Podcast – all you need to know about levy debt

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Last week saw the publication of a confected scandal of an elderly couple who’d been given bad advice, blaming their owners corporation for a special levy of $18,000 that had blown out to a debt of $44,000.

As we pointed out in this story, and on this podcast, the owners corp were probably just fulfilling their legal obligation to fix common property and charge owners according to their unit entitlements.

But the appallingly one-sided yarn glossed over the influence of the financial and legal advisers who got the couple into that financial hole and instead took potshots at the strata committee and owners corp.

Anyway, purely by coincidence, the previous week I had sat down with David Sachs, principal of Sachs Gerace Lawyers to talk about levy debts, how they can be recovered and what you should and shouldn’t do when they mount up for one owner.

This includes tracking down overseas investors who leave their units empty and never pay levies … which may involve hiring private detectives in foreign countries. Ooooh… exciting!

But seriously, David provides a calm voice of reason in what can be a highly emotive area … something that was notably lacking in the previously mentioned “fake news” travesty.


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TRANSCRIPT IN FULL

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Jimmy  00:03

Last week, before the story blew up about the old couple in Earlwood being (allegedly) driven out of their home because of a levies debt, I interviewed David Sachs from our sponsors, Sachs Gerace Lawyers, mainly about debt.

That was something we’d organised well in advance, so it’s purely coincidental… and this is by way of an explanation, if people listen to this and think “well, why are you not talking about that story that was in the Sun-Herald?” The reason is, it hadn’t happened yet.

I’m Jimmy Thomson, I write the Flat Chat column for the Australian Financial Review. And this is a very special Flat Chat Wrap.

[MUSIC]

Jimmy

I am with David Sachs of Sachs Gerace Lawyers,  here in Woolloomooloo, technically, and we’re going to talk about levy debts and what you can do about them and what you can’t do about them. Good afternoon, David.

David Sachs  01:26

Hi, Jimmy.

Jimmy  01:27

Okay, question one; there is a mandatory 10% penalty rate for unpaid levies, or overdue levies… When does that kick in?

David Sachs  01:38

Well, I would never use the word ‘penalty.’ It’s actually a bit of a black mark for lawyers, because penalties mean, you can’t recover it. But, there is interest that is chargeable, and it is chargeable from, I guess, the day after the levy is due, but unpaid, but, there’s a grace period, so that if you pay within a month after the levies are due, then you’re not charged the interest. But, if you paid two days later, then you’ll pay for the full 30 days, plus two days.

Jimmy  02:09

Which is a proportion of the 10%.

David Sachs  02:12

Yes, it’s 10% per annum, just calculated in the ordinary ways. So if there was a $100 debt, then 10% of it will be $10, and that would be calculated on a daily basis. It accrues notionally for the first month, but it’s only able to be recovered, if the levies are not paid within that one month grace period.

Jimmy  02:34

What processes does a strata scheme have to take, to get unpaid levies back?

David Sachs  02:42

So there’s procedures that are specified in the Act that every strata manager would know about, but it’s essentially, you make sure that a valid levy has been struck that the notices to pay the levies have been issued, that the requisite amount of time has been allowed for people to pay. You’ve got to allow at least 30 days for people to pay, then if they don’t pay them, you’ve got to give them a notice with information that’s required under the Act about that payment; how the things’ been calculated, etc. And then, after that point, an owners corporation can recover it like any other debt. So most of the time, you’ll be commencing a case in the small claims division or the general division of the local court.

Jimmy  03:33

So it’s not an NCAT thing; it’s a Small Claims Court…

David Sachs  03:38

It’s a Small Claims Court thing. It can be done as an adjunct to some other proceedings that are brought in NCAT. For example, there may be some other strata dispute that’s within the scope of NCAT’s exclusive jurisdiction, and then you can tack onto that a debt recovery matter, but you don’t bring just a debt recovery matter on its own, in  NCAT; you bring that in the local court. And that’s so much better to do anyway, because NCAT doesn’t have the mechanism to enforce its own orders, whereas the local court does. It’s something that we can discuss later on, in a different context, but the local court has a whole lot of remedial debt recovery powers with the sheriff and garnishee notices, but NCAT doesn’t have that.

