Author: Jason Shephard – Candidate Attorney
Supervisor: Penny Chenery – Head of Real Estate and member of the Management Board
Homeowners’ Associations, or commonly abbreviated to “HOA’s”, are legal bodies created for the purpose of managing and regulating common areas and amenities for residents of a particular area. The core mandate of a HOA is to enforce rules and regulations pertaining to the use of common areas and amenities, resolve disputes among members of the community, and may extend to collecting fees and levies for the upkeep of shared spaces and areas.
However, it is often the case that disputes arise not only between members of the community, but also between HOA’s and members themselves. This invariably leads to a party bringing an application to the Community Schemes Ombud Services (“CSOS”) to resolve disputes when they arise. This was the case in Chapman’s Bay Estate Home Owners’ Association v Lötter.[1]
The first respondent is Mr Adriaan Willem Lötter (“Mr Lötter”), the owner of certain residential property (“the Erf”) situated in a residential development in Noordhoek, Cape Town (“the Estate”). The appellant is Chapman’s Bay Estate Home Owner’s Association (“the HOA”), a homeowner’s association established under the common law.
The dispute arose in relation to overdue penalty levies imposed by the HOA on Mr Lötter for failing to construct a dwelling within the allocated period set out in the HOA’s Constitution. The HOA sought to rely on a provision in the Constitution that stipulated that in the event the purchaser (of the land) failed to build a dwelling within three (3) years of taking transfer from the developer, the HOA will be entitled to impose penalty levies on the purchaser.
The issue in this matter was whether the penalty levies could still be imposed on Mr Lötter as the subsequent owner of the Erf, and following the transfer of the Erf from Mr Michael Gould, the previous owner, to Mr Lötter on 29 January 2021. The importance thereof is that, at the time of transfer, Mr Gould had owned the property for more than four (4) years but had not yet built a house on the land. Upon transfer of the property to Mr Lötter, Mr Gould duly paid the penalty levies to the HOA for breaching clause 9.10. Mr Lötter, after taking ownership, immediately commenced construction of his property and completed it without delay. This notwithstanding, the HOA continued to impose penalty levies on Mr Lötter from the date he took transfer of the property. This was on the basis that the impugned clause 9.10 of the Constitution provided:
‘Penalty levies as determined by the Trustees Committee are payable to the Association if a dwelling on the property is not completed within 3 (three) years from date of transfer of the property from the Developer on the basis that construction of the dwelling should commence within 2 (two) years from the date of transfer of the property into the name of Purchaser, and completed within 1 (one) year from date of commencement of such construction process, which shall be undertaken on a continuous basis, unless an extended time period is approved by the Design Review Committee due to the complexity of the dwelling.’
The appeal stems from an application brought by Mr Lötter to CSOS, in terms of section 38 of the Community Schemes Ombud Service Act 9 of 2011 (“the Act”), for an order inter alia that the HOA ‘be stopped from enforcing penalty levies on new owners who made every effort to develop their property expeditiously’. In CSOS, Mr Lötter contended that imposing penalty levies on ‘second’ owners, who are not to blame for failing to construct a dwelling within the mandated three (3) years, is unfair; and alternatively, that the interpretation of clause 9.10 should not be read to mean that it includes imposing penalty levies on ‘second’ owners. In addition, Mr Lötter further argued that the three (3) year period should commence afresh once a new owner had taken ownership of the Erf. The HOA, on the other hand, contended that clause 9.10 should be interpreted to mean it attaches to the property, and not the person or owners thereof. This would mean that penalty levies may be imposed irrespective of whether the property is transferred to new owners. In this regard, the adjudicator agreed with Mr Lötter’s submissions that the clause should be interpreted to mean that it starts afresh each time the Erf is transferred. Furthermore, the adjudicator held that it would be unfair to impose penalties on an owner who completed construction of a dwelling within three years after acquiring the Erf. Accordingly, the adjudicator found in favour of Mr Lötter, and held that the monies were not due to the HOA.
The HOA took the adjudicators findings on appeal to the Western Cape High Court, Cape Town and argued that the adjudicators findings were incorrect in that he failed to apply the purpose behind clause 9.10: that that construction of a dwelling is to commence and be completed within three (3) years after the first transfer from the developer to the owner. Again, the High Court found in Mr Lötter’s favour; this time however, on a different interpretation altogether. The High Court found that:
“[o]n a proper interpretation of clause 9.10, it is the responsibility of the member who takes transfer from the developer to construct a dwelling within three years after transfer. It is a personal obligation undertaken on the basis of the contractual nature of the constitution. It does not attach to the property, but to the contracting member. For that reason, such obligation cannot be transferred to new members, as is acknowledged by clause 7.5.”
Based on this reasoning, the High Court concluded by finding that the words contained in clause 9.10 do not authorise the HOA to impose penalty levies on subsequent owners, but only on owners who purchased the property from the developer. The HOA was accordingly ordered to desist from imposing further penalty levied on Mr Lötter.
On appeal to the Supreme Court of Appeal (“SCA”), the HOA sought to challenge the findings by the High Court by alleging that the court a quo had misdirected itself in not applying the principles applicable to contractual interpretation. The HOA further repeated its submissions before the High Court and again argued that the interpretation by the High Court rendered the clause nugatory.
As a start, the SCA was at pains to highlight that Mr Lötter was not required to pay any penalty levies he ‘inherited’ from Mr Gould, when Mr Gould had in fact paid the levies before selling the property. The penalty levies imposed on Mr Lötter were additional penalties imposed on him, based on the HOA’s interpretation of the provisions of clause 9.10, when in truth, Mr Lötter had built his property shortly after the transfer had occurred.
The SCA then engaged an analysis of the clause by referring to the decisions of Natal Joint Municipal Pension Fund v Endumeni Municipality[2] and Capitec Bank Holding Limited v Coral Lagoon Investments 194 (Pty) Ltd,[3] where the SCA in those cases held that when interpreting documents and contracts, the evitable point of departure is the language of the provision itself.
The court concluded that the words in clause 9.10 are clear and specific, and refer to two distinct persons – the ‘owner who received the transfer’ and the ‘developer’. In addition, clause 9.10 also refers to the non-completion of the building within three years ‘from date of transfer of the property from the Developer.’ On this interpretation, the court held that the ordinary grammatical expression of the clause clarifies that the HOA was only entitled to impose penalty levies on owners who purchased the property from the Estate developer, and not subsequent owners thereof. Any other interpretation of the HOA, as submitted by counsel, would lead to an absurdity. In the result, the appeal was dismissed.
This case highlights the importance of drafting a clear and concise Constitution for Home Owners Associations. Ambiguity should be avoided, especially where it may cause lengthy, and often very costly litigation between parties. To mitigate loss and potential legal proceedings, it is imperative that legal professionals assist HOA’s with drafting constitutions that cater for the interests of the HOA itself, and its members.
[1] [2024] ZASCA 153.
[2] [2012] ZASCA 13 para 18.
[3] [2021] ZASCA 99 para 26.
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