COVID-19 Emergency Response – Good intentions, unintended consequences

The Justice and Other Legislation (COVID-19 Emergency Response) Amendment Bill 2020 was introduced to the Legislative Assembly on 19 May 2020, and it was at this time that the public was first given notice of the proposed legislation, including Strata Community Association (Qld).

On 20 May 2020 the Bill was considered for a second time by the Legislative Assembly.  David Janetzki, the Shadow Attorney-General and Shadow Minister for Justice, said that these proposed reforms to body corporate law ‘…have been done extraordinarily quickly and without consultation…’.    

On the afternoon of 21 May 2020, and two days after the public was given notice of it, the Bill was passed by the Legislative Assembly. There will be no opportunity for amendments to it for now.

The speed with which the Government has moved to introduce and then pass this legislation is remarkable for two reasons:

  • it shows the Government’s commitment to rapidly respond to the evolving COVID-19 crisis, which it is to be commended for; and
  • it stands in stark contrast to the long seven years it has taken so far for the wider review of the Body Corporate and Community Management Act 1997 (Qld) to achieve any meaningful results.

Legislation that is as industry specific as this ought to be scrutinised by the stakeholders in that industry.  Those that will be left with having to implement the emergency measures should have been given a meaningful opportunity to comment. 

We have identified some practical implications and complications these new amendments will cause for strata managers and bodies corporate across Queensland.

A snapshot of the proposed changes

The purpose behind the amendments to strata legislation is to assist ‘…Queensland businesses and individuals suffering financial and operational stress caused by the public health emergency…

Specifically, ‘..the bill amends the Body Corporate and Community Management Act 1997 to provide bodies corporate and their committees with increased flexibility regarding long-term budgeting, due dates of unit owners’ levies, timing of debt recovery proceedings and borrowing.’

The changes to the Body Corporate and Community Management Act 1993 (Qld) include:   

  • the body corporate, by ordinary resolution, will have the power to adjust and reduce the budget for the sinking fund and refund owners in line with the new budget;
  • the committee will have the power to extend the due date for payment of contributions levied;
  • bodies corporate will be prevented from imposing penalties on any outstanding contributions until 31 December 2020; 
  • bodies corporate will not be required to commence recovery actions, but they may still do so; and
  • bodies corporate will have greater borrowing power.

We do not have a date on when the proposed changes will commence.  We anticipate the commencement date will be when the Bill is given Royal Assent.  That could be in a matter of days.

Penalties

Bodies corporate are prevented from imposing penalties on outstanding contributions levied for the relevant period, which is from commencement of the Act (which is unknown at this stage) until 31 December 2020.

The effect of the legislation is that there will be a freeze on imposing penalties on all outstanding contributions during the relevant period, even existing contributions that were outstanding from before the health crisis.

For example, let’s say the commencement date is 15 June 2020 and an owner has an outstanding contribution that was due for payment on 1 February 2020

The body corporate cannot claim penalty interest for the month of June 2020 to December 2020 but may claim penalty interest for the months of February to May 2020 and January and February 2021.  Further, penalty interest accrues for each month the contribution is outstanding. It cannot be applied on a pro-rata daily basis.

A positive point to this change is that it will provide relief for owners who have otherwise paid their contributions in a timely manner but have been adversely affected by COVID-19. 

It will also provide an advantage to long term debtors who failed or refused to pay their levies well before the term COVID-19 ever appeared in the media and whose recalcitrance is a cause for the difficult cash flow problems many bodies corporate are now experiencing. 

Contributions

The change will allow committees to determine whether to extend the due date for payment of contributions levied in this financial year. 

An extension may be granted:

  • to particular owners if the committee is satisfied that an owner is suffering financial hardship because of the health crisis; or
  • for all lot owners, irrespective of whether financial hardship is experienced.

However, any extension granted must not extend the due date beyond the scheme’s end of the financial year, and the committee’s decision on any extended due date must be reasonable in the circumstances considering anticipated liabilities.  In other words, a committee should not treat this as a carte blanche to uniformly extend the due dates if the body corporate does not have sufficient cash reserves to meet anticipated expenses in this financial year.

The SCA (Qld) lobbied to amend that so extensions could be granted up to two months after the proposed date of the next annual general meeting.  We are not sure if that amendment has been made to the Bill before it passed, although it was mentioned by Mr Janetzki to the Legislative Assembly.

That change would have ensured owners were financial and could vote at the annual general meeting and be elected to the committee at the AGM if the due date for contributions was extended.

Sinking fund budget

The body corporate, by ordinary resolution, will have the power to adjust and reduce the budget for the sinking fund and refund owners in line with the new budget. 

A sinking fund budget needs to cater for capital expenditure in the current financial year and then also raise some money to accumulate towards capital expenses that will be realised over the nine years that will follow.  So, if the body corporate forecasts a need to repaint the building exterior in five years, it should be accumulating those funds over the next five years.

