Building in Security Estates: The ‘Persuasive Sting’ of Penalty Levies

“… had the respondent imposed more moderate penalties, it would likely not have had the desired effect, or put differently, the same persuasive sting for individuals of substantial means.” (Extract from judgment below)

Buying “plot and plan” in a residential complex allows you the freedom to build your own dream house in a secure environment, quite apart from providing what is likely to be sound long-term investment. Just make sure that you will actually be ready to build within the time frame required by the HOA (homeowners’ association). If you don’t, you risk having to transfer the plot back to the developer (a costly exercise), or you could be lumbered with penalty levies many times higher than normal levies.

You can ask a court to reduce the penalty, but…

Our law gives us general protection from excessive “out of proportion” penalties by means of the Conventional Penalties Act, which in the section headed “Reduction of excessive penalty” provides that –

“If upon the hearing of a claim for a penalty, it appears to the court that such penalty is out of proportion to the prejudice suffered by the creditor by reason of the act or omission in respect of which the penalty was stipulated, the court may reduce the penalty to such extent as it may consider equitable in the circumstances: Provided that in determining the extent of such prejudice the court shall take into consideration not only the creditor’s proprietary interest, but every other rightful interest which may be affected by the act or omission in question.”

However, as a recent High Court decision illustrates, you will have your work cut out for you if you want the court to exercise that discretion in regard to penalty levies.

The ‘persuasive sting’ of 5x normal penalties

• The HOA of a “luxury/ultra-luxury” residential estate required in its constitution that –
  
  • Each owner must start construction within one year of transfer,
  • Should construction not commence timeously the developer had the option to require re-transfer of the erf to it,
  • If the developer did not exercise this option, the HOA could “impose whatever penalties it deems appropriate in its sole discretion” on the owner.
    
• When several erf owners failed to build within the one-year deadline, the HOA passed resolutions imposing penalty levies on them until they started construction.
• These levies started off at 2x the normal levies, and over an eight-year period were increased in stages to 5x the normal.
• The HOA sued the defaulting owners in the Regional Court to recover these levies, winning both in that Court and on appeal to the High Court.
• It was, held the High Court, up to the owners challenging the amount of the penalty to prove –
  
  • What prejudice the HOA suffered,
  • That the penalty was disproportionate to that prejudice, and
  • The extent to which the penalty should be reduced.
    
• In addition to the actual monetary prejudice (damages) suffered by the HOA, it was said the Court necessary to consider the HOA’s other “rightful interests” that might be affected by the failure to build, such as problems with security, nuisance, aesthetics, damage, and value loss caused by extended building activities. In this case, one of the additional reasons for the penalty provision was to discourage speculation in the erven by buyers intending to re-sell the plots for profit rather than build and live in the estate.
• There was prejudice to the HOA even though the penalty provision was intended to create a deterrent rather than compensation for default – the prejudice was to the HOA’s “right to enforce concerted action for the common good, and to its interest in obtaining concerted action”.
• Whether the penalty was “out of proportion” to the prejudice could be assessed in three ways:
  
  1. By looking at comparable situations where the desired result was achieved (the Court compared another similar matter in which a 10x normal penalty was reduced by the Court to 8x normal, much more than the 5x imposed here),
  2. By looking at the size of this penalty and the penalties in general in relation to the income and expenditure of the HOA, and
  3. “By exercising one’s sense of fairness and justice.”
     
• The HOA had been fair and reasonable in phasing in the increases over an eight-year period.
• Imposing more “moderate” penalties “would likely not have had the desired effect, or put differently, the same persuasive sting for individuals of substantial means.”

In the end result, the owners must pay the full penalty levies, interest, and costs on an attorney and client scale.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

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