What is a conflict of interest as it applies to trustees in sectional title schemes?
ELA
EstateIQ Legislative Assistant
Here's a clear, comprehensive explanation of conflict of interest as it applies to trustees in sectional title schemes, specifically referencing the legislative framework:
⚖️ Conflict of Interest in Sectional Title Trusteeships
Under the Sectional Titles Schemes Management Act (STSMA) and the Prescribed Management Rules (Annexure 1), trustees must always act in the best interests of the body corporate and must avoid situations where their personal interests conflict with their duties as trustees.
🔍 What Is a "Conflict of Interest"?
A conflict of interest arises when a trustee:
- Has a direct or indirect personal or financial interest in a contract or decision being considered by the body corporate, and
- Could potentially benefit — even indirectly — from that contract or decision.
This includes interests such as:
- Owning or having shares in a company that is being considered as a service provider,
- Receiving a salary, commission, or profit from the body corporate (directly or via a company),
- Having a close family member or associate who would benefit from the body corporate's decision.
📜 What the Law Requires
Under section 8(2)(b) of the STSMA, a trustee:
- Must avoid material conflict between their own interests and those of the body corporate.
- May not receive any personal economic benefit (direct or indirect) from the body corporate or any other person in relation to scheme matters unless:
- The trustee notifies all other trustees in writing about the nature and extent of the interest (STSMA 8(2)(b)(ii)), and
- The conduct is approved in writing by all members of the body corporate with full knowledge of the material facts (STSMA 8(4)).
Under Management Rule 6(3), Annexure 1:
A trustee with a direct or indirect personal interest must not be present at or participate in any discussion or decision related to that matter.
✅ Examples of How This Applies
Permitted with Disclosure:
- A trustee owns shares in a large public company (e.g., Microsoft) and the body corporate subscribes to a Microsoft product.
→ This is not considered a material conflict; no action required. - A member who already supplies services (e.g., gardening) becomes a trustee.
→ This is permitted, but the trustee must disclose the contract, recuse from related decisions, and not participate in any renewal or payment deliberation.
Higher Risk — Strong Safeguards Needed:
Let's say a trustee owns a security company. The body corporate is considering switching from its current provider, and the trustee's company is the proposed new service provider.
→ This is a material conflict. The trustee must:
- Disclose their interest fully,
- Recuse themselves from all related decisions, and
- It is strongly recommended that the contract be approved by all members in writing to trigger the protection of STSMA 8(4).
- They must disclose their interest in writing to the board before any discussion happens.
🧩 Expanded Explanation of STSMA Section 8(4)
Section 8(4) is a protective clause for trustees — it allows certain conflicted conduct to be lawful, provided that all members of the body corporate approve it in writing, and are fully aware of all material facts.
Here's what it says, in essence:
"Even if a trustee has a conflict or benefits from a contract, this is not considered a breach of fiduciary duty if:
- All members of the body corporate approve the conduct in writing, and
- They do so with full knowledge of all relevant facts."
This clause does not require member approval in every conflict situation — but it acts as a liability shield for the trustee if later challenged.
In practical terms:
- Trustees can proceed without member approval if the conflict is managed correctly (recusal + disclosure).
- However, if the conflict involves a financial benefit to the trustee or a unique service with no competitors, it is highly advisable to seek written approval from all members.
This approval:
- Must be in writing (e.g., signed consent form, AGM minutes with unanimous support),
- Must show that owners were aware of the trustee's interest and still approved the arrangement,
- Helps prevent disputes, CSOS applications, or demands for reversal of contracts.
⚠️ Why This Matters
Failure to manage conflicts properly can:
- Render the trustee personally liable for breach of fiduciary duty,
- Lead to challenges at the Community Schemes Ombud Service (CSOS),
- Undermine trust in the board's decisions.
🧭 Best Practice
When in doubt, trustees should:
- Disclose all interests,
- Recuse themselves from conflicted decisions,
- Document everything in trustee meeting minutes, and
- Seek written approval from members if any benefit could arise, even indirectly.
✅ Summary: What Trustees Must Do
| Step | Required? | Legislative Source |
|---|---|---|
| Disclose financial or personal interest | ✅ Yes | STSMA 8(2)(b)(ii) |
| Recuse from related decisions | ✅ Yes | PMR 6(3), Annexure 1 |
| Obtain written approval from all members | ⚠️ Strongly advised (not always mandatory) | STSMA 8(4) |
🔐 Bottom Line
Conflict of interest is not illegal on its own — but it becomes a legal problem when:
- It is not disclosed,
- The trustee fails to recuse, or
- The benefit is not approved by informed members under section 8(4).
Being transparent, formally recusing, and seeking member approval where appropriate protects both the trustee and the body corporate from liability or dispute.
Key Legislative References:
- STSMA 8(2)(b) — Avoidance of conflict and disclosure requirement
- STSMA 8(4) — Member approval as a safeguard
- Management Rule 6(3), Annexure 1 — Recusal from decisions involving personal interest
ELL
EstateIQ Legal Lookup
Sectional Title Schemes Management Act
STSMA Section 8(2)(b)
8(2)(b): must avoid any material conflict between his or her own interests and those of the body corporate, and in particular
(i) not receive any personal economic benefit, direct or indirect, from the body corporate or from any other person; and
(ii) notify every other trustee of the nature and extent of any direct or indirect material interest which he or she may have in any contract of the body corporate, as soon as such trustee becomes aware of such interest.
STSMA Section 8(4)
8(4): Except as regards the duty referred to in subsection (2)(a)(i), any particular conduct of a trustee does not constitute a breach of a duty arising from his or her fiduciary relationship to the body corporate if such conduct was preceded or followed by the written approval of all the members of the body corporate where such members were or are cognisant of all the material facts.
Management Rule
Management Rule 6(3)
6(3): A trustee who has any direct or indirect personal interest in any matter to be considered by the trustees must not be present at or play any part in the consideration or decision of the matter concerned.