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I live in a strata scheme of 21 dwellings in a suburb of Sydney. I am secretary of the strata committee.
We have had an ongoing issue. The back border of the property is a sandstone cliff face, requiring remediation. After many difficulties and delays we have some quotes and the cost will be more than $400,000. We will raise the money by the payment of a special levy by the owners. This is still to be approved by the owners corporation.
However, in anticipation of a shortfall in the special levy payments and to ensure we have the funds available for ongoing payments we will put forward a proposal at a General Meeting of obtaining a loan to the owners corporation. We have had advice from a strata financing company. A loan would be approved but we would not pay interest until we downloaded a partial amount as required & the interest would only be on that amount.
The Strata Manager has advised that as the loan is to the owners corporation any interest that may have to be paid on the loan would be shared amongst all owners including those who have paid the full amount of the special levy.
I would appreciate your advice please on whether this is correct or is there an option for the owners who have not paid the full amount of the special levy to be responsible for the payment of the interest possibly on a pro rata basis depending on the percent of the levy paid.
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I’m not certain but this is how I think it could work:
The special levy presumably has a due date, interest is payable on any amount that has not been paid by a lot owner after that date. This is the same for any amount of arrears such as being late with the ordinary levy.
If the Owners Corporation (OC) has taken out a loan, then the OC as a whole is liable to pay the interest on that loan.
I assume that when everyone pays the special levy, it will be enough to discharge the loan.
If the loan interest is less than or equal to the interest payable on arrears, then, in effect, the lot owners who have not yet paid the special levy will be covering the OC’s interest cost.
In the ACT legislation and probably elsewhere, there is also a provision to bill lot owners specifically for costs that are incurred by the OC due to some failure or negligence on the part of a lot owner. It might also be possible to use that sort of provision to cover any short-fall in the recovery of interest costs.
I suspect the strata manager is correct. Payments having to be made by the owners corporation are funded according to the unit entitlement of each owner. I am confused about what you are trying to do? Take our a loan to cover for owners who do not pay the special levy? That’s not going to work, if that is the case.
In your shoes, I’d either take out a loan for all the work, and negotiate that it can be paid back early, as levy amounts come in. Or skip the loan, and raise it all by a special levy, and leave it up to individual owners to get loans for their part of the money. Keep in mind that the special levy is like other levied amounts, and owners who fail to pay are charged interest at 10% annually, which would occur regardless of loans etc…
OK, I believe that there are circumstances whereby owners can make payments related to common property on a different basis from simply everyone according to unit entitlements. This would operate where some owners can afford to pay the whole of the special levy up-front – and therefore avoid interest payments – but others can’t.
For instance, I know of a low-rise apartment block with multiple lifts where a few apartments don’t have or need lift access. In this block, only the apartments with lift access contribute to the lift maintenance fund.
To do this, it would require some legal instrument whereby some owners paid directly into a fund while others serviced the loan (which would also contribute to the fund). That fund would then pay for the work to be done.
It would be complicated but not impossible and, in fact, I can see the time coming when split special levies and loans will have to be offered for major works, so that owners who don’t have the money lying around to pay special levies aren’t forced to sell because of essential major works.
Now, I think it’s fair to say that the strata loan companies are not keen on this, for a variety of reasons, not least of which is that the less they lend, the more money they make.
However, there are other considerations. There is the attraction of it all being a lot simpler for everyone if all owners are participating in the loan.
It also means that future purchasers are making a contribution (which they can calculate as part of the sales price) rather than getting a free kick from benefitting from payments made in advance.
Also, strata lenders say that when people are considering the difference between lumps sum payments of a special levy with loan repayments, they tend to forget the “opportunity” cost of paying the whole lot out of your bank account.
For instance, have they cleared all their credit cards, the interest on which is about double the interest on a strata loan? Are they going to sacrifice something they want or need – like a holiday or a kitchen refurb to pay the special levy.
And then there’s the amorphous issue of community and collective responsibility. Many strata schemes allow a discount on levies that are paid in advance, so that’s one way people who are cashed up can save.
Having said all that, I’d love to hear from any Flatchatters who have successfully split maintenance and repair costs between a special levy and a loan, and from strata professionals who have helped to organise it.
The opinions offered in these Forum posts and replies are not intended to be taken as legal advice. Readers with serious issues should consult experienced strata lawyers.
We have been down this rabbit hole, basically the answer is no, everybody needs to be levied in the same manner.
One strata loan company has offered a hybrid product that does allow people to pre-pay but it causes personal tax issues and the ATO has rained down hard on them so I don’t believe they are still offering the product.
We took an approach of giving the owners 2 choices at the EGM, fully fund the capital needed in one levy, or agree to a strata loan of the same size over several years.
At the end of the day the latter was agreed over a 3 year term as the majority of owners felt it was better to pay a little interest and know the funds were available as needed.
The levies ramp up as work gets completed so it’s not like you pay the full amount from day 1. In our case we actually collected more than what was needed for the first quarters repayments so we were able to make an additional $150k repayment which saved interest and will reduce the term.
By chance, I spoke to Tony Cordato today. He is a property lawyer and accountant, and he didn’t think the hybrid model was feasible either. So all of that may be wishful thinking on my part. But I’d hate to live in a building where someone was forced to sell because the majority of other owners preferred to pay a special levy than get a loan
The opinions offered in these Forum posts and replies are not intended to be taken as legal advice. Readers with serious issues should consult experienced strata lawyers.
Different situation here because no loan was involved but I live in a building where a special levy was raised on only five of six apartments. One apartment had done some extensive renovations (at own expense but with OC approval) that included changing the nature of balcony windows. Five years later, the OC decided to do the same to all the other balcony windows in the building. It was deemed unfair for the lot owner who had paid for her own window work to then pay the special levy for everyone else’s work, so a by-law was developed excusing her from the special levy and handing responsibility for ongoing maintenance of her windows back to the OC. The special levy was paid by five owners. The work was completed on five sets of balcony windows. The OC is now responsible for ongoing maintenance of the windows on all six apartments.
“For instance, I know of a low-rise apartment block with multiple lifts where a few apartments don’t have or need lift access. In this block, only the apartments with lift access contribute to the lift maintenance fund.”
I believe this type of approach can only be arranged with a “common property rights by-law” under Section 142 of the Strata Schemes Management Act, which requires the written consent of ALL the owners affected by the by-law. This can happen with new buildings, where the developer is initially the owner of all the lots, and they write a by-law to separate out some of the facilities to be paid for by a sub-set of owners – like only the upper-floor lots pay for the lift maintenance. But once the building is operating normally, this type of arrangement is hard to arrange. Since it will just take one owner to refuse to sign a consent to the by-law to prevent it being made. In this example, any of the upper-floor lot owners will realise that having all the owners pay to maintain the lift (which is the default), will be in their best interests.
But in the absence of a common property rights by-law the cost of maintaining, repairing and replacing common property is shared among all owners, according to unit entitlements.
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