Risky business for homeowners’ association directors

Are you qualified to serve as a director of your homeowners’ association? Are the current directors of your association familiar with the latest legislation? It is a role that should not be taken lightly as errant directors could face a fine, imprisonment, or both, according to specialist community schemes attorney and BBM Law director Marina Constas.

She says that property sector roleplayers – including homeowners – should understand the risks faced by homeowners’ association directors who fail to comply with the Community Schemes Ombud Service Act.

“Since the inception of the Community Schemes Ombud Service (CSOS) in October 2016, there has been speculation around whether or not the service applies to developments managed by homeowners’ associations. There have been legal challenges from certain large schemes which feel that CSOS should only govern the sectional title community.

“The ombud service is having none of that, however,” Constas stresses. “It has made it clear that homeowners’ associations must register with the ombud’s office and will face penalties on interest should they fail to pay the quarterly CSOS levy. The CSOS legislation also faces imminent amendment to include a peremptory compliance certificate for the scheme’s rules.”

Constas says that homeowners’ association directors may be pleased to learn that in terms of the regulations of Chapter 4 of the CSOS Act, they have been promoted to “scheme executives”. Their obligations, however, in terms of the same chapter, are quite onerous, and include informing and educating themselves about the community scheme, its affairs and activities and the legislation and governance documentation in terms of which the community schemes operate.

Playing hooky from meetings is not permitted, she says. “Unless excused by the chairperson of the scheme executives on reasonable grounds, they are obliged to attend all meetings of the scheme executives and attend the community scheme’s annual general meeting if it holds such a meeting.

“For me,” says Constas, “a crucial part of the Act is Chapter 4, which states that all of these obligations are in addition to and do not detract from the fiduciary obligations of a scheme executive. Homeowners’ association directors must take their fiduciary duties very seriously to avoid the risk of personal liability.

“Another important aspect of the legislation is fidelity insurance. An estate or homeowners’ association may be vulnerable to loss of money due to theft or fraud. The directors have to insure the scheme against this risk or loss of money by the dishonest conduct of a scheme executive (themselves), an employee or agent of a community scheme who has control of the money, a managing agent or a contractor who has access to the monies of the scheme. Chapter 4 of the CSOS Regulations goes as far as to set out that the minimum cover in respect of the fidelity fund insurance must be the total value of reserves and investments at the end of the last financial year together with 25% of the community scheme’s operational budget for the current year.”

Chapter 2 Section 34 of the act deals with offences and penalties. “I don’t want to discourage anyone from taking on the role of a homeowners’ association scheme executive, but the responsibility should not be underestimated. Failing to comply with the act’s directives, or failing to provide access to books, accounts, documents, assets, data or information could put them on the wrong side of the law. Intentionally refusing to perform a duty, obstructing someone else from doing so, or accepting unauthorised fees or rewards are also offences punishable by fines, up to five years’ jail time or both.”

Having served on the CSOS board, Constas says she has been privy to the operations of the service, which, she believes is becoming resourced and more powerful.

“Compliance will be a priority this year, with the appointment of inspectors, playing a bigger role in checking that all community schemes fall squarely within the letter of the law,” she concludes.