The collection of levies and the proper maintenance of sinking and administration funds is an essential part of strata scheme living. All apartment owners in strata schemes are required to pay levies and most apartment owners understand the need for these levies to ensure property maintenance costs can be met on an ongoing basis by the Owners Corporation, sadly not all individuals see things this way.
Routinely, strata managers and owners’ corporations and body corporates are faced with recalcitrant owners who simply refuse to pay their levies on time. This can lead to serious problems arising in respect of the funding of both sinking and administration funds and long term building maintenance.
Administration Fund vs. Sinking Fund
It can be helpful to think of an administration fund in terms of being a weekly or monthly budget. The portion of any levies paid into a sinking fund is used to cover day to day expenses such as cleaning contractors and other regular maintenance costs like lawn mowing and small repairs. The administration fund is also used to cover bank charges and small ongoing administration costs such as the strata manager’s fee.
A sinking fund is more akin to a rainy day fund and contains reserves that are set aside for either future emergencies or major capital repairs on common property. Examples of the sorts of things covered by a sinking fund could include a roof replacement for the entire building, a new driveway or the replacement of all guttering and downpipes.
If we have a healthy administration fund do we really need a sinking fund?
The short answer to this question is “YES”. Even if you have a healthy administration fund set up to cover day to day maintenance costs in most states and territories it is mandatory for each owners’ corporation or body corporate to make some provision for future building maintenance.
In the ACT, NSW and Victoria a 10 year sinking fund plan is mandated by legislation. In Queensland this period is described as being a plan for the current year plus the next 9 years. In South Australia although no set period is specified by legislation there is a requirement for owners to develop a long term ‘sinking fund plan’ or ‘maintenance plan’.
What happens when levies are not paid on time?
In an ideal world all strata owners would pay their levies in full and on time. Regrettably this does not always happen and tales of outstanding levies running into thousands if not hundreds of thousands of dollars abound. When levies are not paid the ability to properly maintain property on both a short and long term nature can be severely compromised.
In addition, when levies are not paid promptly there is tendency for sinking fund levels to drop below what would ordinarily be expected to be needed for long term building maintenance. If this situation becomes chronic then a special levy may be required to cover unexpected expenses where no other funds have been allocated.
Special levies are generally dreaded by strata owners of both the owner occupied and investor kind as they are often, by their very nature, large and need to be paid at short notice. Proper maintenance of the sinking fund including recovering outstanding levies on a regular basis can go a long way to avoiding the need for onerous special levy collection.
A cautionary tale
Disputes regarding unpaid levies have the potential to escalate quickly and can lead to significant legal costs being incurred.
Take the case of the dispute between the body corporate for an apartment complex known as ‘The Wave’ and banking behemoth Westpac. In that matter Westpac, in its position as mortgagee in possession was ordered to pay outstanding levies plus reasonable recovery costs even though the bulk of the outstanding levies had become due and payable before Westpac took over possession of the subject property.
The background to the dispute sounds familiar enough with two owners of a property in the strata scheme falling behind in their levies. Unfortunately, by the time the matter was finally resolved the costs of recovering those levies far outweighed the original unpaid levies.
In 2007 Dr and Mrs Prins (‘the Prins’) took out a loan through St George Bank (who later became part of the Westpac group) to purchase property in a development known as ‘The Wave’. Subsequently the couple fell behind on their body corporate fees. The owner’s committee and their strata manager made several attempts to mediate with the Prins but all attempts failed and by 2011 the Body Corporate felt its only option was to take legal action to recover the debt for the outstanding levies.
In October 2012 after lengthy proceedings including a 5 day trial the Prins were ordered to pay outstanding levies, penalty interest and reasonably incurred recovery costs which at that stage were in the order of $150,000.
Regrettably the matter did not end there with the Prins launching several appeals. By April 2013 when the Prins were finally declared bankrupt costs had increased to more than $340,000. Westpac then took possession of the apartment and while they paid the outstanding levies owed to the Body Corporate they refused to pay any recovery costs claiming that they were not liable for those costs.
On 11 April 2014 the Queensland Supreme Court dismissed Westpac’s appeal and ordered the bank to pay the outstanding legal costs of the Body Corporate. By that time the outstanding levy recovery costs had ballooned and were estimated to be in the order of $450,000.
The road to recovering unpaid levies can be difficult and expensive
The matter above sounds a cautionary warning about the costs both in time and dollar terms that can flow from letting unpaid levies get out of hand. Even allowing for the imposition of mandatory 10% simple interest on unpaid levies this is an area of management that all owners’ corporations and body corporates should exercise diligence.
How can we help?
Often despite the best efforts of a body corporate or owners corporation to ensure that all members pay their strata levies on time there may be members who repeatedly fail to pay their levies on time or at all. Simply handing the recovery over to a debt recovery company is not usually the answer as these types of disputes have the potential to quickly escalate beyond a simple debt recovery answer.
As lawyers we are able to assist you to cost effectively recover outstanding levies and any reasonable costs of recovery action in a timely manner. Remember, the longer levies remain outstanding the greater the debt becomes and the harder it is to have the situation resolved and always try to seek legal advice sooner rather than later to ensure the best possible outcome is able to be achieved.
If you or someone you know wants more information or needs help or advice, please contact us on (02) 9818 2888 or email [email protected].