Levies debts: Who suffers when you can’t pay?

As the financial screws start to tighten on individuals, it’s interesting to see what they are prepared to sacrifice just to stay afloat in the cost of living crunch.

For instance, which bills will the average apartment owner stop paying first? Gym memberships? Dining out? Medical visits and prescriptions? Food?

According to several posts on the Flat Chat website, strata levies (or fees) are prime candidates for default.

Ironically, that’s partly because owners feel the non-payment would only hurt an invisible body, as remote as the local council or state government, in fact affects their neighbours, sometimes imperceptibly, often significantly.

And the issue for strata committees can be whether they protect the building or go easy on the levies defaulters. After all, the non-payers are already struggling – why make their lives more difficult with final demands for levies or fees payments?

As Strata Community Association (Vic) President Julie McLean wrote recently, strata schemes were never intended to be a bank for their owners. But then we should have some compassion for those among us who are doing it tough.

A well-run strata scheme will have a tight but not restrictive budget.  If one or two owners are late with their levies, the sky won’t fall in and the lifts won’t stop working because the power has been cut off.

But what if it’s 10 or 20 per cent of owners who can’t pay or won’t pay? The first thing that’s going to suffer is the maintenance fund, for the simple reason that the scheme must pay the bills to keep the lights on.

Repairs and improvements may need to be put on hold, so in some subtle ways – and some more obvious – your investment is being harmed if the expected finances haven’t materialised.

That said, presumably your committee wouldn’t let it get to the point where unpaid cleaners and concierges were walking off the job, or all the common property lights were being switched off in a late-night curfew.

Some schemes will raise a special levy to cover the shortfall – but why should the majority of owners shell out when there are other alternatives?

In NSW there is a mandatory 10 per cent penalty interest rate on unpaid levies unless a majority of owners in a general meeting decide not to impose it. Similar exigencies apply in other states.

And while hitting them with an additional 10 per cent impost may seem like kicking a struggling owner when they are down, there’s a way to resolve this that could them a chance to get their finances in order without dragging the whole strata scheme with them.

Owners corporations can apply for strata loans to cover serious shortfalls in finances, at interest rates comparable to the penalty charge.

Thus the struggling owner can effectively take advantage of the strata scheme’s borrowing power when their own ability to raise funding is at a point where they may have to sell their home to clear their debts.

Meanwhile, strata schemes are empowered to institute payment plans with owners.

And if the owners’ mindset is more “won’t pay” than “can’t pay”, there are ways of recovering the debt that should cost the strata scheme next to nothing, even if court action is required.

For the average investor, the critical issue is to find out what the total budget deficit is for the scheme and what the committee’s plans are to deal with it.

And if it comes to a combination of strata loans and payment plans, well, we are supposed to be a community, aren’t we?

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