An important aspect to consider in the context of sectional title property is whether the parties have correctly recorded if there are any exclusive use rights to parts of the common property to be transferred to the purchaser. Failure to do so, in the instance where the transaction will result in the developer ceasing to be a member of the body corporate by ceasing to have a share in the common property, can result in the body corporate instead of the intended purchaser, acquiring the exclusive use rights in terms of section 27(1)(c) of the Sectional Titles Act 95 of 1986 (STA).

The Western Cape High Court (Court) case of Diaz Hotel and Resort (Proprietary) Limited v Body Corporate of the Visa Bonita Sectional Tiles Scheme [2021] 4 All SA 786 (WCC), is a good illustration of how this dilemma can potentially arise.

Diaz Hotel

The dispute in Diaz Hotel arose from the developer entering into a sale agreement with Diaz Hotel and Resort (Proprietary) Limited (Applicant) for the sale of all the rights and assets of a business owned by the developer, who was in liquidation. As part of the sale, section 73 and three exclusive use areas, namely parking bays P73, P74 and P64 were sold in the sectional title scheme where the Body Corporate of the Visa Bonita Sectional Tiles Scheme (Respondent) was the body corporate.

The transaction was initially rejected at the Deeds Office as the three exclusive use areas were not expressly cited in the sale agreement. The parties subsequently concluded an addendum, and a special power of attorney was granted to the attorneys to sign and execute the notarial deed of cession for the exclusive use areas.

The transaction was then re-lodged at the Deeds Office and section 73 was successfully registered in the Applicant’s name. The three exclusive use areas were, however, not transferred from the developer to the Applicant by the Deeds Office.

The Applicant subsequently filed an application requesting the Court to direct the Deeds Office to rectify the error and register the transfer of the exclusive use areas into its name. The Respondent, however, challenged the application, claiming entitlement to the exclusive use areas on the basis that the exclusive use areas registered in the name of the developer automatically vested in the body corporate in accordance with section 27(1)(c) of the STA when the developer ceased to be a member of the body corporate.

The issue

The question before the Court was therefore whether the exclusive use areas, registered in the name of the developer, vested in the body corporate in accordance with section 27(1)(c) of the STA when the developer ceased to be a member of the body corporate. If not, the Court had to determine whether these exclusive use areas could still be transferred to the Applicant and, if they could be transferred to the Applicant, the Court had to consider whether section 33(1) of the Deeds Registries Act 47 of 1937 (DRA) could be used to rectify this error.

A developer ceasing to be a member of the body corporate

In addressing the first issue, and as its starting point, the Court examined section 27(1)(c) of the STA. The Court emphasised that this section deals with the rights of exclusive use of parts of the common property and states that the body corporate acquires these rights if the developer ceases to be a member of the body corporate as outlined in section 2(2) of the Sectional Title Schemes Management Act 8 of 2011 (STSMA).

A developer ceases to be a member of the body corporate as per section 2(2) of the STSMA when they no longer hold a share in the common property. This occurs, as stipulated in section 34(2) of the STA, when ownership of each section in the sectional title scheme is held by someone other than the developer. However, if the developer retains the right to extend the scheme by adding sections and exclusive use areas under section 25(1) of the STA, they may still be a member of the body corporate. If the developer has not reserved this right to extend, and ownership of every section in the scheme is held by someone other than the developer, the developer ceases to be a member of the body corporate, and the exclusive use areas become the property of the body corporate, free from any registered mortgage bond.

In such instance, the body corporate is entitled to apply to the Registrar of Deeds for the issuance of a certificate of real rights in its favour.

In applying the above principles, the Court found, on the facts at hand, that the conclusion of the addendum to the sale agreement, which was to ensure the transfer of rights to the exclusive use areas, resulted in the Applicant acquiring personal rights for the transfer of the exclusive use rights of the parking bays in question. The Court further found that the failure to transfer the exclusive use area rights was an error that needed rectification to reflect the correct legal position.

Rectification: Personal and ownership rights

As to the question of whether section 33(1) of the DRA could be used to rectify this error, the Court was clear that it had already determined that the Applicant was only entitled to the transfer of the exclusive use rights to the parking bays, which are registrable personal rights, but not ownership of the parking bays themselves. Consequently, as section 33(1) of the DRA specifically deals with the transfer of ownership rights, the section could not be relied upon to rectify this error.

The potential pitfalls

The case of Diaz Hotel is therefore a valuable reminder of the important distinction drawn in our law between personal rights and ownership rights, a distinction which can often be overlooked when one is dealing with personal rights which relate to immovable property and that are registrable at the Deeds Office.

The case is also a good illustration of the potential pitfalls that may arise in transferring sectional title property directly from a developer where proper due diligence and maintaining accurate documentation has not been adhered to. This is a failure which can have severe financial implications for both parties to the transaction, as the body corporate instead of the intended purchaser can potentially end up acquiring the property if the omission is not timeously rectified. The property would in such an instance also be transferred to the body corporate free from any registered mortgage bond, which the developer would still be obligated to settle with their respective credit provider.