In terms of the Sectional Titles Schemes Management Act, as amended, every sectional title scheme must be revalued every three years to establish the current replacement cost of the building for insurance purposes.
One of the challenges is that many trustees are unaware of the requirement to obtain a replacement cost valuation every three years. Even where trustees are aware, there is often no formal mechanism in place to remind them when the next valuation becomes due. This is particularly understandable in schemes where trustees change from year to year following the AGM, resulting in a loss of institutional knowledge.
It should also be recognised that most trustees serve in a voluntary capacity and are not property management professionals. As such, many have limited opportunity to familiarise themselves with the Sectional Titles Schemes Management Act (STSMA) and its associated rules and regulations. Given the complexity of the legislation, a thorough understanding typically develops only through experience and ongoing involvement in sectional title governance. For this reason, it is important that trustees are supported with practical tools, guidance and reminders to assist them in meeting their statutory obligations and ensuring that their schemes remain compliant. This is an opportunity for Valuers to keep a database of sectional title schemes and send out regular reminders of the anniversary date for revaluation.
In terms of the Act, managing agents act on the instructions of the Trustees and are appointed to perform the functions delegated to them by the body corporate. While managing agents are generally expected to be registered with the PPRA, levels of experience, expertise and compliance may vary across the industry.
The role of the managing agent is to administer the affairs of the body corporate within the scope of their appointment. Many professional managing agents have systems in place to remind trustees of important statutory obligations and governance requirements, including the need for periodic insurance valuations. However, the responsibility for ensuring compliance ultimately rests with the trustees, who are not obliged to follow every recommendation made by their managing agent.
Although many managing agents provide proactive guidance and take care to explain the Trustees’ duties and responsibilities, others adopt a more administrative or reactive approach, carrying out only the instructions they receive. Where trustees are unaware of certain statutory obligations or simply overlook them, important compliance requirements may unintentionally be missed.
Let’s come back to the required valuation. It is specifically called a Replacement Cost Valuation in the Act. This means that this work can only be done by a registered Valuer, a registered property valuer whose scope of registration includes replacement cost valuations, or an Associated Valuer. Valuers are seldom architects, builders, developers, or QSs. By this I mean that few Valuers would have direct experience in the cost of building, and in some cases, the cost of building quite large and complicated buildings. I am sure that they would need to work closely with building industry professionals in establishing realistic replacement costs for sectional title buildings. Clearly, it would not be sufficient to simply take the participation quota (PQ) sheet and calculate a standard cost per square metre to calculate the replacement cost of the building. While this would be relatively simple to do for a one- or two-storey building, it would be an entirely different story when looking at the replacement cost valuation of a high-rise building, or one with lifts or escalators, or even underground buildings and parking. Essentially, the valuer is being asked to estimate the amount that the building must be insured for, to protect the owners from major damage to the building that will result in it having to be rebuilt. For that reason, care must be taken to ensure that the valuer is taking into account a number of factors that may not immediately be obvious. For example, the building may not be a modern or new building, but rather one that was constructed some time ago. Typically, established blocks of flats in central locations were built during the last major building boom, which can be considered in many areas to be in the mid 1970s. While there has been major construction of units since that time, I would suggest that this has mainly been in the low-height townhouse-type development. Design and building regulations have changed considerably since that time. Likely, the original building plans are no longer available, so it would be necessary to have the plans redrawn, taking into account current building regulations. This would in effect, probably mean a total redesign and taking into account solar electricity, solar geysers, hydraulic lifts, modern fire-fighting requirements and importantly, far more restrictive parking requirements. Modern building regulations require a lot more parking than in the past, which, for practical reasons, results in smaller units and fewer units being able to be built on the original site.
Valuations must take into account anything that might affect the cost of reconstruction. Apart from a new design and plans, they will include the cost of demolition and removal of building rubble. This can increase the cost of rebuilding considerably. Because the original plans would seldom be available for use, the plans would have to be redrawn (architects’ fees), and new engineering drawings would need to be created (engineers’ fees). With new plans for larger schemes, electrical engineering and other specialist reports/drawings may well also be required. Valuers need to remember that it is not only the units that are being insured. The insurance policy would cover all construction on the site. This will definitely include the boundary security, walkways and staircases, carports, garages, storerooms, swimming pools, and the like. On sloped sites, allowance would need to be made for site works in order to secure slopes against slippage. Sewerage and drainage would need to be looked at. With new buildings, it might be an option to use modern solar systems rather than rely on local authority systems. Substations can incur considerable extra cost.
Care, however, must be taken not to over-insure. New plans and designs only need to be taken into account if the original plans are no longer available. If they are available, the valuation would allow for rebuilding to the original design. However, for older buildings, the body corporate may not be allowed to rebuild as per the original plans available. When looking at rebuilding costs, the location at which the property being valued is situated must be taken into account. When the original building was erected, the area might well have been an open new development, which allowed for easy access to the site. The current situation might be very different. For example, at that time, the sidewalk could have been used for the delivery and offloading of building material; however, this may have changed, and the site may have large trees, bus stops, and other obstructions to make construction challenging. A site that requires nighttime delivery or is difficult to work on for other reasons will increase the cost of working on the site. In my opinion, the cost should allow for the original building materials that were used, even though this may no longer be popular. An example of this would be a building clad with marble. This is a very expensive finish on the outside of any building. Current owners would likely agree to a more modern, less expensive finish. When valuing the building, the high cost of the original buildings needs to be allowed for.
Modern legislation regarding building sites is also important to take into account, as it is another cost in the chain for new buildings. At some stage, the building may be partially occupied while rebuilding is underway; therefore, security needs to be considered.
The reality is that a replacement building is likely to cost more than a brand-new one.
