Different Ways to think about Overdue Strata Levies

or, are we thinking about unpaid strata levies the wrong way …

A Quick Read

Unpaid strata levies have bedevilled strata buildings, committees, and managers since the second quarter of the first ever strata building. And, it’s become topical again with media attention on and strata law reforms in a few Australian states to ameliorate the worst impacts on strata citizens. But, given the unique nature and characteristics of strata buildings, strata levies, and, strata owner obligations, maybe we’ve been looking at strata levies problem from the wrong perspectives.

[an 11:00 minute read, with 2223 words]

The Full Article

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INTRODUCTION

For as long as there have been strata title buildings, there have been overdue strata levies. It’s probably the most perennial and universal feature of strata title. And, the ways overdue strata levies are recovered haven’t changed much, if at all, since then, either.

But maybe we’re looking at strata levies the wrong way, and there’s a better way to deal with them.

After all, once strata levies needed to fund current and future expenses and are determined by a strata building:

• there’s really no effective arguments about them being needed or appropriate,

• they can’t be reduced or waived by strata buildings,

• interest applies automatically to the strata levies when they’re overdue, and

• strata owners can delay paying them but can’t avoid them [eventually].

Despite those seemingly inevitable things, high and unpaid strata levies remain a serious problem for strata owners who can’t pay them and strata buildings that want to collect them.

So, here’s an alternative view of strata levies and an example of what someone has done differently with overdue strata levies.

SOME STRATA LEVY BASICS

Strata levies represent the strata owners’ shared or joint liability for a strata building’s expenses and other liabilities.

In general terms, strata levies have the following key characteristics.

• Strata buildings must estimate for and levy strata owners for their expected routine or exceptional current and long term expenses and for any unexpected expenses or liabilities.

• Strata levies are created by formal processes [via notices and meetings] and strata owners’ voting.

• Once created, all strata owners are liable to pay strata levies even if they disagree with them, voted against them and/or don’t perceive they benefit them.

• Apart from process irregularities when strata levies are created, or strata levies for non-strata purposes or unauthorised expenses, it’s virtually impossible to challenge the validity or amount of strata levies.

• Interest automatically applies to overdue strata levies.

• All strata owners [and later strata owners of lots] must pay strata levies and accrued interest.

• Overdue strata levies can be recovered by legal action, which is not subject to or limited by usual strata law controls on legal action or advice.

• In most cases, overdue strata levies and accrued interest get paid ahead of all other strata lot liabilities, including council and water rates, mortgage liabilities, etc.

Plus, all these characteristics are long-standing and have been confirmed consistently by Court and Tribunal decisions.

CURRENT ISSUES ABOUT OVERDUE STRATA LEVIES

Since there’s no formal data available about strata levy arrears, I have to rely on ad-hoc data I have access to and my experience. Those sources suggest that overdue strata levies vary between about 5% and 9% of total annual strata levies at any point in time. Generally, the percentage of overdue strata levies varies up and down over each quarter.

Plus, whilst there are more strata lots with overdue strata levies in larger strata buildings and the amounts are generally higher, the percentage of levies that overdue lots represent [and therefore the impact on cashflows] is higher in smaller strata buildings since each overdue levy represents a larger part of the budget.

In that context, I see a number of issues with the current ways strata buildings, managers and lawyers handle overdue strata levies as follows.

1. In some states, strata buildings can and do offer discounts for early payment of strata levies. This makes no sense to me and just creates an artificial upwards adjustment of strata budgets and levies to allow for unpredictable discounts and/or uncontrolled underfunding if there are too many discounts.

   I’ve made this criticism in point 9 of my article ‘Strata Reforms [NSW] Update 6: Financial Matters’ about NSW strata law reforms and have submitted that the discount should be abolished.

2. Interest on overdue levies is actually a significant penalty that does not represent the loss a strata building suffers when there are overdue levies just because a strata owner pays late.

   I’ve also made this criticism in point 9 of my article ‘Strata Reforms [NSW] Update 6: Financial Matters’ about NSW strata law reforms and have submitted that interest for overdue levies should be abolished or reduced to represent the actual losses a strata building suffers.

3. Action to chase and recover overdue strata levies takes up significant management time and resources, involving ongoing reviews of levy payment statuses, reminder notices, demand notices, legal threats, legal actions, enforcement actions, payment plans etc, etc.

   It’s all just strata management energy that isn’t being devoted to running the strata building better or to improving values, investor strata owner returns, or amenities for strata owners and residents.

4. Strata levy recovery is slow, costly, and [ultimately] unsatisfactory since it is based on an old-fashioned legal debt recovery model. It can take 6-18 months to reach effective enforcement for recalcitrant or trickier strata owners, and recovery costs can be the same as [or sometimes more] than the overdue strata levies.

   Since these costs need to be funded during the debt recovery process by the strata building, they take further money away from other strata expenses. Plus, because the recovery costs are eventually paid by the strata owner, they are a significant financial burden on those owners.

   Or, potentially worse, where the recovery costs are funded by the debt collection business or levy recovery lawyers, there is an incentive to take more legal actions, more quickly and with higher legal and other recovery costs.

   Plus, there’s always some resultant antipathy after legal action between strata buildings and their strata owners that sour future relations.

5. Perennially unpaid strata levies or rolling overdue strata levy balances mean that strata buildings, committees, and strata managers are constantly focused on cash flow management to review and prioritise creditors. Who hasn’t heard a strata manager tell a creditor that they’ll pay them when the next quarter’s levies are paid?

