How strata housing levies can lead to bankruptcy!


How strata housing levies can lead to bankruptcy!

For many of us, ownership of a residential strata apartment is a successful way of fulfilling the need for a private dwelling, but it comes with the shared responsibility for maintenance and upkeep with other owners.

As we are now seeing in many cases, the situation can become difficult when strata unit owners are being faced with massive costs of rectification of underlying defects in their building, resulting in high special levies for remediation works being imposed by body corporate committees on owners.

For some owners, the amount of these levies can be beyond their immediate capacity to pay.  Owners are also faced with the difficulty of selling their strata apartment and even borrowing further monies towards the apartment becomes limited or impossible because of the defects.

Anyone owning or buying a strata unit should be aware that the strata owners corporation has a responsibility under the NSW Strata Schemes Management Act 2015 to both set levies for maintenance of the block, and to set special levies for particular maintenance needs, and to recover those levies through the legal process. While the owners corporation may come to an agreement with an owner in financial hardship, generally the owner must acknowledge the amount owing and offer reasonable payment terms.

Bankruptcy and building defects

There are now a number of court decisions in Australia involving the bankruptcy of a strata unit owner, but we are yet to see how the more recent issues of building defects will play out.

A recent case in New Zealand gives some indication.  It involved an owner going bankrupt because of the cost of building defects.

Her residential block was found to require significant remedial works including the replacement of decayed timber walls, roofs and floors. The estimated cost of the works was in the order of NZ$13 million. A settlement was reached with the builder, but this was not enough to cover the full costs of remediation. Special levies were imposed by the body corporate committee on all owners.  One owner not only refused to pay these special levies, but she also unsuccessfully sued the body corporate committee over its right to impose the levy. This ultimately led to bankruptcy proceedings being taken against her by the body corporate. By that time, her debt had risen to over NZ$200,000.

dVT Group have managed several cases where the main reason property owners became bankrupt was due to their failure to pay strata levies for their strata property. We administered these bankrupt estates in a cost-effective way and having vast experience in the sale of real property, we managed to sell the properties quickly and achieve excellent sale prices.  This allowed for outstanding levies to be paid along with other debts owing by the individual owner.  In some cases, the bankrupt was annulled and a surplus was achieved after sale of the property.

In another matter where we were appointed trustee, the unit owner unsuccessfully challenged the bankruptcy order, indicating the firm position the courts can take on these matters.

An alternative to bankruptcy

Bankruptcy is generally not the preferred way to proceed in these instances, particularly not for an owner who is otherwise meeting their financial commitments, and even for the strata committee who would see it as a last resort.  If a non-bankruptcy settlement can be achieved by agreeing on a compromise on the amount owed and/or a period of repayments agreed, then all parties usually benefit from a better outcome than if going down the bankruptcy path.

We say this as experienced trustees in bankruptcy who are required to administer these bankruptcies.  The aim is to avoid owners being forced to give up their home and to avoid accumulated costs and government charges eating away whatever equity value the owner has in their unit.  That equity can also be limited or non-existent in times of falling property prices; if a trustee is ultimately obliged to sell the unit, the law does not require the trustee to wait on any housing price recovery.  This can result in the strata committee being in a situation where the money collected from the sale of the property is not enough to cover the money owed as well as its own accumulated costs.  That is often not the end of the bankrupt owner’s litigation, with the trustee then being the subject of challenges to his or her authority under the law, adding to the costs and time.

With the potential for the recent building defects cases in NSW leading to bankruptcy proceedings, there are also calls for government assistance, claims on insurance, and talk of class actions in response.

Is bankruptcy the right option? 

With our experience in financial claims and bankruptcy, we can give advice on what the consequences of bankruptcy would be.  We take into consideration the amount involved, the value of the property, the value of other creditors’ claims, and in particular secured claims by banks or other lenders and of course the capacity of the owner to maintain mortgage repayments.

There are some instances where bankruptcy cannot be avoided, and in some cases, it can be what is needed to help resolve a person’s overall financial predicament.  In any situation, the key to getting the best outcomes possible is to ensure that the bankrupt owner has early discussions with the trustee and that they co-operate in the necessary requirements of bankruptcy law.

At dVT Group we can help you or your client by evaluating the individual situation of being a strata housing owner and by discussing the options available. We would commence with a review and possible restructure of the owner’s financial commitments with a view to resolving their difficulties outside bankruptcy; or, if the situation warrants it, by way of recommending bankruptcy or other personal insolvency option.

Please contact Mark Robinson on 02 9633 3333, email or complete our online contact form to find out more about how we can help you or your client.  

dVT Group is a business advisory firm that specialise in business turnaround, insolvency (both corporate and personal), forensic services and business strategy support.