Time to finally end the disruptive low levies lurk

There’s a little-known, frequently breached and grossly under-utilised section of NSW strata law intended to prevent the low levies lurk whereby developers deliberately underquote on fees needed to run new apartment blocks.

Section 89 of the Strata Schemes Management Act that says the Tribunal (NCAT) can order a developer to compensate owners if it finds that the estimated and expected levies for a new block were inadequate.

Why would a developer underquote on levies for a new off-the-plan development? To make apartments seem more attractive to buyers, obviously.

Compounding the calumny, they or their preferred strata managers then present an essentially fake budget to the owners at the first AGM for their inevitable approval. When, over the ensuing months the money coming in doesn’t match the money going out, the strata treasurer has to deliver the bad news to owners – your levies are going up.

Things are not so bad in this regard as they used to be. It’s not so long ago that some developers were promising strata newbies “affordable luxury” paired with impossibly low levies.

A lot of first-time buyers fell for it, and it was only after the first year, when the real bills and expenses had to be paid, that owners discovered the true picture.

When the finger-pointing started, as it inevitably did, the strata managers and developers would say the newly minted committee had been over-spending.

It still happens, and the ensuing in-fighting among owners, many of whom can’t easily pay levies based on actual expenditure rather than pie-in-the-sky guesstimates, can rip fledgling communities apart.

Back in 2016 when the then new Strata Schemes Management Act came into force, it allowed owners to take action against developers for compensation to make up the shortfall.

“The Tribunal may… order the original owner of the strata scheme to pay compensation to the owners corporation if the Tribunal determines that the estimates and levies determined during the initial period… were inadequate to meet the actual or expected expenditures of the owners corporation,” the Act says.

The critical word in that is “may” not “should” or “must”. By way of contrast, the same section of the Act says the Tribunal MUST NOT order compensation if the developer can show that they used “due care and diligence in determining the estimates and levies”.

Define “due care and diligence”. You can picture the developer’s lawyer rumbling on about imponderables, unforeseeables and unpredictables to the point that neither “care” nor “diligence” has any real meaning.

Why is this even a problem? Well, many developers leave it to their favoured strata managers to set the budget and required levies. If the strata manager wants any more work from that developer, they will keep those levies as low as possible. Correction: not possible, believable.

I know a strata scheme where the strata manager said their “due care and diligence” in developing the budget and proposing the levies involved comparing the scheme with similar developments.

A request to name an existing “similar” low-rise scheme with 80 units and 16 lifts, with which they compared the proposed levies, was met with sullen silence.

When the budgeted levies in this block predictably failed to cover the costs of running the building, the strata manager, just as foreseeably, accused the owners of over-spending. The fact was that they had spent more than the budget, but they needed to to maintain the property to the owners’ expected standards.

I’m told by friends in the strata management industry – yes, I still have some – that few if any owners corporations pursue developers under a Section 89 complaint because it would cost more in legal fees than they’d gain in compensation.

And that’s not to mention the stress-related personal cost of taking a developer and their strata management mates to a Tribunal.

And so the low levies lurks continue, albeit they’re not as extreme as in the past when some owners found they had to double their contributions to meet their building’s needs (which prompted the change in the law).

But still, new strata committees find the figures don’t add up, and newbie owners – especially those on fixed incomes – are outraged to be told their levies are about to be raised significantly.

The strata manager blames the committee for over-spending, otherwise they’d have to admit that, at the developers’ behest, they provided false figures in the first place.

A section of the owners, unused to being lied to by professionals that they should be able to trust, will accept that view and then internal and entirely unnecessary strife ensues.

Now, I know strata managers who will not touch initial budgets and levies with the proverbial bargepole, because facts and figures can get very fuzzy and the needs of the consumer – the strata owner – can be the developer’s last consideration.

These strata managers also tend to be among those who don’t depend too greatly on grace and favour contracts from developers to set up strata schemes.

Meanwhile, the NSW government needs to either scrap this law or give it some enforceable heft – maybe impose a trigger of 5 per cent margin over which questions are asked and feet held to the fire. That might ensure diligence where it’s due.

An edited version of this comment featured in Flat Chat Newsletter last week. To subscribe (for free) to the weekly newsletter, which also delivers links to the latest posts from this website, just click HERE.