50k Special levy with 1 month notice and another one coming... | Finance, budgetting and loans | Flat Chat Forum: Your Questions Answered




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50k Special levy with 1 month notice and another one coming...
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rhea
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06/11/2016 - 1:56 pm
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Hi,

I live in a 12-unit block, out of that 7 units are owner occupied, 3 units are owned by one investor and another 2 units by two separate investors.

In October 2015 each owner was encumbered with 50k for remedial work to balcony, replacement of balustrade and window. At AGM 2015 meeting we were given one-month notice to deposit 50k each with no planning or prior notice regarding the special levy. Unfortunately for me the rest of the committee agreed to go ahead with the remedial work without sourcing competitive quotes or opting for progressive payments. We had only 25k in sinking fund.

The remedial work was scoped poorly and the deficiency led to numerous work variations that blew the budget and still running 2 months behind schedule. Due to the poor scoping the contractor has added 12 variations amounting to 88k. Contractor has not demonstrated that they could scope, deliver the project in time nor within the agreed budget. In my opinion they should not be given the work anymore.

The treasurer and strata manager created a budget last week. The treasurer sent us email regarding raising another special levy (88k) before Christmas with agenda for executive meeting prior to next weeks AGM. The financial commitments detailed in the Agenda reads as if the Treasurer and the Strata manager have already made the decision. Another special levy does not seem necessary and certainly not fair on impecunious owners who are surviving on limited income. 

I suggested the following below that has fallen to deaf ears:

  1. My numerous request to source competitive quotes has been ignored.
  2. I suggested progressively payment of special levy to build the sinking fund and having a staged work plan over next 5 years
  3. My request for a full report from contractor to determine the lead-time of delivery and the immediate impact has been ignored.

Unfortunately, I am doubtful that my recommendation will be taken on board at the executive meeting because the investors and the secretary have vested interests and they will vote for raising another special levy.

Is there any legislation regarding how to raise the special levies? What are my options? Any suggestions at this stage would help.

To make matter worse the secretary approved 2-work variations without informing the committee. Can the secretary take such financial decisions alone?

Your advice is greatly appreciated.

Regards

Desperate owner.

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Lady Penelope
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07/11/2016 - 11:45 am
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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:

http://www.ncat.nsw.gov.au/Pag.....rders.aspx

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

http://www.ncat.nsw.gov.au/Pag.....arges.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.

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scotlandx
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07/11/2016 - 2:24 pm
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I don't know where to start with this, what a mess.  A few comments:

  - when the special levy was approved at the General Meeting, did the owners also approve entering into the contract for the remedial works?

- does the notice of meeting for the variations include approval of those variations, and not just the raising of the special levy?

If not, the special levy will be approved but not the entering into the contract.

If I were you I would be putting in an urgent application for appointment of a managing agent, on the basis that the scheme is dysfunctional.

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rhea
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12/11/2016 - 7:08 pm
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Hello,

Thank you for your response. 

– when the special levy was approved at the General Meeting, did the owners also approve entering into the contract for the remedial works?

Yes 9 owners agreed. I was the only one who disagreed with the way the special levy was imposed without considering regular periodic instalments and also my suggestion to sourcing competitive quote was disregarded.

– does the notice of meeting for the variations include approval of those variations, and not just the raising of the special levy?

The notice of meeting includes 8 new variations of which 1 was already approved by Treasurer without the knowledge of committee members , other 7 variations have costing and instruction to raise special levy before Christmas.

If not, the special levy will be approved but not the entering into the contract.

I did not understand this part.

If I were you I would be putting in an urgent application for appointment of a managing agent, on the basis that the scheme is dysfunctional.

We have a strata manager who worked with the treasurer to prepare the meeting agenda that details the variations, costings and recommendation to raise another special levy.

I agree the scheme is dysfunctional because it is run by the treasurer and investors and for some reason no one will speak up against their decisions.

Can the treasurer approve variations for approx $6000 without taking approval from the committee members?

Regards

Rhea

p.s Apologies I am newbie to this forum and do not know how to reply to post hence PM'ed you.

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rhea
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12/11/2016 - 7:15 pm
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Hello proudsceptic,

Thank you for your detailed response. I live in Sydney. Unfortunately I do not know much about Strata law nor the processes that are in place.  I was under the impression that if 75% of committee member agree then the rest 25% cannot do anything. Can NCAT help me if the majority of committee were in favour of the special levy?

Answer to your question:

Was an option of the Strata scheme borrowing money to conduct this major work ever voted upon? We were not given an option to raise the money via a Strata Finance loan,  but asked to pay 50k each  as one instalment within the month, to which all the other owners agreed. I asked the committee to source competitive quotes but no one was in agreement to my proposal. They told me it was waste of time and they did not want to spend money on structural engineer.

Originally two quotes were sourced for window replacement but one company withdrew therefore they engaged the other one. They did not source any more quotes.

Excerpt from AGM minutes held on 1st Sept 2015....

"Subject to either of the next two succeeding motions being passed, the Owners Corporation SPECIALLY RESOLVE pursuant to S65A of the Strata Schemes Management Act (1996) to authorise replacement of existing single glazed windows on common property with double glazed windows. (Balcony doors and windows are not common property).

RESOLVED that a Special Levy contribution be raised to the Administrative Fund, pursuant to Section 76 (4) of the Strata Schemes Management Act (1996), based on Units of Entitlement such levy to be for an amount of $600,000 including GST, to be raised in one instalment due and payable on 1/10/2015, for the specific purpose of funding the balcony works and window replacement project.

LEVY CONTRIBUTIONS: RESOLVED that levy contributions be determined pursuant to Sections 76 (1) (2) and 78 of the Strata Schemes Management Act 1996 commencing 1 October 2015:

1. To the Administrative Fund - at the rate of $31,000 including GST per annum payable quarterly in advance (last year: $31,000).

2. To the Sinking Fund - at the rate of $6,500 including GST per annum (last year: $5,800 including GST)."

As you can see the strata manager has quoted all the relevent sections from the Act. I read the Section 76 there is no reference to imposing special levy nor does it sets the limit to contribution towards special levy.

Raising another special levy before christmas is not fair. Honestly I am quite lost.

Regards

Rhea

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JimmyT
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14/11/2016 - 9:37 pm
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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.

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rhea
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14/11/2016 - 10:33 pm
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Thank you Jimmy T.

I went though the interim order form on NCAT website. It says" An application for an interim order must be accompanied by a substantive application, or relate to a substantive application already received by NCAT."

What is a substantive application? 

Thanks in advance.

Rhea

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BONNIE L
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26/01/2017 - 3:16 pm
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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!

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Lady Penelope
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29/01/2017 - 10:43 am
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Rhea - Re "substantive application" .....My understanding of a "substantive application" is that the application must have some basis (such as a breach of the Act or an infringement on a right), and evidence must be provided. In other words it must not be frivolous or irrelevant. NCAT would no doubt wish to discourage 'time wasting' applications.

Bonnie L - Re Lannocks and "20% of what" .... why don't you phone them and ask. I am sure that they would be happy to answer your query.

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Paul Morton
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14/02/2017 - 3:18 pm
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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

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