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TEYS Training Note

Tuesday, 28th June 2011

An owners corporation or body corporate is insolvent if it is unable to meet its payment obligations as they fall due. Unlike shareholders in a company, when this happens in a strata entity, the owners are indirectly responsible for the unpaid bills. This is because the law provides for an administrator to be appointed and for a special levy to be struck to make the strata entity solvent.

What can go wrong?

Strata insolvency is a reasonably rare event but it does happen.
  • The owners commence legal action and cost blow out beyond the estimate and budget.
  • A developer holds a large number of apartments and fails to pay their component of the levies.
  • Urgent repairs and maintenance are required and the sinking fund is inadequate.
Usually when these types of events occur, administrative fund expenses are paid from the sinking fund.  When this happens the sinking fund has to be replenished within three months.

What can be done to prevent this from happening?

A well-run committee will:
  1. Budget accurately;
  2. Move to strike special levies immediately the need arises rather than putting the owners corporation under financial stress for months on end;
  3. Allow a discount for prompt payment of levies as an incentive for owners to pay early as well as charge interest on late payments - discounts are common in Queensland but not so common in New South Wales.  All that is required to implement a discount is to gross up the expenses by 20% and allow for a 20% discount for prompt payment.  This in effect imposes a penalty on late payers in addition to interest.
In budgeting, committee and managers should note:
  • Energy costs in Sydney are expected to rise by up to 39% over the next two years.
  • Mortgage default rates are increasing right across Australia (admittedly off a low base) and this is a sign that levy defaults will increase.
Next Week

This is the last note in our risk management series.  Next week we begin a 12 part series on "Solving Neighbourhood Problems". The series will cover the following topics:

  1. Fences and boundaries
  2. Trespass and responsibility for visitors;
  3. Noise;
  4. Smoke, smells and pollution;
  5. Trees and other plants;
  6. Water, drains and swimming pools;
  7. Building and development;
  8. Traffic, roads and parking;
  9. Privacy, defamation and nuisance calls;
  10. Children;
  11. Harassment, violence and discrimination; and
  12. Police and neighbourhood matters.
For more information visit www.teyslawyers.com.au

by

Michael Teys

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