50k Special levy with 1 month notice and another one coming…

Which State do you live in? The whole scenario sounds dreadful. The matter is obviously urgent and needs to be dealt with immediately. For a very small fee you may need the help of the wise Adjudicators to sort your problem out.

I would therefore be seeking an Interim Order immediately from NCAT (if you are in NSW) or QCAT (if you are in Qld). Other States have similar Tribunals.

For NSW Interim Order applications see here:

https://www.ncat.nsw.gov.au/Pages/cc/Divisions/Strata_and_community_schemes/Adjudication/interim_orders.aspx

For Fees for lodgement of application for Interim Order see here:

https://www.ncat.nsw.gov.au/Pages/apply_to_ncat/fees_and_charges/fees_and_charges.aspx

Questions may be raised about whether proper process was followed and whether the Committee committed any breaches: in the obtaining of only one quote instead of two quotes (this applies in some States but not others); failing to submit a Motion with Alternatives at a General Meeting; Committee spending limits failures etc. Was an option of the Strata scheme borrowing money to conduct this major work ever voted upon? Wiser heads need to determine whether proper procedure was followed!

See Section 76 of the SSM Act for information regarding the proper process if the special levy needs to be raised to meet unexpected additional costs, and how periodic payments of the special levy can be made rather than a one off payment.

STRATA SCHEMES MANAGEMENT ACT 1996 – SECT 76

Owners corporation to set levy for contributions to administrative and sinking funds

76 Owners corporation to set levy for contributions to administrative and sinking funds

(1) The owners corporation must determine the amounts to be levied as a contribution to the administrative fund and the sinking fund to raise the amounts estimated as needing to be credited to those funds.

(2) That determination must be made at the same meeting at which those estimated amounts are determined.

(3) The owners corporation must levy on each person liable for it such a contribution.

(4) If the owners corporation is subsequently faced with other expenses it cannot at once meet from either fund, it must levy on each owner a contribution to the administrative fund, determined at a general meeting of the owners corporation, in order to meet the expenses.

(5) A contribution is, if an owners corporation so determines, payable by such regular periodic instalments as are specified in the determination setting the amount of the contribution.

You can always apply to NCAT for orders varying the way the payments are made made.

Under the current laws, it’s:

149   Order for variation of contributions levied or manner of payment of contributions

(1)  An Adjudicator may make either or both of the following orders if the Adjudicator considers that any amount levied or proposed to be levied by way of contributions is inadequate or excessive or that the manner of payment of contributions is unreasonable:

(a)  an order for payment of contributions of a different amount,

(b)  an order for payment of contributions in a different manner.

(2)  If an Adjudicator considers that the consent of an owner referred to in section 77 has been unreasonably refused, the Adjudicator may make an order for payment of a different amount of one or more contributions levied or proposed to be levied by the owners corporation.

(3)  If a contribution which is the subject of an order under this section has been wholly or partly paid:

(a)  an order to pay more has effect as if the owners corporation had decided to levy a contribution equal to the difference, and

(b)  an order to pay less imposes a duty on the owners corporation to refund the difference.

(4)  An application for an order under this section may be made only by the lessor of a leasehold strata scheme, an owners corporation, an owner or by a mortgagee in possession (whether in person or not).

Under the laws that come into force on November 30 it’s:

87 Orders varying contributions or payment methods
(1) The Tribunal may, on application, make either or both of the following orders if the Tribunal considers that any amount levied or proposed to be levied by way of contributions is inadequate or excessive or that the manner of payment of contributions is unreasonable:
(a) an order for payment of contributions of a different amount,
(b) an order for payment of contributions in a different manner.
(2) An application for an order may be made by the lessor of a leasehold strata scheme, an owners corporation, an owner or a mortgagee in possession.

Hi there, All the best for 2017 and thanks a million for all the intriguing news.

This asks a maybe dunce question in terms of new strata guidelines, and the article by Lannoks re how much dough is common sense for a sinking fund. The firm reports 20 per cent. I ask 20 per cent of what please – 20 per cent of the existing levy? 

More thanks!

Hi Bonnie

It’s Paul from Lannock Strata Finance.  The simple answer to “20% of what?” is “20% of the total capital works would come from the sinking fund”.

The real value is in understanding the reasoning behind this.  Using a sinking fund to fund 20% of the works means that you would be using borrowed funds to supply the other 80%.  Why is this good?  The answer is all about risk and return.

We know from finance theory that equity is expensive and borrowing is cheap.  But the problem with borrowing is that it increases financial risk.  100% equity (ie, 100% sinking fund) is the least risky but the most expensive option.  Change that to 1% borrowing and 99% sinking fund and cost goes down and risk goes up.  The trick is to find the optimal amount, the best ratio of borrowing to equity.

There are so many practical examples where we land on 80% borrowing and 20% equity – for example, buying a house is usually 80% borrowing and 20% deposit (equity).  And large sophisticated finance structures such as leveraged leases which provide the funding for ports, ships, pipelines etc almost always come out at 80% borrowing and 20% equity.

You’ve probably heard us at Lannock say that there is no one size fits all in strata – there’s no single funding solution that is right for every body corporate because each situation (and every owner) is different.  That’s worth repeating – no one size fits all because every property and every owner is different.

This means that in some cases it will be all borrowing, no sinking fund.  In some others, all sinking fund and no borrowing.  Mostly, it is a combination of the two that will produce the optimal mix of reduced cost without too much risk.

However, if in theory you just had to have a single rule for all strata, it would be to set the sinking fund of 20% of the anticipated major capital works.  100% sinking fund will be the most expensive option and is clearly inappropriate.

Sorry for such a long reply but I trust this helps. 

Paul Morton

CEO, Lannock Strata Finance