May 16 2023
This is the first article by Property Flash’s new collaborator, M’Crystal & Co Attorneys. This firm offers expert litigation services to clients in resolving various kinds of disputes, efficiently and cost effectively. M’Crystal & Co is based in Johannesburg, but also has a presence in KwaZulu-Natal and the Western Cape. The firm has a superb record of winning cases involving evictions, arrear rental and damages claims.
In this piece, real estate law specialist and managing director of the firm, Matthew M’Crystal explains how the share block structure is one of the most underrated ownership setups in South Africa. In future, we may see more property investors embracing this approach to owning and using commercial and residential real estate.
A share block is a form of immovable property ownership whereby a company owns the property or properties and the shareholding in such company confers rights to the use of such properties, property or portion thereof for a specific time (sections 1, 4 and 7 of the Share Block Control act 59 of 1980 (“the Share Block Act”)). The company need not own the immovable property and such property can also be leased by the company (section 7(1) of the Share Block Act), but for the purpose of this article, the focus will be on property ownership. Below we will look into the various statutes in terms of which share block companies, share block schemes and shares in share block companies are regulated.
Shareholders in share block companies aren’t the owners of the portion of property to which ownership of shares relate, but rather merely obtain a rights to use such portions. The extent of use is regulated in the share block company’s Memorandum of Incorporation and, as agreed between the share block company and the share block company’s shareholders. It is also regulated among the shareholders in the shareholders’ agreements and their usage agreements. Shareholders are required to purchase an allocated loan in terms of section 14 of the Share Block Act or pay a levy in terms of section 13 of the Share Block Act as part of their duties, to cover or take over a portion of the scheme’s liabilities. They also pay monthly instalments towards general expenses.
Prior to the Enactment of the Sectional Titles Act in 1986, share blocks offered the only way in which a group of people could “own” their portion of a land or building, and share ownership of common property without the expense and administrative burden of full ownership. Since the birth of sectional title schemes the need for share blocks has reduced significantly, but share blocks have retained their utility in various situations.
Purchasing a share in a share block company was often more affordable than buying a property outright, as the cost of the property was divided among all the shareholders. Their use by South African game reserves and lodges by individuals looking to gain access thereto in circumstances where outright ownership is unaffordable, resulted in the retained popularity of share blocks.
But note that shareholders in a share block company have limited control over the property as the company, which is in the hands of the director, is responsible for managing and maintaining it. This could be frustrating for some shareholders who may have wanted to make changes or improvements to their unit or the property as a whole.
An advantage to share block property ownership is the flexibility. Instead of the conventional deed of transfer registration, which requires the expense of a conveyancer and a protracted process deed registration process, a shareholder of shares in a share block can transfer the shares as it would any other shares in a privately owned company. The transfer of shares has no legislated formalities, which means that the share block company and the shareholders can determine their requirements in provide for same in the shareholders agreement and Memorandum of Incorporation.
Because there is no transfer of the underlying property, transfer duty is not applicable to the sale of shares in a share block company. Instead, unless one is in the business of the sale and purchase of shares, capital gains tax would be payable on the gains made at sale from the purchase price.
Notwithstanding the fact that sale is merely a transfer of shares and not an out and out transfer of property, such a sale falls within the ambit of the Property Practitioners Act 22 of 2019 in terms of section 1(1)(b) thereof. As such no person is entitled to sell such shares for consideration or commission unless registered as a property practitioner with the necessary fidelity fund certification (section 48 read together with section 1(1) of the Property Practitioners Act).
The primary goal of most share block companies is to permit the shareholders of such share block company as much freedom to use and enjoy the property or portion relevant to that shareholder’s shares as possible. This freedom is not unfettered however, as no use and enjoyment of a property or portion thereof by one shareholder should be allowed to detract from that of others or even another.
Share block companies ensure this by providing for rules in the Memorandum of Incorporation by the shareholders among themselves, and between themselves and the company, agreeing to certain restrictions in the shareholders agreement and use agreement (in terms of section 7(3), copies of which shall be kept by the company at the immovable property in respect of which it operates the share block scheme or at the place of which the Registrar was notified in terms of section 110 (4) of the Companies Act 1973 as stated in the Share Block Act, but due to repeal thereof refers to the registered office of the company as per section 23(3)(b) of the Companies Act 2008 and filed with the registrar of CIPC in terms of section 7(5) of the Share Block Act). The provisions of such agreements can hamstring transactions and reduce the liquidity of shares in share block companies.
Financing the sale of shares in a share block company can be challenging as traditional lenders may not be familiar with the structure of share block ownership or willing to finance the purchase of shares in a share block. Each share block company is unique and the value of such share block company is derived not only from the underlying immovable property, but also from the agreements in terms of which the share block scheme operates. Large financial institutions are often unwilling to expose themselves to the added risk resulting from each peculiar set of agreements in addition to the risk of default by the purchaser.
Financing is accordingly either done by private financing where the seller finances the sale usually in terms of an instalment-sale type of arrangement or by the purchaser financing the purchase of the shares themself. Those companies which are willing to finance the purchase of shares in a share block have the potential to perform well as a result.
By venturing into the task of valuing the share block company accurately, with little to no competition, companies could anticipate lucrative returns. A pledge of the share certificates and the necessary signed transfer documents would provide security that could be executed more expediently than what is required for the execution of other immovable property.
Share block companies remain a useful form of property ownership with a number of advantages which are maximised when well-considered Memoranda of incorporation, shareholders agreements and use agreements are in place.
Visit mcrystalandco.com below, to see how your real estate legal needs can be met.
Matthew M’Crystal can be reached at: firstname.lastname@example.org