   Whilst this cashflow management is just another waste of the strata building energy, it also has other less obvious negative impacts on the strata building, including: slowing down activities to match the [short] cashflow; prioritising short term, urgent, or risk management things over longer-term and higher value things; increasing operating costs due to delayed works and/or price revisions; and; reducing creditworthiness with suppliers who start pricing in the payment delays.

   So, it would be better if strata buildings received strata levies when they were expected and didn’t need to spend time chasing them and managing the consequences of cash shortfalls.

6. Payment plans have been unpopular and little used by strata buildings when strata owners can’t pay strata levies because it’s hard to design a payment plan that is affordable to the strata owner but covers new strata levies as they fall due [so that the total debt isn’t increasing], covers the interest on the unpaid balance [since it runs automatically] and reduces the unpaid balance over a 12-24 month cycle.

   However, strata buildings in New South Wales will soon have to offer and reasonably consider payment plans and Victorian strata buildings also have to give strata owners information about making payment arrangements.

   So, it’s very likely that strata buildings and strata managers will have to do more work to offer, consider, negotiate and then manage payment plans, adding even more friction to the strata levy cycles.

A DIFFERENT WAY OF THINKING ABOUT STRATA LEVIES

So, I’m suggesting that rather than looking at strata levies like a household views its income and treating late or non-payment of strata levies by strata owners as a sin deserving shame, approbation, and punishment, we should recognise that creating, collecting, and spending strata levies is all just a timing and cost of money issue.

Firstly, strata levies are a no-loss or non-depreciating debt. By that, I mean that unpaid strata levies do not become less valuable over time, and there is no reduction in recoverability over time [unlike most commercial debts]. So, no strata building really needs to worry about actually recovering the full amount of unpaid strata levies as they will always [eventually] be paid.

Secondly, unpaid strata levies attach to new strata owners, providing more potential payers. By that, I mean that whilst a strata owner who doesn’t pay strata levies is liable to pay them, so are the new strata owners of the lot. And better yet, the two owners stay jointly and severally liable for the same strata levies. This is much better than most commercial debts where the debtor never changes and often becomes less, rather than more, solvent over time.

Thirdly, strata levies are semi-secured debts with statutory recoverability and practically effective legal priority over other debts. By that, I mean that strata laws specifically impose obligations to pay strata levies on owners and future owners so that by reason of the transfer of liability to purchasers, the strata levies always get paid on the sale or arms-length transfer of a strata lot [even under a mortgagee sale].

Fourthly, overdue strata levies are automatically inflation proof. By that, I mean that the combination of statutorily imposed automatic interest and the high prescribed interest rates, overdue strata levies keep growing ahead of inflation and, typically, the cost of money. For instance, in New South Wales, interest on overdue levies is 10% per year, which is way above inflation, mortgage interest rates, and secured overdraft interest rates.

Fifthly, recovery costs for unpaid are fully recoverable. By that I mean that provided recovery actions are fairly taken at a reasonable cost, all those costs can be recovered from the strata owner. So, there’s no commercial cost to recovery action for strata levies if and when that becomes necessary.

All these things make strata levies a pretty bankable source of money.

So, I’d rather think of strata levies as a continuous cash flow stream from multiple risk isolated sources that gets applied to a later occurring and generally lower set of strata expenditures. From that perspective, if you were a Wall Street banker or tech start up, you’d be salivating at the thought of monetising those free cashflows.

Alternatively, you could think of strata levies as a lifetime subscription by every strata owner to the strata building’s services with no limit on pricing. From that perspective, if you were Netflix, you’d be doubling your market capitalisation and pouring all that money into new products and services to increase the value and price of those subscriptions.

Or, finally, you could think of strata levies as a non-cancellable subscription by strata owners to a private strata building club. From that perspective, if you were an unhappy club member, you’d have to find someone to take over your membership to get out and stop paying your [strata levy] dues.

These alternate views may not be entirely correct. But I’m suggesting them to illustrate that there’s more than one old and conventional perspective on strata levies, including overdue strata levies and how to handle them.

EXAMPLES OF ALTERNATIVE APPROACHES TO STRATA LEVIES

Most strata stakeholders take the same old approach to overdue strata levies by undertaking conventional debt collection processes.

However, one South African strata funder, Stratafin, and one Australian strata funder, Lannock, have created specialist financial products for strata buildings to assist them with strata levy arrears.

You can read Stratafin’s marketing material about it here and Lannock’s marketing material about it here.

They’re essentially a kind of debt factoring finance even though Lannock doesn’t say so and Stratafin’s website describes it as a ‘Debt Purchase’ product.

Whilst this is innovative and solves the immediate problem for cash-strapped strata buildings, it’s also pretty good business for Stratafin and Lannock.

What’s actually going on here is that the strata funder is buying overdue strata levies at a discount and then getting the pool of delinquent strata owners to pay them the full strata levies, interest, and recovery costs. Depending on the difference between the cost of money and the strata levy interest rate, they could actually make more money the longer it takes to recover the strata levies.

Plus, I can easily envisage many other new and even more innovative financial products or services for strata buildings based on the key characteristics of strata levies I’ve identified here, including ongoing strata building cashflow lending and strata levy guarantee insurance, strata owner or strata manager levy funding, and more.

They would, of course, need to be linked to a quality assurance system for strata building levying actions to ensure valid levy creation, but that’s good for everyone

CONCLUSIONS

Maybe strata stakeholders have been thinking about strata levies the wrong way, as bills that need collecting with inevitable delays and costs that impact strata building operations.

Instead, strata levies [including overdue levies] are one of the best things in strata land, which we’re not leveraging properly to the strata building’s advantage.

March 19, 2025

Francesco ...

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