Other Ways with Overdue Strata Levies
Maybe we’re thinking about unpaid strata levies the wrong way …
Unpaid strata levies have bedeviled strata buildings, committees, and managers since the second quarter of the first strata building. But, given the unique nature and characteristics of strata buildings, strata levies, and, strata owner obligations, maybe we’ve been looking at this problem from the wrong perspective.
[9.25 minutes estimated reading time, 1848 words]
Introduction
For as long as there’s 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 hasn’t changed 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 are determined by a strata title building:
there’s no argument about them,
they can’t be reduced or waived,
interest applies automatically, and
strata owners can’t avoid paying them [eventually].
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 and long term expenses and for any unexpected expenses or liabilities.
Strata levies are created by a formal process [via notices and meetings] and strata owner votes.
Once created, all strata owners are liable to pay strata levies even if they disagree with them and/or voted against them.
Apart from process irregularities or strata levies for non-strata 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 the lot] are liable to pay strata levies and accrued interest.
Overdue strata levies can be recovered by legal action which action is not limited by 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 state of overdue strata levies and their treatment by strata buildings 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.
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.
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 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 improve values, 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 and recovery costs can be the same as or 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.
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 cashflow 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 building received strata levies when they were expected and didn’t need to spend time chasing them and managing the consequences of cash shortfalls.
A different way of thinking about strata levies
I’m suggesting that rather than looking at strata levies like a household views income and treating late or non-payment 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 one needs to worry about actually recovering the full amount of unpaid strata levies.
Secondly, unpaid strata levies attach to new strata owners providing more potential payers. By that I mean that whilst a strata owner that doesn’t pay strata levies is liable to pay them, so are new strata owners of the lot. And, better yet, the two owners stay jointly and severally liable for the same strata levies.
Thirdly, strata levies are semi-secured debt with statutory recoverability and effective legal priority. By that, I mean that strata laws specifically impose obligations to pay strata levies on owners and future owners, so by reason of the transfer of liability to purchasers they 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.
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, you’d be salivating at the thought of monetising those free cashflows.
Or, alternately, 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 the subscription.
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 dues.
These alternate views may not be entirely correct but are suggested to illustrate that there’s more than one perspective on strata levies including overdue strata levies.
An example of an alternative approach to strata levies
Most strata stakeholders take the same old approach to overdue strata levies by undertaking conventional debt collection processes.
But, one South African strata funder, Stratafin, has created a specialist financial product for strata buildings with strata levy arrears. You can read their marketing material about it here.
It’s essentially debt factoring finance and even 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.
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.
Although there are similar kinds of strata lenders in Australia, I’m not aware of any of them offering this kind of debt factoring service. At least not yet.
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 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 anyway.
Conclusions
Maybe we’ve been wrong thinking about strata levies as bills that need collecting with inevitable delays and costs that impact strata building operations.
And, 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.
June 11, 2021
Francesco ...