De Wet N.O. and Others v Water’s Edge Home Association: De Kock N.O. and Another v Water’s Edge Home Association (A110/2022) [2022] ZAWCHC 155 (24 August 2022)

The Western Cape High Court recently delivered a noteworthy judgment dealing directly with the relationship between homeowners’ associations and their members. The Water’s Edge Home Owners Association (“WEHOA”) forms part of the greater association called Big Bay Beach Estate Property Owners Association (“BBOA”).

This matter concerned an appeal from the Cape Town Regional Court regarding three consolidated actions. Cloete J highlighted the three grounds of appeal, namely:

1. The lack of authority in the Respondent’s constitution to impose penalty levies on homeowners’ failure to timeously complete construction works (effectively that the Respondent acted ultra vires);
2. A general meeting (previously identified as being the required procedure to contemplate and implement the imposition of penalty levies) was subsequently held in order to ratify the WEHOA’s decision to impose penalty levies. It was submitted that this meeting was not validly held due to incorrect notice procedures followed; and
3. Should the above grounds fail, a reduction of the penalty levies in terms of the Conventional Penalties Act 15 of 1962 would be sought.

Given the nature of an association’s constitutional documentation, whereby it serves to govern the association’s activities and exercise authority pursuant to its objective and purpose, the court highlighted the importance of a correct interpretation of the association’s constitution.

The court adopted a non-restrictive approach to the WEHOA and the BBOA’s constitution, given that the two documents effectively spoke to one another, and incorporated certain salient clauses contained in both documents. This approach led the court to conclude that the decision to impose penalty levies in a general meeting is not obligatory for the relevant trustee committee. It therefore dismissed the first ground of appeal, as well as the second, and referred to the counsel’s conclusion that any ratification was “legally inconsequential”.

Subsequent to this, the court considered the third ground of appeal in the following manner:

The court referred to the discretionary nature inherent in a decision to reduce an excessive penalty. It stated that, in accordance with Ambler’s precedents of pleadings, “the question is thus not what damages were suffered, but what prejudice the creditor suffered”.

The court herein relied on principles of Murcia Lands CC v Erinvale Country Est HOA 2004 4 ALL SA 656 (C), where the court was tasked with considering the extent of the penalties imposed on the parties for failing to commence construction within a defined period.

This present matter, however, differed from the Murcia Lands case, in that the body corporate in Murcia Lands was permitted to impose 10x the prescribed penalty levy where a homeowner failed to ensure timeous commencement of construction. The court’s approach in the case of the WEHOA indicates a fair and reasonable approach to the imposition of penalties, ensuring that the members were afforded an extended period to remedy the issue before the penalties increased incrementally.

The penalties were increased incrementally over eight years. Mr De Kock was afforded two years and nine months to commence construction and Mr De Wet was given one year and five months.

The nature and objective of the homeowners’ association, both in this context and in general, will remain a fundamental consideration when addressing concerns raised about decision-making. When acting in accordance with its constitutional documents, to which all members are indisputably bound, an association is generally required to act in the interests of the greater community of members.

The imposition of penalty levies is not a decision taken for the financial gain of the association, but rather to deter a continuance of non-compliance with rules and regulations which has the potential to adversely affect compliant members/homeowners. Such a decision is not taken lightly, but it is worth referring to the following conclusion drawn by the court in this case:

“[31] On the evidence, the penalty levies had the desired effect on most other members who failed to comply since they ended up building their homes sooner rather than later.”

It was further testified that the properties fell within a luxury estate with property values reaching R16-million. The appellant went as far as admitting his ability to afford the penalties imposed. The court rightfully concluded that a more moderate penalty would likely not have resulted in “the same persuasive sting for individuals of substantial means”.

The court appears justified in its approach to dismissing the idea of a more moderate penalty, in that this could set a damaging precedent that would open the doors to absolving non-compliant members of a certain level of accountability for their wrongful actions.