What this change means is bodies corporate would only be required to raise sinking fund contributions to cover capital expenses for the current financial year and won’t have to raise any reserve for anticipated expenditure in future years.

If the sinking fund budget is adjusted and reduced, the body corporate must refund owners the proportion of a contribution already paid by the owner.  The owner is not required to make a written request or show proof that the contribution was paid to receive the refund.  It is important to note that the requirement is to give a refund, not a credit.

The administrative burden this could cause will be profound.  Strata managers don’t keep on record the bank account details for owners.  To process a refund without an owner requesting it would require the strata manager to proactively email all affected owners to ask for their bank account details, and then process each payment individually.  An alternative would be to simply issue cheques for the refunds to each owner’s service address, but that will incur bank fees and cause complications for unpresented cheques.

If a body corporate would like to adjust its sinking fund budget, we suggest this possible solution that could avoid the need to process refunds:

  • If an AGM was held in the first quarter of the calendar year (January – March 2020), then a normal sinking fund budget and contributions would have been approved – let’s say a budget of $100,000 payable in four quarterly instalments. 
  • The body corporate may now want to reduce that budget by 75%, so only $25,000 is needed for this financial year. 
  • The first instalment to the original budget has probably already fallen due and been paid (raising $25,000).
  • Contributions to the new budget of $25,000 should not be required in four quarterly instalments – that will necessitate a refund.  Instead, the new budget should be approved on the basis that it will be funded by a single instalment that will have already been paid.
  • In this way, the contributions already paid by owners will fund the new budget and give owners relief from having to pay any further sinking fund contributions for the rest of the financial year.

Another alternative would be to credit the owner’s account and issue a notice to all owners requesting their bank account details within a certain period.  If the owner does not provide its bank account details, the credit would remain on the owner’s account. 

Borrowing

Under the proposed change, bodies corporate will be able to borrow more with less stringent approval requirements.

However, the changes do not apply to bodies corporate:

  • that have previously authorised borrowing above the prescribed limit in the applicable regulation module; or
  • regulated by the Specified Two-lot Schemes Module.

The below table sets out a comparison between the current borrowing restrictions and borrowing under the new legislation: 

 

Current legislation

COVID-19 amendments

Standard Module

Borrowing $250 or more per lot requires a resolution without dissent.

Borrowing $500 or less per lot requires approval by ordinary resolution.

Borrowing more than $500 per lot requires approval by resolution without dissent. 

Accommodation Module

Borrowing $250 or more per lot requires approval by a special resolution.

Borrowing $500 or less per lot requires approval by ordinary resolution.

Borrowing more than $500 per lot requires approval by special resolution.

Commercial Module

Borrowing $250 or more per lot requires a special resolution.

Borrowing $500 or less per lot requires approval by ordinary resolution.

Borrowing more than $500 per lot requires approval by special resolution.

Small Schemes Module

Borrowing more than $3,000 requires approval by resolution without dissent.

Borrowing $6,000 or less requires approval by ordinary resolution.

Borrowing more than $6,000 requires approval by resolution without dissent.

The wrap up

It is pleasing to see the Government rapidly respond to the financial crisis caused by COVID-19 to all Queenslanders, including those who live or invest in strata communities.  However, I think the speed at which this Bill passed through Parliament without any meaningful community consultation will lead to adverse consequences that were entirely avoidable.  For example:

  • Most bodies corporate that wanted to reduce an already approved sinking fund budget have probably already called general meetings to do so.  This legislation gives them the comfort of legislative authority to not raise funds for anticipated capital expenses beyond the current financial year but may impose the burden of processing refunds to lot owners.
  • Pushing the due date for contributions to the end of financial year will be of limited assistance to those enthusiastic owners who wish to participate in the AGM and volunteer their time on the committee, but are unable to pay all of their levies by the time of the next AGM because of the economic destruction caused by COVID-19.
  • Many owners refuse to pay levies for completely irrelevant and arbitrary reasons – they weren’t happy with a decision made at a committee meeting, they don’t like the chairperson, they think the administrative expenses are too high, etc.  This causes significant strain on the cash flow of bodies corporate (particularly small schemes), exposes the community to litigation costs, and forces the other owners to make up for the deficit caused by the indebted owner until the recovery action concludes.  Those indebted owners now have the benefit of not having to pay penalty interest on 6 months’ worth of arrears even if their failure or refusal to pay levies has nothing to do with the impact of COVID-19.
  • There is no need to put a uniform freeze on penalty interest.  A committee has always had the discretion to waive penalty interest if the circumstances of an owner warranted it.  Some strata communities simply won’t have the ability to extend due dates to the end of the financial year because they don’t have the cash reserves.  A freeze on penalty interest will remove one of the last means of ‘encouraging’ an owner to pay their levies and may push more communities into litigation if the body corporate needs owners to pay on time.

Good intentions can sometimes have unintended consequences.

Authors:

Eloise Soper-Smith, Associate

Jason Carlson, Partner