Podcast: Bankrupting levy debtors is a bad idea

No sooner had we written about how paying levies is often the first thing to go when apartment owners are facing a cost-of-living crisis, than this story pops up on the ABC.

It’s about a woman that got into so much debt that her owners corp eventually had her declared bankrupt.  

In today’s podcast, Paul Morton of Lannock Finance explains why that didn’t need to happen and what the owners corp could have done – at no cost to the scheme – to give the struggling home owner another way out.

Also we talk about an SMH report about the “missing middle” in apartment building, and how the small apartment block that was once the standard model throughout Australian cities could be the compromise solution when the need for more homes butts up against anti-apartment Nimbys.

And we look at proposed body corporate reforms in Queensland – and what’s missing from their modest proposals for change.

That’s all in this week’s Flat Chat wrap.

TRANSCRIPT IN FULL

Jimmy  00:00

Hello, I’m on my own again, unfortunately. Sue Williams is on her way back from Europe, which is a good thing, except right now it’s a double whammy of bad things, because; a. she’s not here and b, she is in an aeroplane somewhere over Europe. We can’t talk to her, so I have to do this on my own. What we’ve got today is a bit of an interesting mixed-bag… There’s a story about the missing middle in Australian apartment construction, which is the low-rise apartment blocks that aren’t being built anymore.

There’s the development of new laws in Queensland. There’s just a couple of days left for Queenslanders to get their submissions in and probably the most interesting thing in this, is the new law that isn’t there; the changes that they are not planning to make.

And finally, the story about the owner in a building, who got into so much debt with her levies, that her owners corporation pushed her into bankruptcy. We’re going to have Paul Morton from Lannock Finance talking to us about why that really didn’t need to happen and what the owners corporation could have done to help the woman out, at the same time as protecting the interests of all the other owners in the block.

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

[MUSIC]

Jimmy

There was a very interesting story in the Sydney Morning Herald this week, about how the kind of apartment blocks that are being built in Australia have changed. It used to be that predominantly, apartment blocks in this country tended to be two-or-three storeys high and you still see them around; the old brick-built two-or-three storey walkups.

They were the most common form of apartment block in the country. Over the years, that level of apartment building has diminished and almost disappeared. It has either gone in one direction to townhouses, or even villas, or the two houses that are joined, or a row of townhouses; what we used to call terraces.

Or it’s gone the other way, to the really high multi-storey apartment blocks. The missing middle that they refer to in this story are the apartment blocks, which used to be the most predominant, which were the three -storey or lower.

Why have they fallen out of favour? Well, because if you’re buying the land, and you can get the planning permission, you’re going to make a greater profit by building more apartments on that patch of land.

The issue is of course, that ‘nimbyism’ tends to put a block on that, because local people and local councils… They make commitments to building X number of apartments in their area, but when somebody comes along and says “we want to build a 10 -storey apartment block here,” they go “no, no, no; we don’t want that in our area. We have a nice urban landscape here. People live in houses, they don’t want hundreds of cars suddenly appearing on their street to go to the apartment block at the end. They don’t want apartment blocks looming over them.”

People who live in houses have a very negative idea of apartment blocks, generally. So they tend to get blocked and we all know by now that one; we are desperately short of housing. Two; the easiest way to solve the housing crisis is to build more apartments. That is a simple fact of life. We don’t want all the hundreds-of-thousands of people who cannot easily find homes, to find those homes by spreading even further out in the city. That’s just craziness, when there is the option to build apartment blocks much closer to the city centre, much closer to existing transport hubs, rather than having to build new roads out into the suburbs.

It seems to me that the missing middle; those low-rise apartment blocks, could solve a big chunk of this problem, if the local people and the local authorities were nudged towards that by government pressure, that not only encouraged, but kind of forced them to say if an apartment block is less than three-storeys high, you’ve got to have a very good reason, for not allowing it to be built. Make it easier for the developers.

Those three-storey apartment blocks do come under building insurance provision, which makes them very different from all the horror stories that we’ve heard over the last couple of years, about buildings falling down and cracking and all the rest of it. They are already covered by insurance, so it’s a  whole different ballgame.

It’s a very attractive option, for local authorities, if they can just get the blinkers off and look at how they could enhance their local areas, bring the population up and bringing up the population helps the local economy; it helps them build facilities that everybody uses. But just get away from this thing of “we don’t want apartment blocks.” They don’t have to be high-rises. A low-rise apartment block can be a really attractive enhancement to an area.

Okay, it’s not going to make the squillions of dollars that the developers want, but it’s going to build houses, and it’s going to make money for developers. I think that really is a significant factor; the missing-middle of apartment development. There’s a link to the story on our show notes; have a look at it. It gets a bit technical, but it’s really interesting and it does show that there’s a required rethink about apartment building in this country.