Jimmy  04:28

How does a strata scheme decide not to impose the (I’m  calling it ‘penalty interest;’ you don’t like that)… That interest; the statutory interest. Now, I know that strata schemes can decide not to do that, but how do they decide not to do that?

David Sachs  04:37

Just interest. They decide not to do that by resolution at a general meeting. It’s all these things about raising levies, setting payment plans, relaxing  interest charges; they are all decided at a general meeting,

Jimmy  05:04

Right. Is it just a normal majority decision, or does it have to be a special resolution?

David Sachs  05:10

No, only a simple resolution, so an ordinary thing and you’ll find that most well-organised strata managers will have proposals about instalment plans as part of their standard agenda items, that go onto the AGM’s for strata schemes that they’re managing.

Jimmy  05:29

Correct. That would be unworkable; it’d be cumbersome. Most good schemes, which have got good managers, will have it as part of their standard kitbag for their AGM and then they’ll be able to apply it as and when necessary, and you just renew it every year. So you could do this in advance; you could make the decision that we will allow for payment plans for people who are behind in their levies… You could do that at your AGM and then just just apply it as and when it’s necessary. You don’t have to have a general meeting every time somebody goes behind in their levies.  So what happens if an owner has agreed to a payment plan and either because their circumstances haven’t improved, or possibly because they just wanted to stall on the payments… What can the owners corporation do, then?

David Sachs  06:25

Well, you should make it that it’s a requirement for the continued participation, if you like, in the payment plan, that people comply strictly with its requirements. If people get behind on an instalment, then the owners corporation can, I guess, at an executive level through the committee, decide whether they’re going to keep it on foot and allow someone to catch up or give them a holiday for a month, or whatever it might be; whether they say “I’m sorry, it’s gone.” So for example, by analogy, in the local court, if you’ve got a debt, you can get a payment plan approved by the Registrar of the local court. Let’s imagine we didn’t have a payment plan approved by the strata scheme and they decided to take it straight to the small claims division and a judgement was entered for $10,000 and the judgement debtor, i.e, the lot owner, wanted to pay by instalments, then they can apply for an instalment plan and have that approved by the Registrar of the local court. By and large, provided it’s sensible, that would be granted, but the rules provide that, if you’re one day late in meeting a payment, then the instalment plan evaporates. It doesn’t require any further order; you don’t have to get it set aside… It just doesn’t exist anymore.

Jimmy  07:39

There is a time limit on these things that can be strictly adhered to.

David Sachs  07:43

Yes, I suppose there’s always lines that need to be drawn, and they’re not going to be fuzzy lines. You need to know when you’re expecting payment, when people are supposed to make it, otherwise, you’re always dealing with explanations all the time. They’re too busy in the local court, to bother with stuff like that.

Jimmy  08:01

And what does a strata committee do, when an owner says “look, I don’t have the money. I’m not paying these levies. I don’t agree with any of the stuff you’re doing, so it’s up to you… The balls’ in your court, I’m not paying?”

David Sachs  08:16

Well, I mean, ultimately, the object is to receive the money as quickly and efficiently as possible. If people are opposing paying levies, because they have a political objection to that whole process, then they’re not really cut out for strata. There are shared burdens and one of the shared burdens is funding the expenses of the owners corporation. So when person A decides not to pay, then persons’ B, C, and D are carrying their burden as well and that’s unfair. If somebody has no money, then provided people are satisfied that that’s correct and whatever, then normal human kindness would require them to be as charitable as could reasonably be expected. But ultimately, if people can’t pay their debts, or if people are insolvent, then there are consequences for doing that.

Jimmy  09:25

We recently read about an owner who hadn’t been paid levies for 10 years, and finally was taken to court, to have those levies paid and the judge or the magistrate said “well, look you forget the first four years, because that’s out of time; those debts have expired.” How does a strata scheme get into that position and how do they make sure that they don’t get into that position, where they’ve got somebody who’s just stringing them along, or even not even communicating with them?

