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My property is managed by a body corporate manager. It got me thinking though.
I live in a block of 4 units. Now, if 1 owner stopped paying the body corporate fees, who would then bear the costs? Essentially, in the end it is the other owners isn’t it? If they want to keep the up keep the management they have to contribute funds and meet slack of other owner who fails to pay. Fair enough, the other owner would go into arrears and the manager would chase them up. However, in the end of the day I would still want my property managed and thus as funds dwindle myself and other owners would have to cough up 1/3 share of the total funds required as opposed to 1/4.
Furthermore, unlike a bank, the other owners, or body corporate manager have no recourse to this owner. They are essentially an unsecured creditor so if a owner decides to no longer pay there is not much that can be done. What can be even worse is, if the body corporate managers fees are not paid after a while he/she may decide they will no longer want to manage the property. Am I looking at this credit risk correctly? Or is there another way the funds can be taken off the owner? Does the body corporate have the same power as a bank? To take a 2nd rank mortgage over the property and essentially sell the property to pay off body corporate fees? Or is the risk borne by other members?
I guess, this reinforces the idea that you have to purchase in good areas where those around you have the capacity to meet payments. Imagine if a US style downturn occurred and people walk away from their property’s, there would be no money to manage common areas.Would love people to share some insight on this. Also would be interesting to see how the larger blocks are managed.
This can be an issue, but fortunately large $$$ arrears and lengthy proceedings are not that common. In NSW there is legislation that sets out the procedure for recovering levy arrears by the owners corp. It starts with reminder letters/letters of demand then moves to a solicitor/debt collection agency who can issue a statement of claim, then have judgement entered and then there are a few options such as sending the sheriff (next to useless), garnishee rent/bank accounts if detailsare known, issue an examination notice where they are required to provide details of all assets, liabilities, income, expenses etc and if they decline to do so can be arrested and taken to court, and finally there is bankruptcy. In NSW the bankruptcy threshold for an individual has just risen to $5,000.
If the proces is followed correctly, all costs are recoverable from the defaulting owner. However it can take a long time if the owner does not/cannot cooperate. If someone is seriously in arreas you can bet that they are also behind in rates, utilities etc however those companies can wear it longer so will be less inclined than the owners corp to take action. In past times, once it got to a certain stage you could sit and wait for the mortgagee to take possession, knowing that you would get your money on settlement of the sale (if the arrears are not paid on settlement the new owner legally becomes liable so you always get the money) However this seems to be becoming less common these days. Not sure why – perhaps lenders have a conscience (haha) or don't want the publicity??
Now if the process is drawn out then yes, it is likely the remaining 3 owners will have to make up the shortfall for a period of time, especially if the funds are low to start with. Not fair, but that's the way it is. It can make paying the bills a real juggling act for the strata manager too, but they are unlikely to quit unless the remaining owners fail to take the necessary action to deal with the issue. The recovery process is the same for any size scheme. A good strata manager will keep track of arrears to try to avoid debts blowing out.
can you place a charge over the title? for example, 2nd ranking mortgage or caveat?
To me this seems like a big risk of buying a strata title, you are essentially taking on the credit risk of other individuals.
In some apartment blocks almost 60 people and there is no real incentive for investors to pay this in a falling market should loan value > property price.
Not in NSW. Don't know about other states.
I would have thought the prospect of bankruptcy might be an incentive? However, that still does not help the other owners during the lengthy period required to get from initial arreas to finalising bankruptcy.You are correct. This is just one of the risks associated with buying strata title.
There is an article on this issue dated 19/08/11 in the http://m.smh.com.au/Domain/first-home-buyers/cant-pay-wont-pay–the-levies-blackhole-20110819-1j0ps.html outlining what happens.
Apparently, around 1/3 of all strata plans have issues with arrears but very few go as far as the courts, so the system must be working.
After reading the link above, it seems to be referring to a particular scheme have 33% of owners in arrears. That would be an exceptional case!! In my experience, across a strata management portfolio it would be more typical to have perhaps 3% of owners more than 30 days in arrears, and perhaps 1% more than 90 days in arrears. It should also be remember that, in NSW, if a levy is due on 1/9/11, the owner has 30 days in which to pay before interest starts accruing. So it's due on the 1st but you can't take any action until the 1st Oct.
I think it varies from state to state.
I'm based in Victoria & I remember discussing this issue with our owners corporation management, they said that in extreme cases the owners corporation can take the non-paying owner to court if need be. If a non-paying owners sells and there are arrears on the owners corporation fees, the owners corporation management also have the right to claim arrears out of the proceeds of the sale.
As Wake already mentioned, if there are only a small number of apartments / units, there may be a problem with the cashflow for the owners corporation manager and bills due may not get paid.
Owners not paying their levies usually does not become a major issue, as there is a legal process for their recovery as mentioned above. You will find that most owners will eventually sell their unit when they are really unable to pay the levies in order to avoid bankruptcy.
I have never heard of a strata manager walking away from their job because their fees weren't paid, as their fees are a fairly small percentage of the outgoings of body corporate. For this to happen, all owners would have to stop paying their levies.There is however one scenario where levies in arrears can become an issue, and this is during a major building renovation. When significant special levies are raised for this, the arrears usually go up, which affects the cash-flow, so it is really important to factor this in and leave a significant safety buffer.
In Victoria the manager has the power to service notices in accordance with the Owners Corporation Act 2006. If they've coordinated the agms correctly the OC can also resolve to charge interest in accordance with the Penalty Interest Rates Act. This is a very affective way to get owners to pay on time as the fees owing become more costly for them. When they decide to sell their unit, prospective purchasers must be given information on that unit such as fees outstanding. This can be a massive deterrent for some buyers. Worst case the OC can take the owner to VCAT if they continue to not pay their fees. There's also affective ways of writing letters which your manager should know what to do as that's what you are paying him for.
If the matter goes to VCAT and an order is made in favour and the owner continues to not pay their fees then you would need to seek advice from a solicitor. There are also government agencies such as Consumer Affairs Victoria who provide free information and advice.
Honey Owners Corporation Management – http://www.honeyocm.com.au – Owners Corporation (Body Corporate) manager for Melbourne, Geelong, Ballarat and Western Suburbs region.
Just to put my two cents in –
My husband and I bought a unit in a block of 6… At the time we bought 5 of the 6 owners had stopped paying their fees… When we bought the Strata received a cheque from the settlement. Our experience has been that it can take a long time to get the money from the other owners because there is a process that needs to be followed and (in NSW) they can file for mediation with the CTTT and Fair Trading which pushes back the process. It has been more than 6 months now and we are still in the process of taking 3 owners to court for the outstanding fees. In the meantime what this has meant is that there is no sinking fund, there is no money for repairs and maintenance as all the money that the Strata receives goes into paying insurance, bills etc. However, we have time and patience to wait this out/see it through and because of the issues with this we got a great deal. I think it comes down to doing your research and your tolerance for risk and stress.
I read a legal case in NSW, where an owner stopped paying for his fees was able to successfully by court intervention was declared bankrupt, by considering the other costs to get the owner over the line to be declared bankrupt. Wish I could find it for you!!!
Hi Jins13,
Thank you for that. We are looking into doing that but all the filing in courts and responses from owners etc take time. We know eventually they will be forced to pay or sell the unit to pay costs. At the moment 3 owners are paid up to date so there is money there for cleaning/maintenance as well as bills which is good.
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