4 October 2022 by and Real Estate Law Alert

Share block schemes and the rights afforded

Share block schemes are defined in the Share Blocks Control Act 59 of 1980 (SBC Act) as “any scheme in terms of which a share, in any manner whatsoever, confers a right to or an interest in the use of immovable property”. In a nutshell, share block schemes can be described as an alternative form of property ownership and allow a single company – referred to as a ‘share block company’, to own a particular development. Individuals who become shareholders within the share block company are allowed to buy the right to use a specific unit or space within the development.

Purchasers individually buy a grouping or block of shares which grants the holder specific rights. The share block company acquires ownership and title to the property by means of a registered title or by renting the land from the owner. These companies must specifically include the expression “share block” or “aadeleblok” in their names. In its basic form, the arrangement can be described as follows – the company holds the immovable property while the shareholders hold shares in the company and a right to use some or all of the property exclusively.

Rights afforded

As purchasers of a specific unit in the share block become shareholders in the company, usage rights in respect of the land are then conferred by the company. This is governed in terms of the memorandum of incorporation and a use agreement is entered into between the parties. The use agreement must clearly define which portion of the property the shareholder has the right to use and occupy. One of the duties as a shareholder in this arrangement is the purchase of an “allocated loan”. The shareholder essentially takes over a portion of the liability and pays monthly instalments which go toward paying the general expenses of the scheme. 

The shareholder is thus the owner of the shares in the company that owns the immovable property and does not acquire ownership of the immovable property itself. Confirmation of this concept was held in the recent judgment of Trustees for the Time Being of the Hunter Family Trust v Duin-en-See (Pty) Ltd and Others (5035/2017) handed down by Judge Binns-Ward on 26 July 2022 (read the full transcript here).

In this case, a dispute arose between the current shareholders holding shares in the share block scheme known as Duin-en-See where the company sought to dispose of the “share block property” known as Erf 13009 Plettenberg Bay. The company was incorporated in 1958 and had an issued share capital of 500 shares with five original shareholders. It was incorporated as a “vehicle to acquire and hold immovable property for the benefit of the original shareholders, who would by means of such shareholding be entitled” to the benefit and exclusive use of a defined portion of land. The current shareholders, who are cited as defendants in the matter, are thus the successors in title of the original shareholders. In 1961, the shareholding held by a H Schlotz was divided into two shareholdings and then sold in a number of transactions to Mrs Hunter. Later in 1995, Hunter transferred what would be the plaintiff’s shares to the trustees of the Hunter Family Trust, for which shareholders’ consent was granted and approved.

Duin-en-See as the defendant pleaded an exception on the ground that the plaintiff – the trustees of the Hunter Family Trust – did not aver compliance with section 7(2) of the SBC Act. This particular provision outlines specific requirements such as a use agreement. They argued that the plaintiff’s particulars lacked the averments to sustain the presumption in section 4 of the SBC Act, wherein a company is presumed to operate a share block scheme. The second exception pleaded by the defendant, and of particular interest for this article, is the 1995 transfer of rights and obligations over what is described as the “plaintiff’s parcel of land” did not comply with requirements outlined in the General Law Amendment Act 68 of 1957 or the Alienation of Land Act 68 of 1981. The question then turns to whether the occupation rights of purchasers in a company operating a share block scheme constitutes an “interest in land” for the purposes of formalities in respect of the Contracts of Sale of Land Act 71 of 1969.

Findings

The court outlined that the agreements relied on between the plaintiff in their particulars of claim was a shareholders’ agreement and the antecedent transactions in 1961 and 1995  were not contracts in respect of the sale of land or for the cession of rights in land. It held that the company did not cede its right in its property under those transactions and when the sale of the shares agreements were implemented, the sellers – when they transferred their shares to their respective successors in title, did so as an “integral part of the transaction ceded their rights in the shares”. The court went further to explain that the shareholders’ agreement determined that the company was to operate a share block scheme and how it was to conduct itself in this manner but that it did not alienate any of the company’s rights in the land. Further, a shareholder has a personal right which can be exercised against the company, but this did not give them any interest in the immovable property of the company. An explanation provided was that if the company were liquidated, the shareholders’ agreement would not prevent or inhibit the liquidator in any manner from disposing of the property or afford the shareholders any rights in the company’s property that they could then exercise against its successor in title to the property.

Sectional title schemes v share block schemes

Sectional title units allow for individual ownership which is then registered at the Deeds Office. Share block schemes existed prior to sectional title schemes and were seen as the closest thing to “ownership” available to occupiers of specific parts of buildings at the time. Many share block schemes have since been converted into sectional title schemes in terms of the Sectional Titles Act 95 of 1986.

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