David Sachs  09:57

To leave it for 10 years, is a very, very long time to cut somebody some slack. I don’t know anything about their circumstances, but they’re pretty neglectful and I think that’s quite an irresponsible way of managing the finances of an owners corporation and if they’ve gone to the point where they’re prevented by the Limitation Act of recovering four years of those levies, then I think that’s fairly poor on the owners corporations’ part and they certainly should have done something very much earlier. But look, sometimes limitation periods with debts; you can fix it up…. Every lawyer will know, that if you’ve got a money claim, you’ve got six years to bring the money claim, unless there’s some particular provision in it that can extend that period… You can get somebody to confirm that they owe the money and provided they provide that confirmation within the six year period, then the six years runs again from the date of confirmation. So if for some justified reason, an owners corporation says ‘David, you haven’t paid your levies for five years. We’re still prepared to give you further time, because we know you’re going to win the lottery. I want you to confirm that you owe the money and that you’re going to pay it back,’ and then I dutifully do that, then they could still sue me, within six years of that date, even for levies that would due more than six years prior to the time that they sued me. It’s because you can confirm a debt, to extend the period.

Jimmy  11:38

So it’s just a matter of keeping on top of it?

David Sachs  11:40

Yes, this scheme that let it go for 10 years was just not on top of it and  the magistrate didn’t have a choice.

Jimmy  11:46

Yes, absolutely. Now, we’ve heard about rents being garnisheed. This is where an investor doesn’t pay their levies. Quite often an overseas person (and we’ll get to that, as well)… They have a tenant; they have tenants in the building, but they never pay their levies and eventually, the owners corporation can go and get the rent garnisheed. How do you do that; is that through a local court?

David Sachs  12:14

Yes, through the local court. If you get a judgement debt, then you can get what’s called a garnishee order. That operates very broadly, so if you find out that there’s another person, a third party who owes money to the debtor, then you can issue a garnishee notice through the court; it has to be approved by the court. Then you issue them with a garnishee notice, and then they are then required to pay whatever money they owe to the debtor, to you. If they don’t… If they get the garnishee order, and they pay the money to the judgement debtor nonetheless, then they owe you the money. right? The classic way of doing it is, bank account, so you can garnish bank accounts. You can garnish any other money that’s owing. You can garnish employers, so you can garnish wages, and there are restrictions on that; you don’t get 100 cents in the dollar. But of course, you could garnish rents, as well. And with the rents, you would go to the rental agent, presumably? You need to serve it on whoever is liable to pay the money, so it would be the tenant.

Jimmy  13:23

And what about overseas investors? We’ve come across, over the years, a couple of occasions where people from overseas have bought apartments here purely to get their money out of wherever they live; put it somewhere that it’s secure. They buy an apartment and never set foot in it and neither does a tenant, but they also don’t pay their levies. How does an owners corporation (especially when there’s no rental agent involved, because there’s no tenants and the person is overseas); how can an owners corporation get those levies back?

David Sachs  13:55

You can still commence proceedings;  they’ve still got to go through the usual requirements of striking the levies, issuing the notices… Make sure they’re sent to the address, in accordance with the Act. Generally, whenever someone buys a unit, they’ll get a an address for the service of documents, the Section 22 notice, or whatever it’s called. Provided they’re issued appropriately to there, you can go to the local court. You can get a judgement debt. You’ve got to make sure that you serve somebody properly. So somebody overseas; Mr Ninkovich in Serbia, you’d find a way of making sure that the court is satisfied that Mr Ninkovich has been served. Once you get a judgement debt, then you’ve got the array of enforcement action available to you and one of the things that you can do, is put a writ on the property. When you put a writ on the property, then the sheriff will… There’s still more processes that need to be undergone, to make sure people are aware of it and eventually, you can become (effectively), a mortgagee in possession, and the property can be sold, in order to pay the debts. That’s a bit of a process, but if worse comes to worse, you can certainly do that.

