Sectional title versus freehold

14 Dec 2010

Cluster or townhouse living has many appealing draw cards, with the greater sense of security and community that you don’t typically get with a free-standing house being the prime motivator. 

Jaco Rademeyer writes a regular column for Property24. He is the owner and principal of Jaco Rademeyer Estates inPort Elizabeth, and is the NedBank Property Professional of the Year for 2010.

Accordingly, townhouse developments and complexes have grown dramatically in popularity in recent years, with many people more than happy to forgo a bit of space and privacy in exchange for safety and peace-of-mind. 

However, there are two distinct types of townhouses: sectional title and freehold, and they are vastly different in the way the complex is run and where the responsibility lies. 

With a freehold property you own the house the land it is built on, and each unit has its own erf number. Every owner is responsible for their own rates and taxes, insurance, maintenance, as well as water and electricity. 

A freehold complex doesn’t have a body corporate, but a home owners’ association is usually established to look after maintenance of the roads, security and communal areas within the complex. A small levy is typically payable by all of the home owners for this upkeep. 

The association also establishes a set of rules and regulations for the complex and the communal areas. Where there is no home owners’ association, the normal municipal laws and bylaws simply apply, as is the case with a free-standing home. As the name suggests, the owner has the freedom to change the unit as they wish. 

It’s a very different scenario as far as a sectional title property is concerned. In this instance, you only own the house, and all outside areas are common property, even if an area is enclosed. 

A body corporate establishes the rules for the complex as well as the levies that apply for the maintenance on the outside of the unit, common property, lawns and gardens, as well as water, taxes and insurance. This is based on a participation quota, using the size of the unit relative to the total surface area of the development. 

In some cases separate water meters may be installed for individual accounts, but rates and electricity charges remain the owner’s responsibility. 

An important aspect to consider here is that the owner will require permission from the body corporate if they intend making any changes that will affect the external structure of the building – such as adding a fireplace or erecting a garage/carport. So if you’re fiercely independent or expressively creative, sectional title may not be for you! 

Building a new townhouse

When purchasing a freehold townhouse in a new development, the buyer will sign a deed of sale comprising a land agreement and a building contract – with the purchase price split up into a land amount and the building value. 

The developer will utilise their own funds or a development bond for installing services. Once this is completed and the municipality has issued the required service certificate, the plot is transferred into the purchaser’s name and the developer is paid for the land. 

The developer will then commence building the unit, and will draw funds at various stages of construction against the purchaser’s bond, with the final draw once the unit is finished. It’s important to remember that the buyer is liable for interim interest, calculated according to the monies paid to the developer (for the plot and building draws prior to completion). The bond is payable from the date of completion. 

In the case of a sectional title development, the developer will utilise their own funds or a development bond for the services and the construction, with purchaser not liable for any costs during construction. 

Transfer can only take place once the unit is complete, and the developer only receives money on transfer. The purchaser is normally obliged to take occupation when the unit is complete, although as transfer can take approximately two months to finalise, the purchaser will be liable for occupational rent until the date of transfer, at which point the bond becomes payable. 

Buying an existing unit

Purchasing an existing freehold townhouse is a simpler affair, as the buyer will sign a single contract encompassing the land and buildings. 

The same applies for a sectional title unit, except that the contract must explicitly state the specific details and numbers that apply to the deal, including the unit itself, as well as extras such as a garage, parking bay/carport or a storeroom – as these are often separated from the townhouse, or may have been added at a later stage.  

SUMMARY

SECTIONAL TITLE	FREEHOLD
Ownership
Purchaser only owns the house. All outside areas are common property	Purchaser owns the house and land it is built on – has its own erf number
Rules
Established by body corporate – will require permission for any alterations	Established by home owners’ association, but limited in scope
Levies and costs
Levy to cover all maintenance on the outside of the unit and common property, lawns and gardens, security, insurance and water (unless individual water meter fitted)	Small home owners’ levy for the upkeep and maintenance of common areas and security, where applicable
Rates and electricity not included in the levy	Owner responsible for all rates and taxes, water, electricity, insurance and maintenance of the unit
Deed of Sale – new development
Purchaser signs one contract	Purchaser signs a land agreement and a building contract – two separate documents
Building a new unit
Developer utilises own funds or development bond for the services and construction	Developer utilises own funds or development bond for servicing the plots
No money required from purchaser during construction. Developer only paid on transfer	Once plot services and municipal service certificate issued, plot transferred into purchaser’s name, developer paid for land
Transfer takes place once the unit is complete. Purchaser obliged to take occupation on completion – occupational rent payable until date of transfer	Developer draws at various stages of construction against purchaser’s bond. Purchaser liable for interim interest on monies paid prior to completion
Bond payable from date of transfer	Bond payable from date of completion
Deed of Sale – existing unit
Purchaser signs one contract – but this must include the different numbers of the unit, garage, parking bay, storeroom, etc.	Purchaser signs one contract for land and buildings

  

Jaco Rademeyer is the owner and principal of Jaco Rademeyer Estates in Port Elizabeth, and is the NedBank Property Professional of the Year for 2010. He obtained an LLB from Stellenbosch University with a special focus on contract law, and is a multiple Institute of Estate Agents award winner. Jaco can be contacted on 041 367 1151, via email or visit his website.