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While 2020 is likely to snare yet more strata owners in the must-pay trap of defects rectifications, there is a giant hole in most states’ strata laws that make it harder than it ought to be for people to cope financially or even make the most of their contribution.
If you live in a block where there is a …
https://www.flatchat.com.au/loans-levies/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.
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Is it not possible to open a separate loan account with interest & principal accrued apportioned to Owners on the basis of their unit entitlement ? So if ABC has funds, ABC can pay cash in full and ABC will be out of the picture for liability under Strata Loan as well as interest thereon from the beginning.What do you think ?
I live in a large apartment complex in NSW and we had this exact issue last year – a large bill for mandatory defects. Our complex has a wide socio-economic/socio-demographic profile; owner/investors, mortgage holders, outright owners, families, retirees, professionals, new home buyers…
When financing options were discussed, the loan plus levies idea was floated. In our instance, even if the regulations weren’t a barrier, there would be practical issues. Our works will take place over a year or years. We assumed that owners who paid outright would want to have the works to their apartments completed first which for our complex, isn’t a practical possibility.
Our complex ended up going with a loan, but agreeing on loan terms was vexed; the duration of the loan made a massive difference to the quarterly repayment schedule, but a longer term and lower repayments meant a big difference in the total amount of interest paid. Both of these affect those needing/wanting to sell, not to mention selling in the midst of construction works.
We even considered whether we could have two different loan terms for the cashed-up and non-cashed-up owners, but met the same obstacles.
Loan terms were eventually agreed but it wasn’t unanimous, that’s a risk of buying into a strata plan. The financial effects are very real and there have been a few sales, but that’s the way the complex crumbles. Or doesn’t.
Putting aside for the moment the questions around the relatively high interest rate charged on Strata Loans, having your Owners Corporation / Body Corporate borrow to pay for defects seems the most equitable method of paying for them.
We are used to putting aside funds every year to pay for major expenses that will crop up in the Future. The Capital Works Fund is not only a useful way of ironing out the “lumpiness” that occurs when large expenses have to be paid at irregular intervals, but it is also a means whereby “Today’s Owners” contribute to the wear and tear on everything from pumps to carpets that their ownership & occupation necessarily involves.
Paying for Defects or the consequences of a fire order is different. These are often very large costs that relate to Past events (construction negligence) – quite likely to a time before any of the current owners became owners. It seems most equitable that the burden and pain of paying for these costs should not fall on “Today’s Owners” alone, but be spread across all those who will be owning / occupying the complex for years to come.
If the OC borrows for a term of 7 or 10 years the repayments may start almost immediately but the financial impact of these repayments will be spread across more than one generation of owners – a more equitable way of paying for the costs of “legacy” issues like defects
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Hi Strata Answers,
Thank you for your contribution to this forum topic. Whilst I agree with your suggestion re- borrowing for a term of 7 or 10 years to be more equitable… this argument was put at our AGM (the issues in our complex are both consequences of fire orders AND paying for legacy defects) and the argument was defeated.
Through this experience, I’ve found that issues of equity (though a nice ideal), don’t factor at all in these situations. My observations were that decisions were made and votes were cast purely on the basis of individual owner’s economic concerns. In this instance, the owners in my complex, faced with very large costs for legacy defects preferred a short term loan to avoid the downsides of a longer term legacy loan.
Apologies to Strata Answers, but as I discovered, your suggestion is too idealistic. Perhaps it might work in an apartment complex with a majority of owners who don’t have access to liquid funds, but even in this situation, an agreement for a longer term loan would be based on each owner’s own financial situation, it is unlikely to be based on a decision to spread the cost of paying off a legacy debt equitably.
In strata, owner’s votes are probably 99% based on how decisions will directly affect them economically.
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