Every syndicate eventually has this conversation.
Sipho put in R400 000 and has not attended a meeting in a year. Lerato put in R100 000 but spends every second weekend dealing with tenants, contractors and the municipality. Sipho holds 40% of the votes. Lerato does 90% of the work.
Both feel they are carrying the syndicate. Both are partly right.
Our guides on syndicate economics and co-ownership agreements cover the overall structure. This article focuses on one recurring source of conflict: balancing members who contribute capital with members who contribute work.
Separate Three Different Things
Most of the tension comes from treating three separate rights as one:
- Economic rights: each member's share of income, growth and sale proceeds.
- Voting rights: each member's say in decisions.
- Payment for services: compensation for work done for the syndicate.
They do not have to follow the same formula. A member can hold 10% of the economics, have an equal vote on some decisions and receive a fee for management work. What matters is that each is agreed in writing before the arguments start.
Economic Rights: Follow The Capital
Economic rights usually follow the capital each member contributed, adjusted for later capital calls. This is the simplest rule to apply and the easiest to explain.
If members want to recognise early work, such as finding the deal, do it openly through one of the mechanisms below rather than by quietly adjusting percentages.
Voting Rights: Match The Decision
Not every decision affects members in the same way. A practical approach is to divide decisions into tiers.
Day-To-Day Management
Routine decisions within an approved budget, such as appointing a plumber or renewing a residential lease at the approved rent, can be delegated to the managing member or committee. Requiring a full vote for every repair makes the property harder to run and burns out the active members.
Ordinary Decisions
Decisions such as approving the annual budget or appointing a managing agent can be decided by a majority based on economic interest.
Reserved Matters
Some decisions change what members originally signed up for. These should need a higher threshold, such as 75% of economic interest and a majority of members by head count, or even unanimity. Common reserved matters include:
- selling or refinancing the property;
- taking on new debt or giving security;
- admitting new members or issuing new interests;
- changing the agreement or constitution;
- approving transactions with a member or their relatives; and
- dissolving the syndicate.
The dual threshold protects smaller members from a single large investor, and protects large investors from being outvoted on their own capital by many small ones.
Paying For Work Openly
An informal understanding that "Lerato will look after the building" usually becomes resentment within a year. If a member does real work, put it on a proper footing.
A Management Agreement
Check the Property Practitioners Act first. A person who, for payment, lets property or collects rent on behalf of someone else is generally a property practitioner. The Property Practitioners Act prohibits acting as one, or receiving payment for that work, without a valid Fidelity Fund certificate (FFC) from the Property Practitioners Regulatory Authority (PPRA), and fees received without one may have to be repaid. Before the managing member starts work or is paid, either confirm their PPRA registration and current FFC, or appoint a registered managing agent for the letting and collection work and limit the member's paid role to tasks outside the Act. Ask an attorney if you are unsure which side of the line a task falls on.
A written agreement between the syndicate and the managing member should state:
- the services covered, such as tenant placement, rent collection, maintenance coordination and reporting;
- the member's PPRA registration number and FFC expiry date, where the services require them;
- the fee, often a percentage of rent collected or a fixed monthly amount;
- the spending limit the member may approve without further authority;
- reporting obligations and frequency;
- how performance is reviewed; and
- how either side can end the arrangement, with notice.
Compare the fee with what a registered managing agent would charge for similar services. A fee close to market rate is easier for passive members to accept.
Sweat Equity
Some syndicates give an active member an additional ownership interest instead of a fee. If you use this approach:
- state the value of the work and how it was calculated;
- earn the interest over time, for example over three years, rather than all at once; and
- state what happens to unearned interest if the member stops doing the work or leaves.
Sweat equity can have tax consequences for the member and the entity. Obtain advice before agreeing to it.
Conflicts Of Interest
The active member often has the most information and the most opportunity to benefit personally, for example by hiring a relative's company for maintenance or letting a unit to a friend below market rent. That does not mean they will, but the rules should make it visible:
- the active member declares any personal interest before a decision;
- members without a conflict approve the related-party transaction; and
- the approval is recorded with the reasons.
Separate managing the property from controlling the money. The person who instructs contractors should not also be able to pay them without a second approval. See our payout approval controls.
Protecting Passive Members
Passive members are trusting others with their capital. In return, they should have:
- Information rights: quarterly income and expense reports, annual financial statements and access to leases, bank statements and minutes on request.
- A vote on reserved matters, as above.
- Notice of any related-party transaction or fee change.
- A clear exit process that does not depend on the goodwill of the active members.
Regular reporting also protects the active member. Clear records answer questions before they turn into suspicion.
Protecting Active Members
Active members need protection too:
- Authority to act within an approved budget without seeking a vote for every decision.
- Fair compensation that is reviewed periodically as the workload changes.
- Indemnity for decisions made in good faith and within their authority.
- A way to step back with notice, so they are not trapped in an unpaid role.
If The Syndicate Is A Company
If the property is held through a company, voting and economic rights are set in the Memorandum of Incorporation and shareholders' agreement. Directors owe duties to the company under the Companies Act, regardless of who appointed them. Different share classes can carry different rights, but these need to be drafted carefully. Our legal-structure guide explains the options.
Deadlock
When the active and passive groups disagree on a reserved matter and neither can reach the threshold, the agreement should provide a way forward, for example:
- a cooling-off period and a further meeting;
- mediation by an agreed independent person; and
- as a last resort, a buy-sell mechanism or an orderly sale of the property.
Our dispute-resolution guide covers the escalation steps.
Agree It Before You Buy
The best time to settle these questions is before the transfer, when everyone is still enthusiastic and nobody has done any unpaid work. Write down who contributes what, how decisions are made, how work is paid and how members leave.
Zeturi records each member's capital, the approvals behind every payment and the decisions made at each stage, so passive members can see what is happening and active members can show what they have done.
Authoritative References
- Companies and Intellectual Property Commission
- Property Practitioners Regulatory Authority
- Legal Practice Council: Find a legal practitioner
This article is general information, not legal, tax or financial advice. Have an attorney draft or review your syndicate agreement.