away’ from the owner’s dominium by restricting its ius disponendi (the right to dispose of a thing). Thus, it subtracted from the dominium of the land against which it was registered and was consequently a real right.

This means:

registered title conditions that prohibit the transfer of residential property without a clearance certificate or consent of a HOA, are thus enforceable in insolvencies and as a consequence the HOA is to be paid prior to any secured creditors.

This was previously not the case.

These judgments placed HOA’s on an equal ground with municipalities and bodies corporate who recovered rates, taxes and levies through provisions of the Municipal Systems Act 32 of 2000 and Sectional Title Act 95 of 1986.

This provided greater security to the members of HOA’s, who are no longer at risk of having to contribute to any shortfalls arising from outstanding levies deemed to be irrecoverable resulting from insolvencies.