After this, we’re going to talk about bankruptcy, unpaid levies, and why it never needed to happen, that somebody was driven into bankruptcy by their owners corporation. That’s after this.

[MUSIC]

Jimmy

There was a story on the ABC News website this week, about a woman who got behind with her levies. Her owners corporation arranged a payment plan for her. That didn’t work and eventually, she was $10,000 in debt. Now, that triggers the potential for the creditor to force the debtor into bankruptcy, which is what they did and that has not helped her situation one iota. And really, it’s kind of not really doing an awful lot for the owners corporation, because they are then in a position to enforce a debt, which may lead to her losing her home, which is not good for anybody, really. It’s not good for the sense of community in the building. But on the other hand, why should the other owners in the building subsidise the person who, for whatever reason, cannot pay their levies? I’m joined this morning by Paul Morton of Lannock Finance, who’s going to explain a bit about what we buy into in apartments and what we don’t buy into.

And one of the things we don’t buy into is servicing other people’s debts. He will also explain how there is a simple alternative, that means that the owners corporation did not have to force the owner into bankruptcy, and how they could have given her a bit of leeway, and still paid all their bills and eventually got their money back. Here’s Paul Morton.

Paul  07:48

Basically, we’re looking at a number of situations and it’s somewhat speculative as to what comes up. The first thing I think we could say, is that whenever anybody is in any kind of financial distress, it’s difficult for all concerned, but obviously, most difficult for the person in distress. And then it comes to a matter of which bills do you pay and how can you deal with that? Is the owner of an apartment an ‘owner,’ or are they a consumer? Now, this comes to a really critical thing, which is I’d say, perhaps at the time of purchase they are a consumer.

What are the rights and obligations and things like that? But when it comes to actually being an owner of a property (and particularly a strata property), you’re actually owner of a lot, and that lot is part of the strata scheme. That ownership involves obvious benefits, such as the ability to have a place to live, but also obligations to that strata corporation. Now, it actually bears a lot of thinking about, which is the owner, or the owning equity in something, is quite a different structure and understanding, than it is to be a consumer. I’ve bought this toaster, I’ve bought this holiday, or whatever it might mean.

And it’s also a very, very different relationship to the corporation, than it is to being a borrower and lender. Now, I am sort of talking the background of the situation, but we’re used to the ocean-notion. In fact, we want to support the notion, that the federal government, on our behalf as citizens, should help the more unfortunate people in our community, whatever is the cause, or the symptom of that misfortune. Similarly, with the state government, we want our state governments to help people in our society. We also expect that from council. Should we be expecting that from our body corporate, our owner corporation from our strata?

It gets really tricky, because if someone doesn’t pay their levies, for whatever really valid reason, or maybe a horrible reason… But if someone’s not able to pay their levies, what’s the responsibility or the obligation on the other owners? Because if someone can’t pay, the only thing is that the other owners have to pay. Now, I think there’s a very, very strong discussion or argument here, which is, that when you buy your flat, you don’t actually expect, or even want, or legally take on the responsibility for providing financial assistance to the other people in your building.

 Nobody buys a flat, whether it’s a rental, or whether it’s an investment property, or they’re going to live in it, saying “okay, I’ve bought into this property. I’m now responsible for the financial situation of all the other owners.” And it’s a humongous difference, between buying into the concept of being a citizen (whether it’s Australia, or New South Wales, or the local council), and buying into an owner corporation as a property owner.

Jimmy 11:01

Right. What we’re looking at here is, people who, for whatever reason, can’t pay their levies. And as you’ve outlined, that non-payment of levies affects the other owners in the scheme. Either because they’ve got to make up the shortfall, or because they are not able to finance the scheme in the way that they would normally, in terms of services, and repairs and maintenance.

So you know, that is the responsibility that you’re not buying into, when you buy (or you don’t think you’re buying into), and I guess we elect our committee members to steer our ship through those stormy waters. Can I just ask you a very technical question; is there an advantage to an owners corporation in declaring one of their owners (who is in debt beyond the threshold of $10,000), declaring them bankrupt? Is there a benefit to the owners corporation in that?

Paul  12:00

My view on this is probably slightly different to to the answer you might get from others, which is, I don’t see the advantage in declaring bankruptcy. But alongside of that, is the issue that; it’s a really horrible, unfortunate truth. But it is a truth, that if you can’t pay your levies, whether it’s a sinking fund levy or a capital works fund levy or a special levy, or the levy that services a loan… If you can’t pay those levies, you’re actually in a property that you shouldn’t be in. You can’t afford to be in that property.

