Can an Owners Corporation include legal costs on an owner ledger? Yes!

A common question we are asked on the topic of strata levy recovery is whether legal costs for chasing unpaid arrears are payable by owner before the Owners Corporation has obtained a court judgment for them. This question is often followed by another, more practical question, which is “can legal costs be included on an owner ledger?”

In a recent case – in which Grace Lawyers acted for the successful Owners Corporation – the NSW Civil and Administrative Tribunal has vindicated our long-held view that, yes they are, and yes you can!

The decision bucks conventional industry wisdom and has the potential to save Owners Corporation’s thousands of dollars in legal costs by avoiding the long, drawn out Court process.

Background

Almost all Owners Corporations will experience debt recovery litigation at some point. An owner stops paying their levies, interest accrues, and the Owners Corporation has to take action to recover the money it is owed.

Oftentimes these matters end quickly. After a few strident letters, the owner coughs up the money, blaming a change of address or a lazy property agent for the delay.

All good, right? Well, no. Not for the Owners Corporation which has expended the time and costs of chasing the owner for the levies. Costs which the industry will tell you the Owners Corporation must now shoulder. Multiply that by the five or so owners who fall into arrears each quarter, and you have the potential for the Owners Corporation to be wasting hundreds, if not thousands of dollars in legal costs in chasing down levies.

But does an Owners Corporation really have to swallow these costs? The industry position on this has been overwhelming negative. Most take the view that that costs can only be recovered from an owner – or included on an owner ledger – after the Owners Corporation has obtained a court judgment for them.

The reason for this is that section 86(2A) of the Strata Schemes Management Act 2015 (NSW) states that Owners Corporation can only recover a contribution not paid at the end of 1 month after it becomes due and payable, “together with any interest payable on that unpaid contribution and the reasonable expenses (i.e. costs) of the owners corporation incurred in recovering those amounts.

Because Courts are the only ones capable of determining if expenses are in fact reasonable, conventional wisdom has been that an Owners Corporation must commence legal proceedings to recover costs. Otherwise, a Court could never certify the costs are reasonable and an owner would never become liable to pay them!

This was the view adopted by the Local Court of NSW in The Owners – Strata Plan No 52098 v Khalil [2014] NSWLC 2. This decision is parroted by a number of big industry bodies and pressure is put on strata managers to follow its lead.

Grace Lawyers have never agreed with this view.

The case of Oliveira v The Owners – Strata Plan No 74698

In the case of Oliveira v The Owners – Strata Plan No 74698, an applicant owner sought an order from the Tribunal to remove thousands of dollars in legal costs from an owner ledger. That was said to be on the basis that – you guessed it – the Court had not yet found the costs were reasonable, and so the owner was not yet liable to pay them.

The background to the matter was that the Owners Corporation had obtained a number of default judgments in the Local Court against the owner. Those judgments had recently been set aside. The costs on the owner ledger were therefore no longer “secured” by a court judgment, and had to be removed.

The Owners Corporation opposed the order, arguing the following:

  1. That section 86(2A) of the Act, properly understood, meant that a debt recovery expense is immediately payable by the lot owner at the time it is incurred by the owners corporation, not when the Court enters judgment.

    The costs would not otherwise be a “debt” and the Owners Corporation would not have a cause of action to recover them.

  2. An interpretation of section 86(2A) whereby an Owners Corporation was required to sue an owner just to have Courts rubber-stamp even if the smallest amount of costs, would lead to complete disproportionality of costs and a revolving door of litigation. 

  3. The decision in Khalil was clearly wrong, and was consistent with the heavily criticised position of the Queensland Civil and Administrative Tribunal’s in Body Corporate for Liberty CTS: 27241 v Alotier Pty Ltd, Steward Silver King and Burns [2009] QCCTBCCM 3 (11 February 2009).

    The Liberty decision followed the same logic as Khalil, and had been rejected by numerous courts (and QCAT itself, at a later date) since it was handed down in 2009.

  4. The owner ledger was nothing more than a transaction summary. It was not binding on an owner. If an owner disagreed with its contents, he/she/it could choose not to pay it.

The Tribunal agreed with all of these points. In dismissing the lot owner’s application, the Tribunal expressly declined to follow Khalil and stated that:

It cannot be said that recovery expenses incurred pursuant to s 86 of the SSMA are not owed by a lot owner until they are assessed by a court. Subsection 86(2A) means what it says – recovery action is available to an owners corporation if a levy contribution is not paid at the end of 1 month after it becomes due and payable.

The Tribunal found that any amendment of the owner ledger should occur after the Local Court proceedings had concluded. If the Court found any of the costs included on the ledger were unreasonable, those costs would need to be removed.

What does this mean for Owners Corporations?

The decision is a welcome reprieve for Owners Corporation and strata managers who have stuck to their guns and maintained this position in the face of staunch criticism (including from industry bodies).

Moving forward, strata managers delegated the function of debt recovery should ensure the following practices are implemented:

1. Costs, including lawyer’s invoices and charges pursuant to agency agreements, should be included on the owner ledger.

However, Owners Corporations should remain diligent to ensure payments by owners are not mistakenly applied to costs. Payments must always be allocated in the following matter:

(a) In accordance with the owner’s instructions at the time of payment;

(b) If no instructions are provided, what the Owners Corporation can reasonably infer the payment is for based on the amount and timing of the payment.

For example, if a $1,200.00 payment is received on the date the $1,200.00 March quarterly levies fall due, one can reasonable assume the payment was for this purpose;

(c) If the Owners Corporation cannot infer what the payment is for, based on the Owners Corporation’s policy regarding how payments are to be applied;

(d) If no such policy exists, to the oldest debts first.


2. Costs should always be included in letters of demand. This is extremely important.

If a lot owner pays the outstanding levies and interest only before the issue of a claim to recover levies, interest and costs, the Owners Corporation may lose the ability recover costs.


3. Ledgers should be adjusted following court judgments.

For example, if $1,000.00 in costs is included on an owner ledger but the Court only awards $500.00, the additional $500.00 must be removed.

Strata managers should ensure the ledger is always an accurate reflection of what is owing.

For further information please contact Daniel Radman or Sean Turner on (02) 9284 2700.