Are recovery costs a body corporate debt?
This has been a question vexing the strata management industry for some time.
Most owners pay their levies on time. Some don’t. It is without doubt that the levies and interest are recoverable from the non-paying owner concerned. What has been a source of conjecture (and some inconsistent judicial decisions over the past few years) has been the recoverability of the costs that are spent chasing the unpaid levies, such as reminder letters, administrative time, lawyer’s costs and so on.
It is not necessarily fair that a body corporate cannot recover 100% of these costs from a defaulting owner, but the Body Corporate and Community Management Act 1997 (BCCM Act) has not been expressly clear about what constitutes a ‘body corporate debt’ and what can then be passed on to the owner of the lot.
We now have the answer via the Queensland Court of Appeal (the highest court in Queensland): recovery costs are a body corporate debt. This decision has serious implications for anyone with an interest in a community titles scheme (CTS). For what we see as the practical effects read on:
The Wave is an attractive building in the heart of the Gold Coast suburb of Broadbeach. It has also been the source of what has been an epic fight over some relatively minor unpaid levies. A timeline will make it easier to digest the background:
Lot owner gets sued for levies of $5,500 and costs of $1,100. Service proves difficult but is eventually effected and a defence filed. There are some fights over disclosure and unsuccessful negotiations.
The owner lodges a complaint with the Financial Ombudsman Service about their mortgagee (Westpac). A little known fact is that lodging one of these complaints prevents a bank from acting against you to recover the debt in dispute. This stalled the owners’ mortgagee (Westpac) from doing anything with respect to the property until November 2012.
The body corporate obtains summary judgment. This is where the court basically says there are no realistic prospects of a defence succeeding. Judgment was for circa $13,000 with costs to be assessed at a trial that was ordered.
All of this is still fairly vanilla at this stage.
The body corporate’s lawyers write to Westpac saying they have judgment against the owner for the $13,000 and adds a lovely little PS by saying that the costs to date have been $46,000 and the estimate of costs for a trial (on the aspect of arguing the costs alone) would be up to $100,000.
The owner fails to pay the next quarter’s levies. Westpac is advised that the total owing (levies and costs) is now $133,000.
The body corporate gets judgment for its reasonable recovery costs of $150,000 against the owner after a 5 day trial on just that point. The body corporate gets a warrant for possession (enabling it to seize and sell the property to recover the judgment amount). The owner appeals that decision.
Westpac gets the right to take possession of the lot.
The owners’ appeal against the $150,000 judgment is dismissed.
The owner declares themselves bankrupt.
Westpac finally takes possession of the property to enforce their security.
Westpac pays the outstanding levy arrears (of just short of $11,000). The body corporate then demands the recovery costs from Westpac, which are now $347,000. The original $150,000 judgment has seen a further $187,000 added to it from a recovery cost perspective.
Guess what Westpac did? It suggested the body corporate could go sing for the costs as they were not payable under the BCCM Act.
How wrong that ultimately proved to be. It was held that:
- Recovery costs are a body corporate debt.
- Recovery costs attach the lot similar to rates of a local council payable by past and future owners.
- The owner of the lot includes a mortgagee in possession – even before the mortgagee took possession of the lot but provided it took steps to enforce the mortgage and notified the body corporate.
So what does that mean in practical terms for the strata management industry?
- If recovery costs have been incurred, the owner of that lot is unfinancial even if they have paid the contributions and penalty interest.
- When an owner has unpaid recovery costs they lose the right to:
- vote on any motion in general meeting (except on a resolution without dissent); and
- nominate for, or be appointed to, a committee position.
- At law there is a real gap about how recovery costs (which may yet not be quantified) are disclosed. Until that is clarified, we think best practice for strata managers is:
- when issuing a contribution notice, disclose any outstanding recovery costs; and
- when preparing an information certificate for a potential sale, disclose any outstanding recovery costs.
This will save you from being sued by a purchaser for failing to disclose a potential liability to them. Imagine the potential consequences for issuing a certificate that does not note the $150,000 judgment?
- There will still be arguments about the reasonableness of recovery costs – there will be greater urgency to those arguments now that the right to vote and stand for election to the committee is compromised by those costs. Bodies corporate still need to be vigilant about what recovery costs they incur and whether those costs are reasonable in all of the circumstances in order to avoid any shortfall. This includes the administrative costs of debt recovery (which includes reminder notices etc.).
- Warring body corporate factions will now pay close attention to whether any recovery costs were incurred in respect of a lot owned by one of their opponents in the past. It would be prudent for committees to investigate this and, if appropriate, make a decision to waive any liability for recovery costs to give everyone a clean slate.
- If you are thinking of selling a lot in a CTS that has an unresolved issue with recovery costs, deal with that issue as soon as possible to avoid being hit with all recovery costs at settlement.
- If you are looking to buy a lot in a CTS, make sure you thoroughly investigate whether there are any recovery costs owing otherwise you may be left paying for the sins of another.
This does not clear the air about:
- the position with respect to receivers and managers or a liquidator as they do not appear on title and can be appointed by any number of means; and
- whether statutory trustees or trustees in bankruptcy would be captured similar to mortgagees in possession (which we ultimately think will be the case).
Click here to read the decision. This case may prove to be another example of the commerciality of strata litigation we first discussed here. There is still a question in this case about whether the recovery costs were reasonable, and that will be a very interesting footnote to this decision.
We are only a phone call away if you would like to discuss any of these operational issues or what adjustments your body corporate should now make.