Jimmy  15:14

But the whole question of, if you’ve got someone sitting in Shanghai, how do you even start to serve a notice on them?

David Sachs  15:24

Well, the local court is a bit more relaxed about doing it. If you’ve got addresses that are authorised under the Strata Schemes Management Act, for Service of Notices… We do allow people from overseas to own apartments in New South Wales and so there’s address provisions there and the local court will allow you to do that.  I did do a tricky defamation case many years ago, where we were suing a publisher of a newspaper; it was published in Macedonia, but also distributed in Australia, but it contained some highly defamatory things about an Australian resident. He ended up suing the journalist and suing the paper over there. We had to work out a way of serving documents. There’s a thing glamorously called ‘the Hague Convention’ that regulates this and we had to pay for and get the cooperation of the Department of Foreign Affairs to deal with the embassy. Well, it turned out to be the embassy in Serbia, and they ended up doing it. We had all the documents to satisfy the Supreme Court that it had been served and away we went. I mean, it’s much more prosaic, when you’re dealing with the local court, but you can also get an order for substituted service,  if people are sort of avoiding service of documents, which entitles you to serve documents that would ordinarily require to be personally served, to serve them by email, if you can satisfy the court that they’re going to be brought to their attention and then you just take it from there.

Jimmy  17:03

I think it’s generally known that you can add the costs of recovering a debt, to the debt itself; reasonable costs. Reasonable costs; do they include private detectives in Macedonia?

David Sachs  17:19

It may be. Reasonable are just generally the things that are properly incurred, in order to be able to recover the debt. If you can satisfy someone i.e. the court, who’s ultimately got to add it all up, that these things were properly incurred and you can just explain  why that was done…

Jimmy  17:43

Was there a limit put on it, in the last couple of years, that some debt collection agencies were just piling on expenses, or has that always been?

David Sachs  17:53

Well, there’s no cap that’s specified in the regs’ or the or the Act, other than that they’ve got to be reasonable.

Jimmy  18:00

Right. So that would be determined by the magistrate?

David Sachs  18:04

Yes, ultimately by somebody, if it’s ever challenged. Otherwise, you just claim it and add it on. Eventually, the issue is, is it ever going to be reviewed? Does it need to be independently adjudicated by somebody, or is it something that you will simply add on? Most strata schemes,  if they’re trying to recover levies, and they’ve got an intransigent lot owner, will add legal costs incurred and there will just be a line item in it, or additional strata management fees incurred, and they will just add it up and they’ll just get another number and they’ll bring that to the local court. No one’s actually going to take on whether that’s reasonable or not. The registrar’s not going to independently review it.

Jimmy  18:47

I’ve written in the website this week, about a case in WA… It was a crazy upstairs neighbour, driving previous owners out,  their tenants out, and the new owner out of their apartment…

David Sachs  19:04

Western Australia as well, they have people like that?!

Jimmy  19:06

They do apparently; only one or two. The judge in the case, in the Supreme Court, actually lamented that they had brought this case to the Supreme Court, because he said “look, these people that you are suing for rescinding the contract and then damages (which amounted to something like $450,000); they’re not going to be able to pay. They are going to go declare bankruptcy and you’re the plaintiff, you are still going to have to pay your lawyers. So you’re going to be in debt. They’re going to be bankrupt.” The crazy guy is still there, in the apartment. Just talk about bankruptcy, if you would, for a minute. What is the danger of pushing somebody so hard for a debt incurred through levies, that they declare bankruptcy and you don’t get anything?

David Sachs  20:03

Bankruptcy is not a punishment. Bankruptcy is a facility that’s there for people who are not able to pay their debts. It’s meant to be a way of, you know, providing a managed period, where people who are in a financial hole, are not forever screwed over by that and can actually come out the other the other side. They’re heavily regulated by their trustee, to a degree (it just depends on how the regulation has been done). There is no doubt that if you’ve got a large debt which is genuinely owed to you, and a person is bankrupted and throughout that period, they do everything that they’re required to do by their bankruptcy trustee, and you still don’t get paid… At the end of the period of bankruptcy, they no longer owe that money to you. Your debt is just gone. Sorry, because it’s been washed up in the bankruptcy, because that’s the whole idea; that after three or five years, or whatever it is, the person can be freed of their debts, after they’ve complied with all of the Bankruptcy Act requirements.