That’s a horrible fact; we don’t want to acknowledge that. But at some level, there are people who, for whatever reason, they’ve bought into a property, which they can’t afford really to be part of that property. Now, what should happen in that situation… It’s dreadful; it’s a really horrible individual situation.

But the thing is, the relationship is not ‘I’m a consumer, and I’ve bought this horrible, bad toaster.’ And it’s not ‘I’m a borrower and the big, bad bank has so much more financial capacity than I do.’ It’s ‘I am an equity owner of an asset, and I have responsibilities to that asset.’ So the law in New South Wales, I think, quite rightly, it’s perfectly correct… It says that if someone makes an application for a payment plan for levies, the owner corporation should consider it. I think that’s appropriate. But there are so many things that could go into that consideration.

And really, it’s what is the impact on other owners? Is this going to be a short-term thing? “Oh, it’s only a month or two; yes, we can absorb that. We want to absorb that; we like Mabel. We don’t want to cause distress.” But if Mabel (I’m sorry, to all the people called Mabel out there), can’t pay and the corporation accepts that, that creates a greater financial burden on the others. What if that then causes Joe not to be able to pay? You can see the cascading effect of this. Ultimately, people are going to have to say “if you can’t pay your levies, we will have to take action, in order to sell the property, so that the corporation can get the levies back,” in the hope the next person can pay.

Jimmy  14:24

Somebody who’s in debt with their levies, you can assume that that’s not the only debt that they might have in their lives; there are other things that they may not have paid for. Does an owners corporation declaring bankruptcy on an owner who’s in debt, does that put the owners corporation at the top of the queue for getting the money back, if and when the property is sold?

Paul  14:47

Now, let me answer that in a strange way, by saying I’m not an expert on bankruptcy. Let’s take the ‘b’ word out of it and say the owner corporation has the power (I’ll use a banking term), to ‘enforce’ against the owner, if their levie is unpaid. What that will ultimately lead to (and I’m ignoring the ‘bankruptcy’ word), is the sale of the property. On conveyance of the property (and this is absolutely correct; it;s the way it should be), the sale of the property, the due, but unpaid levies paid in priority to the owner or the mortgagee or people like that. So yes, it has to be like this, because the owner corporation must receive its payment, otherwise, it can’t exist.

So this is sort of a weird way… What’s the purpose of an owner corporation? Well, we sort of think about it in a sense of the purpose of the owner corporation is to serve the needs of its owners… It’s actually the other way around. The owner corporation exists as a separate legal entity.

It has obligations; the famous one we all know and love is ‘repair and maintain the common property.’ But because it has obligations, the first job of an owners corporation is to ensure its survival, because if the corporation doesn’t survive, it can’t meet it’s obligations. So therefore, it has to be certain of getting the levies from owners.

Jimmy  16:25

If I can jump in here, because I know you’re on a tight schedule as well… You are in the business of offering loans to strata owners corporations, for whatever reason. Is there a facility there where an owners corporation can come to you or your company and say “look, we’ve got this person, who’s getting way behind in their payments. We don’t want to kick them out of their home, because we like them and it’s not their fault. They’ve just had a run of bad luck.”

 Are you able to say “well, look, we can offer you money to tide the owners corporation over, so it can continue functioning, while this person either sorts out their finances, or sells their home?”

Paul  17:07

Okay, short answer and long answer… Short answer, yes. Jimmy, that was almost like a Dorothy Dixer; of course we do that. The longer answer is, that we have a loan we call Levy Assist and that’s specifically for this situation. There are levies in arrears, so let’s set it up like that. It’s actually, I think (I would say this, because I’m the lender, wouldn’t I),  that this is actually a wonderful product, because it’s the sort of thing…It only needs to be a paragraph note as a resolution in a general meeting, to say if and when we need this thing, the committee and the strata manager can set it up, so giving that overall authority.

The way that we do that (and to me, why it’s such a great idea), is that the owner corporation can charge that individual owner interest. And most times that interest which is chargeable to them, is about the same; often slightly more, than the interest rate on the loan. So ultimately, it all works out in the wash. The owner corporation gets the cash  in this way, in the form of loan, rather than levies that it needs, just to keep on doing its operating things.

And ultimately, when that owner’s property is sold (hopefully not)… When that owner is actually in a position to pay their levies again, everything is made good. I don’t think we should underestimate or underplay the problem of financial distress amongst owners. It’s real. If you’re in that situation, it’s horrible. But we have this thing, where the owner corporation wasn’t set up; no one bought their apartments. No one actually bought into this saying “my responsibility is to look after your financial position,” and that’s a horrible factor in strata, and it can’t be any other way.

