TIP 5. Know the penalties you’re entitled to charge and make sure they are properly authorised
The late payment of levies by delinquent owners is a disruption to the smooth operation of a community titles scheme because it causes the body corporate not to have its budgeted cash flow, which if not properly managed could disrupt the supply of services by the body corporate. In addition, the body corporate committee has to spend time and effort in pursuing the unpaid levies and managing the consequences arising from the unpaid levies.
To encourage lot owners to pay their levies on time, and to compensate the body corporate for the late payment of levies, each of the accommodation, standard and commercial modules permit a body corporate to pass an ordinary resolution fixing a penalty to be paid by lot owners if a levy is not received by the body corporate by the due date.
Each module provides that the penalty must consist of simple interest (i.e. the lot owner cannot be asked to pay interest on the interest) at a stated rate for each month the contribution is overdue. The maximum allowable monthly interest rate is 2.5%. This equates to an annual rate of 30%.
An example of how this penalty is calculated is as follows:
- Assume that a body corporate has annual administration and sinking fund levies of $3,000, payment in four instalments, with the first instalment due on 31 March.
- Assume that the body corporate validly issues a levy notice for the first instalment of $750 (due on 31 March), but the lot owner does not pay the levies until the 3rd of July.
- Assume that the body corporate previously validly passed a resolution authorising the imposition of a penalty of 2.5% per month on overdue levies.
- The penalty is $56.25, being $750 ×2.5%×3 months.
It’s important to note that the module by itself does not entitle a body corporate to charge the penalty – the body corporate must first pass a resolution authorising the imposition of the penalty.
Typically a body corporate will pass a resolution at its first general meeting authorising that a penalty of 2.5% per month is payable if a levy is not paid on the due date.
We suggest you check your body corporate records carefully to ensure this resolution has been passed.
Some delinquent lot owners might try and argue that a penalty of 2.5% is void on the basis that it is not a general pre-estimate of loss. This argument has never previously succeeded in a body corporate context. The preferable view is that these principles have no application to this type of penalty, given that the penalty does not arise from contract law, but rather arises from a resolution of the body corporate as specifically authorised by statute.
TIP 6. Know the costs you are entitled to charge and make sure they are properly authorised
- A lot owner has not paid his or her levies for a year;
- Penalty interest has accrued and continues to accrue on the debt;
- The lot owner does not respond to telephone calls or letters from the committee or strata manager.
This body corporate now needs to instruct lawyers to take the necessary action to recover the levies. However, naturally, the process will incur legal costs, including court filing fees, process server costs and professional fees. All committees want to know how much the process will cost and whether the body corporate can recover its costs.
The good news is that a body corporate, as a litigant attempting to cover an unpaid debt, is better placed to recover its costs that almost any other creditor. This is because, in recognition of the importance of levy collection for the smooth operation of a community titles scheme, a body corporate is empowered by statute to recover as a debt:
- The amount of the unpaid contribution;
- Any penalty for not paying the contribution (as discussed in tip 5); and
- Any costs (including recovery costs) reasonably incurred by the body corporate in recovering the amount.
Practically, this means that, except in rare circumstances, a body corporate should be able to recoup all its recovery costs so that the body corporate is not out of pocket as a result of the debt recovery exercise.
The issue of recovery costs has been raised in many cases but the issue now appears to be fairly settled. In the District Court decision of Body Corporate for Sunseeker Apartments v Jasen  QDC 51, the court held that a body corporate could recover costs and disbursements reasonably incurred and reasonable in amount.
The body corporate therefore needs to ensure it acts reasonably in pursuing a debt. The body corporate should carefully consider what actions it takes in recovering unpaid levies, and take appropriate legal advice throughout the process, to be best placed to rebut future arguments that its actions (and therefore its costs incurred in taken those actions) were unreasonable.
The third article in this series will address the process for suing for unpaid levies and the recovery of unpaid levies (and costs) from subsequent owners and mortgagees in possession.