Jimmy  21:18

So in a case where you’ve got somebody who owns an apartment; they’ve got behind in their levies… Seriously behind in their levies; they’ve got other debts accruing, possibly even, through no fault of their own, just bad luck, but at the end of the day, they declare bankruptcy… Now, the bankruptcy trustee, could he say, well, you’re going to have to sell your apartment, to pay some of your debts…Where does the owners corporation fall in the list of people who are going to get their debts, some of their debts repaid?

David Sachs  21:52

Well, they’re an unsecured creditor, so they fall into the pool of all other unsecured creditors. Primarily, they would be high; if we’re talking about an apartment, primarily, they’d be behind a mortgagee, who is a secured creditor; will always take priority. Some other secondary priorities that go to employees’, wages, and monies that are owed  to the government for things, and whatever. After that, it just depends on what money would be left over, if anything, and it needs to be shared with the others. We’ve all heard the expression, ’20 cents in the dollar;’ that sort of really comes from when everybody’s assets are liquidated, how much is left to share amongst the pool of unsecured creditors.

Jimmy  22:35

Is there any way an owners corporation can make themselves secured creditors or is that just something silly?

David Sachs  22:41

I think the person you referring to is possibly thinking of the thing where maybe, it’s a debt judgement. That means that when the apartment is sold, the owner has to pay whatever they have to the strata scheme; that doesn’t ring any bells with you? Not normally. You don’t have a charge over the property, on account of the unpaid levies. Somebody said that to me earlier today, that they thought an owners corporation could do that. There’s there’s nothing in the Act that enables them to put a charge on. It doesn’t give them an interest in the property. If you want to put a caveat on something; if you think you’ve got a chargeable interest over property that could be secured by a caveat, you need to have an interest in the property, and that’s something more than just a debt. That doesn’t mean that someone owes you money; that somehow you own part of their property or you can make a claim over it. Not only does it not ring a bell, but that’s not correct. People don’t have to pay their debts when they sell. Well, there are provisions, when someone is selling their apartment… If you owed a lot of money in unpaid levies, and you were selling your property to me, then I would require, as a condition of the sale, that there be an adjustment of the sale price, so that from whatever monies I have to pay you, I’d pay that down to the owners corporation. I mean, it’s fundamental, because otherwise, I will take on that debt. So if you owe 20 grand in unpaid levies, and I buy the apartment from you, and I’ve obtained one of those notices… a statutory notice about the state of play for your lot, and I buy it and I don’t require that payment, then I owe the money.

Jimmy  24:39

So, if I buy the apartment from you for $820,000 and you owe $20,000, then I give you $800,000?

David Sachs  24:49

And pay $20,000 of the agreed price to the owners corporation, so as to clear that debt. You do the same as, like with council rates and water usage; that’s what people do. It’s called adjustments, so you just make adjustments and in strata, one of the adjustments would be unpaid levies. People do that. There might be something that’s coming up; there might be a levy that’s coming up, or a disputed thing in strata (because it’s always a moveable feast, that doesn’t fit in exactly with what people are doing with a sales transaction)…. Sometimes, they put money aside… People have little trust funds that are sit there, waiting some determination of something. There’s always something there, so you just need to have your eye on the ball, but that’s a conveyancing practice thing, more than strata practice.

Jimmy  25:41

A final question (and this is a tricky one)… We’ve talked about payment plans and giving people a bit of leeway, which I’m calling ’empathic engagement.’ But, at what point, would you say an owners corporation should say “look, this is running away from us. We need to start taking action.” Is there something that would set your alarm bells ringing, on behalf of one of your clients?

