What is a share block scheme?
Property developers and owners often seek advice on the best property time-sharing scheme to use in respect of a development. The choice of scheme is dependent on the requirements of the owner or property developer. One option is a share block scheme.
A share block scheme is defined in the Share Blocks Control Act No 59 of 1980 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”. The share block company acquires this right to land either through registered title (i.e. by taking transfer of the land in question) or by renting the land from the owner.
Once acquired, usage rights in respect of the land are then conferred by the share block company upon its shareholders by recording such usage rights in the share block company’s memorandum of incorporation and in an agreement of use entered into between the share block company and the shareholders, on more or less identical terms.
In setting up this scheme property owners and developers need to take heed of the following:
The share block company may not issue shares which confer a right to or an interest in the use of land or buildings thereon to the public before it has been incorporated in accordance with the Companies Act No 71 of 2008 as a share block company; and
No compensation may be accepted by the developer, owner or share block company in respect of the share block company’s shares until a certificate of practical completion in respect of the buildings forming part of the share block scheme has been issued by an architect. One of the exclusions to this requirement is the receipt of compensation by a share block developer. The developer’s main source of finance for the development of a share block scheme will usually be a loan from a financial institution secured by a mortgage bond over the land and buildings forming part of the share block scheme. The share block company is dependent on contributions from its shareholders to discharge its obligation to repay the loan and it is therefore important that the memorandum of incorporation obligates shareholders to make a monthly cash contribution to the share block company for it to use in discharge of that loan obligation.
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