Penalty interest confusion (Vic)

Most strata management companies have a couple of resolutions that relate to Section 29 to support the owners corporation statutory responsibility. The strata manager is not the owners corporation but is an agent for the owners corporation and actions the decisions of the owners corporation either from a general meeting or a committee meeting. The manager has some delegated functions within the management contract to perform without further instruction, but the vast majority of the strata managers work is on instruction.

As you have said the Owners Corporation Act sets out under section 29, four subsections that provides discretionary powers and some statutory (musts) requirements for the owners corporation.

The first discretionary power relates to the authorisation for the owners corporation to charge penalty interest on outstanding fees. This is an ordinary resolution and must be done at a general meeting. The owners corporation must be able to point to this resolution if it wishes to recover the penalty interest at VCAT or Magistrates court. The Committee is unable to authorise the charging of penalty interest. This is why you see the same resolution every year.

Typically this resolution at the annual general meeting is passed under the “Financial or Debt Recovery” item in the meeting and looks like this:

That the Owners Corporation resolves to charge penalty interest in accordance with the conditions set out by the Owners Corporation Act 2006, Act No. 69/2006 Part 3.

The second discretionary power relates to the Committee (or the owners corporation in the event there is not a committee), not the manager (unless they have been delegated a specific power to do so) to waive any penalty interest.

The first statutory (must) power requires the committee to report to the owners at the annual general meeting if the waiver of penalty has been considered and the committee (or the manager) must report any decision to waive or not waive. This report is voted on usually as part of the “Committee Report” and/or the “Managers Report” or as separate resolution, if there is no written committee or managers report.

An example of the owners corporation delegating the waiver of penalty interest resolution at the annual general meeting may be found under the item “financials” or under “delegation” and looks like this:

That if on the 1st working day of the month in which a general meeting occurs there is less than $7.00 owing on a lot owners account, and this represents penalty interest, that the sum owing will be waived.

The reason this is done, is to increase the number of owners to be financial so they can vote at the AGM and to reduce the time consuming receipting of cash for debts under $7.00 at meetings.

Lastly, as a part of good governance the committee approves a debt recovery process with the manager. This will include when reminder letters are sent and cost, final fee notices and cost and the threshold at which the fill is handed to legal service for debt recovery at court. A debt recovery process may also be reflected in the Rules of the owners corporation, in which case the manager must follow that process. Usually the manager includes the process in the annual general meeting to be resolved each year so owners  are advised before they fall into debt what the process is.

That the Owners Corporation may recover, as a debt due from the person or persons in default or breach, the costs, charges and expenses incurred by the Owners Corporation, (but excluding the personal time cost of any person acting in an honorary capacity including the chairperson, secretary, or committee member of the owners corporation) arising out of any default or breach, by any lot owner, or occupier of a lot, of any obligations under the Owners Corporations Act 2006 or the Owners Corporations Regulations 2018 or the Rules of the Owners Corporation… the resolution would go on to describe the steps and the charges relating to each step.

The resolution that you have mentioned looks like it relates to the section 29 (4), the requirement to report if penalty interest has or has not been waived. The resolution seeks to confirm the income and expenditure statement that has been included, as penalty interest is received as mutual income and usually coded as penalty interest. Some strata management companies report the waiver in the Managers Report and the Committee should also reflect that they authorised the waiver and the reason for that decision.

For example the Managers Report might say:

Penalty interest waived: $27.00 representing the total penalty interest waived on the 1st working day of the month in which a general meeting occurs there is less than $7.00 owing on a lot owners account, to enable those owners to be able to vote at the annual general meeting. 

So, in summary:

1. The resolution –  ‘There were no instances where penalty interest on Lot Owners’ Fee arrears were waived or reduced during the previous financial year.’ is valid, particularly for OC’s without a committee and the statement is a statutory requirement under section 29 (4) – just check the income and expenditure statement to confirm if Penalty Interest was received. If PI was shown, then the resolution was faulty.
2. The charging of fees for the debt recovery process is different to the charging of penalty interest. This is a contractual or delegated process agreed to by the committee. If you want to know more about that process, speak with your manager or committee member. A committee may choose to waive the debt recovery costs at the same time they waive the penalty interest – it depends on the circumstance.
3. Many committees refuse to waive PI of debt costs as they have a zero tolerance for people who do not fulfil their statutory obligations by paying on time. Others review the payment history before making a decision.

Hope that helps.