David Sachs  26:19

Look, eventually, it’s always a balancing exercise. You can’t always have your mind on the person who’s got problems, who can’t pay their levies, because ultimately, it’s going to become a problem for everybody else. So there was a community association we were dealing with, not so long ago, where some people were not paying a special levy that was required to rebuild a retaining wall, that was in structural problems and was causing risks for the building. I mean, yeah, sure, it was probably an unanticipated expense and maybe, they were struggling with money and all of that sort of stuff. But in the end, the thing’s got to be fixed and a responsible strata manager is not going to sign up a builder to do $300,000 worth of work, without having the $300,000 there. All that does is delay work being done, and it’s unfair on other lot owners. I guess the point comes where somebody’s delay is really starting to impact on the proper management of the scheme and the rights of other lot owners to have things done, when they’re the people that are complying. It doesn’t mean they’re better than them, but they’ve got interests in compliance, too.

Jimmy  27:35

I think there’s an attitude about levies; it’s almost like the attitude that some people have towards tax, which is, if you can get away with it, don’t pay it. Unfortunately, especially in small blocks, if there’s one person who’s just not paying, it can have quite a huge impact. If you’ve got a block of six or eight, and one owner is just not paying their levies, then that’s a big chunk of the income of the building, that cannot be put to repairs, etc.

David Sachs  28:05

Or the strata manager; it’s pretty competitive in the strata management market, and they’re keeping their fees pretty low, so they’re not making huge profits on these things. The owners corporation then, can’t afford to pay their strata manager, who is doing a whole lot of work for them… It’s just not fair for everybody.

Jimmy  28:31

Okay, David, thank you so much. We’ve gone over our allotted time. I’ll just cut out all the nonsense I said and leave your stuff, and it will all be good.

David Sachs  28:40

Okay, thanks.

[MUSIC]

Jimmy  28:43

Thanks for listening to the Flat Chat Wrap podcast. You’ll find links to the stories and other references on our website, flatchat.com.au. And if you haven’t already done so, you can subscribe to this podcast completely free on Apple podcast, Google podcast, Spotify, Stitcher, or your favourite pod-catcher. Just search for Flat Chat Wrap with a W, click on subscribe, and you’ll get this podcast every week, without even trying. Thanks again. Talk to you again next week.

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  • #64217
    TonyC
    Flatchatter

    If I can add to the excellent discussion, forcing the sale of the property through any means (Bankruptcy being the simplest for an individual, Liquidation for a company) is an effective way to recover an outstanding Strata levy / Strata debt because it is conveyancing practice that all property outgoings which are outstanding are cleared on settlement.

    In NSW the requirement is found in clause 14.1 of the standard Contract for Sale which states:

    Normally, the vendor is entitled to the rents and profits and will be liable for all rates, water, sewerage and drainage service and usage charges, land tax, levies and other periodic outgoings up to and including the adjustment date after which the purchaser will be entitled and liable.”

    Notes: Even though it says Normally, it is rare that this clause does not apply.  The adjustment date is on completion / settlement, unless early possession is given (if so, it is the possession date).

    Comparable provisions exist in the Contracts for Sale in the other States and in the Territories.

    It is the practice of Trustees in Bankruptcy and Liquidators to pay sale expenses such as agent’s commission, conveyancing fees and outstanding outgoings (such as strata levies) on settlement, and treat them as sale expenses. The same practice is adopted by Mortgagees who sell the property under power of sale.

    So, the procedure is that the property is sold at auction, let’s say for $820,000. That is the Contract price. If there are for example $20,000 in unpaid outgoings, then on settlement, the purchaser still pays $820,000 for the property but $20,000 will be applied to pay the unpaid outgoings directly.

    The bottom line is that the outstanding strata levies / strata debt will be paid when the property is sold. And the best way to force a sale is to have a Trustee in Bankruptcy appointed if the owner is an individual, and a Liquidator appointed if the owner is a company.  If the property is mortgaged, the mortgagee will take over when a Trustee in Bankruptcy or a Liquidator is appointed.

     

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