Legal warning for South African estate trustees

Volunteer trustees and directors of South Africa’s 70,000 residential community schemes could face personal financial liability if they fail to meet their legal duties.

These volunteers are often responsible for decisions involving security, maintenance, budgets, and contractors.

However, their role carries a legal obligation to act in the scheme’s interests and exercise their powers responsibly.

This is according to Van Deventer Dowlath & Marx associate, JD Paulsen, who warned that everyday decisions can expose trustees to legal disputes and personal liability.

In sectional title schemes, the fiduciary duties of trustees are set out in section 8 of the Sectional Titles Schemes Management Act (STSMA).

Directors of homeowners’ associations may also have duties under section 76 of the Companies Act, depending on the association’s structure.

For example, the duty of loyalty requires scheme executives to act honestly, in good faith, and within their authorised powers.

They must put the scheme’s interests ahead of their own and avoid conflicts of interest.

This means trustees cannot secretly benefit from contracts awarded by the scheme or use their positions to favour friends and family.

Material interests in contracts must be disclosed, and conflict-of-interest procedures must be followed.

The duty of care requires trustees to make informed decisions, remain involved in the scheme’s affairs, and oversee finances and maintenance properly.

“Crucially, under the Sectional Titles Schemes Management Act, trustees owe the body corporate a fiduciary duty and must act with reasonable care, skill and diligence,” Paulsen said.

Put differently, this means personal liability is not reserved for dishonesty or gross negligence.

“Voting without first informing yourself, rubber-stamping a managing agent’s recommendations, or letting essential maintenance slide could all leave you exposed to personal consequences,” he said.

Trustees can be held liable for everyday mistakes

Fiduciary breaches do not necessarily involve deliberate fraud. Paulsen said trustees can get into trouble through routine management decisions and failures to follow prescribed procedures.

One risk is awarding contracts for services such as painting, security, or gardening to personal contacts without disclosing the relationship and managing the conflict.

Trustees may also expose themselves to disputes by approving expenditure without reviewing financial statements, by missing meetings, or by failing to obtain professional advice before committing scheme funds.

Other potential problems include neglecting the required 10-year maintenance plan, failing to oversee annual budgets, and missing mandatory three-year insurance replacement valuations.

Major decisions should also be properly documented. Trustees who bypass voting procedures or act without a formal written resolution may struggle to demonstrate that they acted within their authority.

Paulsen stressed that these requirements matter when owners challenge how scheme funds are spent or whether trustees obtained the necessary approval before proceeding with a project.

Section 8(3) of the STSMA provides that a trustee who breaches their fiduciary duty is liable to the body corporate for losses resulting from the breach or any economic benefit received as a result of it.

Trustees should not assume that the body corporate’s indemnity will protect them in every circumstance, Paulsen said.

Prescribed Management Rule 8(4) requires a body corporate to indemnify qualifying trustees against costs, losses and expenses arising from official acts, provided those acts do not breach their fiduciary obligations.

According to Paulsen, this protection does not extend to conduct that breaches those duties.

Fidelity insurance, which protects a scheme against certain dishonest acts, also does not protect the person responsible for the wrongdoing.

Court cases show the risks

Paulsen said a dispute over a solar panel installation at a KwaZulu-Natal residential complex shows the importance of transparency and proper approvals.

In the matter of CSOS3934/KZN/21, owners challenged the trustees’ decision to proceed with a solar photovoltaic installation and related expenditure.

The dispute included allegations that the trustees had not obtained the required approval and had failed to provide adequate information about the project.

The applicants sought documents including trustees’ meeting minutes, written resolutions, project costs and supporting information.

They also raised the issue of the trustees’ potential personal liability for allegedly breaching their fiduciary duties.

The Community Schemes Ombud Service ordered that records and information be made available in part of its ruling.

The case revealed the risks of proceeding with substantial expenditure without clearly documenting the authority for the decision.

A separate dispute, Trustees of Monte Carlo Body Corporate v Khanyile, shows how inadequate records can undermine a scheme’s financial claims.

The Durban-based body corporate sought more than R115,000 in arrear levies, interest and other charges from an owner who had not responded to the claim.

However, the adjudicator found that the body corporate had not provided sufficient supporting documentation to establish the amount owed.

The written trustee resolution authorising the interest charged to the owner’s account was also missing.

Under the prescribed management rules, interest on overdue amounts required an authorised written resolution of the trustee.

A body corporate also cannot debit a member’s account with charges that lack a proper legal basis, consent or an applicable order, Paulsen said.

The adjudicator refused the claim after the body corporate failed to provide the requested information and records.

The ruling also questioned why the arrears had been allowed to grow so large without adequate action by the trustees.

“Every charge on an owner’s account needs a lawful basis and a resolution behind it,” Paulsen added.

“Without that paper trail, even an uncontested claim can fail, and the trustees’ own stewardship ends up under the spotlight.”