How to avoid paying other strata owners’ bad debts

Recent media reports about levies (or fees) debts and their consequences may have alarmed some apartment owners and puzzled others.

A Sun-Herald story earlier this month about the “cruel” owners’ corporation that was allegedly driving an elderly couple to bankruptcy and the possible fire sale of their home, tapped into a virulent anti-strata sentiment in the community.

The emotive yarn was about an $18,000 special levy for window replacement in the 50-year-old Sydney block, which blew out to a $44,000 bill, including legal costs, despite part-payment of $13,000.

The report did not mention that owners corporations (bodies corporate) have little choice in whether or not they maintain common property, or that the couple could easily have raised a reverse mortgage, or that they unadvisedly fought a case in court that they could not win.

But don’t fret, a younger member of the couple’s family launched a crowdfunding campaign which has now raised $62,000 – a tidy $18k buffer on their future inheritance once the bills are paid.

Another side of the levies debts story comes via the Flat Chat Forum, in a post about three owners in a block of only four units.  They had failed to effectively pursue the fourth, who hadn’t paid levies for 10 years.

They struggled for a decade on 75 per cent funding, hoping to recoup their losses when the backsliding investor eventually sold.  By the time they decided to press the issue in court, the judge ruled that the first four years of the debt had expired.

Thus the non-payer got an immediate 40 per cent levies reduction, just by being a deadbeat landlord.

Not only that, when those debts are finally paid back the money will go into the strata funds. Only in the unlikely event of a unanimous vote will it be returned to the other owners and either way the new owner will probably get a share of it.

The common thread in both of these stories is a dearth of good advice offered to either the debtors in the first instance and the owners corporation in the second.

That’s one reason why, as an investor, you need to keep an eye on levies debts owed to your strata scheme, and what your owners corp, strata committee and strata manager are doing about them.

The cost of living is rising, mortgages are going up some owners can’t pay their levies, while others simply won’t as it’s not their highest priority, but there are ways to ensure you don’t pick up the tab.

If the debts mount, by all means show compassion for those who can’t pay big bills in one hit, but that should mean helping them find alternative means of financing, not letting it ride until a problem becomes a crisis.

This is also why you want to make sure your apartment block has a properly costed 10-year maintenance plan and either factored-in levy payments or a line of credit that will service the work.

All over the country, there are ageing strata blocks, occupied by even older people on fixed incomes, who may well regret having neglected their “sinking funds”, as their chickens come home to roost on sagging roofs and rusting guttering.

As the cost of living rises across those people need sound financial advice.  Meanwhile other owners might ask their strata committees if they have a strategy for dealing with the “can’t pay, won’t pay” neighbours.

It doesn’t have to be cruel or heartless, just smart and workable, with the least personal stress possible for all concerned.

After all, you can’t always count on funding from kind-hearted donors. For more on this, strata lawyer David Sachs discusses levies debts and how to recoup them on a recent episode of the Flat Chat Wrap podcast.

A version of this column first appeared in the Australian Financial Review.