Strata Levy Contributions – Debt Recovery
The ability for an owners corporation to be able to initiate debt recovery action against defaulting lot owners is statutory. In NSW it is enshrined in the provisions of the Strata Schemes Management Act NSW 2015 (the “Act’).
Recovery of legal costs
A strata manager that was recently looking to engage our services to recover overdue levies from lot owners asked us:
- “Are all legal costs recoverable if we engage your services to recover overdue levies?”
The reason for their question was that they had endured a negative experience on a case whereby a court had ruled that recovery of costs was unreasonable, as it was determined that the owners corporation via its strata managers had not provided reasonable notice to the owner that they intended to initiate legal action.
The answer to the strata manager’s question is that an owners corporation may recover as a debt in a court of competent jurisdiction, a strata levy contribution that has not been paid at the end of one (1) month after it becomes due and payable. The owners corporation can also recover any interest payable on that unpaid contribution and the reasonable expenses of the owners corporation incurred in recovering the strata levy debt.[i]
The key word in the legislation is “REASONABLE”.
i.e., The owners corporation can recover – “the reasonable expenses of the owners corporation incurred in recovering the strata levy debt”.
The main error that owners corporations or strata managers make in ensuring that the legal costs they seek to recover are reasonable is that they fail to comply with the pre-legal statutory notice requirements.
An owners corporation must not take legal action to recover a strata levy debt unless it has given the person against whom the action is to be taken at least 21 days’ notice of the action.[ii] The notice of the action must set out the following[iii]:
(a) the amount of the contribution, interest or expenses sought to be recovered, and
(b) the recovery action proposed, and
(c) any other matter prescribed by the regulations.
We always advise our owners corporation or strata manager clients to follow the below strict internal debt collection procedure before referring a matter to us for legal action:
- Issue the levy notice.
- If the levy is not paid within 30 days issue a 7-day courtesy reminder notice.
- If the levy is not paid after the reminder notice issue the statutory 21-day notice.
- If the debt is not paid after the 21-day statutory notice refer the matter to the solicitor.
- The solicitor will send a 7-day solicitors letter of demand.
As a further courtesy to the defaulting owner, the solicitor will send a further 7-day solicitors letter of demand before initiating legal proceedings on your behalf – as per item 5 above.
Once a law firm starts to bill the owners corporation for its legal services then the strata manager can add the legal costs (less any GST) to the owner ledger and the legal costs will become due and payable along with the overdue levies and interest.
21-day Statutory Notice
It is prudent for all owners corporations and strata managers that send out statutory 21-day notices to ensure that they have a solicitor draft the template on their behalf so that the notice complies with the requirements of the legislation.
If a solicitor did not draft the current 21-day notice that you are sending to defaulting owners we suggest that you get a solicitor to check your 21-day notice to ensure that it complies with statutory requirements.
Recovery of Interest
Most strata levy accounting and management software in use today has a system for manually calculating interest on a daily basis.
The Act provides that if a strata levy contribution is not paid when it becomes due and payable then the owners corporation can charge interest at an annual rate of 10% or as otherwise prescribed by regulations.[iv]
An owners corporation, at its own discretion, may decide by resolution that a contribution is to bear no interest.[v] Decisions to this effect are usually made on a case by case basis and take into account the owners reasons for late payment. During the recent COVID-19 lockdowns many owners that have been financially affected have had interest waived to assist them whilst they are suffering financial hardship.
Payment Arrangements
Another option for owners suffering financial hardship is to allow them to pay contribution arrears by payment arrangement. However, it should be noted that paying strata levy arrears by payment arrangement is legislated for and the provisions of the relevant act should be adhered to.
An owners corporation may agree to enter into payment plans either generally or in particular cases for the payment of overdue contributions. A payment plan is to be limited to a period of 12 months, but a further plan may be agreed to by the owners corporation.[vi]
The existence of a payment plan does not limit any right of the owners corporation to take action to recover the amount of unpaid contributions.[vii]
Community Schemes
The legislation referred to in this article is the Strata Schemes Management Act NSW 2015, however, similar mirror legislation exists for the management of community, precinct and neighbourhood schemes in the provisions of the Community Land Management Act NSW 2021 No 7.
Links to provisions of the relevant legislation are provided below:
http://classic.austlii.edu.au/au/legis/nsw/consol_act/ssma2015242/s85.html
http://classic.austlii.edu.au/au/legis/nsw/consol_act/ssma2015242/s86.html
http://classic.austlii.edu.au/au/legis/nsw/num_act/clma2021n7282/
[i] Strata Schemes Management Act 2015 NSW Section 86 (2A)
[ii] Strata Schemes Management Act 2015 NSW Section 86 (4)
[iii] Strata Schemes Management Act 2015 NSW Section 86 (5)
[iv] Strata Schemes Management Act 2015 NSW Section 85 (1)
[v] Strata Schemes Management Act 2015 NSW Section 85 (2)
[vi] Strata Schemes Management Act 2015 NSW Section 85 (5)
[vii] Strata Schemes Management Act 2015 NSW Section 85 (7)