Jimmy  18:59

So without this turning into an advert for Lannock Finance, there is the option there for owners corporations to set up a loan that covers the missing levies and to give the owner some breathing space. And it doesn’t actually cost the owners corporation anything, because eventually, they will get that money back through the interest that they legally can charge against the owners who’s behind in their levies.

Paul  19:33

That’s exactly what the Lannock ad would say, if we had one, Jimmy; it’s exactly like that. And actually, we’re discussing within the company a few enhancements to that, which would make it even more attractive. Let me not be (what’s the word when you say something too early)? Let me not do that.

Jimmy  19:52

Presumptuous.

Paul  19:53

That’s a good word. I don’t want to be presumptuous; watch this space.

Jimmy  19:58

It won’t be overnight, but it will happen, as they say about the shampoo. Paul, that’s been terrific. That’s been really helpful and I hope our listeners can see that we don’t have to declare people bankrupt and we don’t have to kick people out of their homes, unless they get to a position where it’s just untenenable. Thanks for your time, Paul, and I’ll let you get on with your day.

Paul  20:27

Thanks, Jimmy, good to talk.

Jimmy  20:29

That’s really interesting and I hope it didn’t sound too much like an advert for Lannock Finance. But guys, you know, if you have an owner, or a number of owners in your building, who cannot pay their levies, and you, as an owners corporation, still obviously have to pay all your services, pay your cleaners, pay your electricity bills, and maybe maintain and repair common property, there is an alternative that doesn’t cost you any money or cost the owners any more money than it need. It’s certainly worth considering.

When I come back, I’m going to be talking about the proposed law changes in Queensland, that’s after this.

[MUSIC]

Jimmy

Just a quick note (and there’s a piece on the website about this), Queensland is looking at changing some of its body corporate laws. And some of them really need to be brought up to date; there are law changes about pets, law changes about sunset clauses and there’s proposed changes about rules on smoking. And there’s consideration being given to introducing laws like we have in New South Wales, about terminating strata schemes that are basically past their use-by-date.

You might have an old crumbling building that’s costing more and more and more to maintain, in a position where a developer can come along and say “look, I’m going to give you way over the market value of your apartments, if you can all agree to just extinguish the strata scheme, and we’ll buy the whole thing. We’ll come in and we’ll build something fabulous there. You’ll make money, we’ll make money. What’s the problem?”

They’re looking at that and they’re looking at their rules on towing cars on common property, which I don’t think any other state has; certainly not New South Wales and Victoria, but Queensland already has the ability for owners corporations to tow cars that are parked illegally. So they’re looking at changing those laws.

Now, these are still at the discussion stage and you’ve only got two or three days. Have a look at the story, there’s a link on the show notes to the story on the website.

One thing that’s not there, is even discussing changing the presale of management rights. That’s not even up for discussion. They’re not interested in what your views are on that. Maybe it’s just not this time around, but you know, there’s been complaints that they promised to do something about management rights. They haven’t put up any proposals. There’s nothing being discussed. There are no concrete proposals there for people to even say “well, we should do that, or we shouldn’t do that.”

It’s ridiculous. It makes the whole body corporate law in Queensland look ridiculous. 25-year contracts; which are the most common contracts now, in Queensland. We know the system is being rorted; we know people are being ripped off. Yes, there are schemes where the caretaker managers are happy members of the community and everybody’s happy with the way it works and they don’t mind that they’re paying extra, because somebody bought the management rights from the developer, which established the value of the management rights, which is paid on and on and on.

They don’t even mind when the caretaker manager comes along and says “hey, I need to sell these management rights, but you need to extend them for another five years, so I can do that.” Some people don’t mind that; a lot of people really, really do.

And there’s Strata Community Association in Queensland, which is strata managers and service providers. They’re saying enough is enough; we’ve got to change this. It’s a ridiculous thing. Nobody in Australia gets a 25 -year contract for anything. So how come apartment owners in Queensland have to accept a 25-year management contract?

They don’t have any right in saying what the terms of those contracts are. They’re almost impossible to get rid of. In fact, I think under Queensland law, about the only way you can guarantee that the contract is rescinded, is if the caretaker manager physically assaults owners in the building. Otherwise, you’re kind of stuck with it.

And what is the Queensland Government doing about this? Nothing! You guys really need to get your act together. It’s an embarrassment. It’s an embarrassment to your state. And yes, I know you hate people from outside Queensland, telling you what’s wrong with things there, but gee guys, from over here, we’re thinking this has a whiff of white shoe about it.

That’s probably enough from me for this week. Next week, Sue Williams will be back; I’m sure you’ll all be glad to hear and some common sense will return to the Flat Chat Wrap. Thank you so much for listening, and we will talk to you again next week. Bye.