While 2020 is likely to snare yet more strata owners in the must-pay trap of defects rectifications, there is a giant hole in most states’ strata laws that make it harder than it ought to be for people to cope financially or even make the most of their contribution.
If you live in a block where there is a large bill for mandatory defects repairs and a majority of cashed-up owners want to pay their contribution as a special levy, you could find yourself scrabbling around for a personal loan or, at worst, having to sell your unit at the worst possible time with the spectre of a defects program hanging over it.
However, if you have plenty of spare cash, you might resent paying interest when the majority of your fellow owners opt for a strata loan that you don’t want or need.
This is the conundrum that has faced owners in the crumbling Mascot Tower – more cracks appeared this week – and other similarly afflicted blocks, as well as the unlucky investors and resident owners across the country who have been ordered to remove and replace combustible cladding.
That’s because in most states, for buildings more than six years old, the only entity left with a legally enforceable liability for rectification and repairs is the Owners Corporation … the apartment owners.
The resulting individual bills are calculated according to your unit entitlements – the figure on which your levies (or fees) are based.
Usually collective payments are calculated entirely on that basis. There are a few rare circumstances where that does not apply but payment for defects repairs is not one of them.
There are basically three ways owners corporations can pay for repairs. If you’re very lucky, there’s enough cash in the maintenance fund.
More likely, however, you will be asked to come up with a chunk of money in a relatively short time and there are two ways of doing that – the owners either agree to raise a special levy or they arrange for a strata loan.
One problem with a special levy is that if you can’t pay your share, there are all sorts of potential knock-on issues, like losing your right to vote and incurring penalty interest rates – and you could end up having to sell your unit with a huge repair bill hanging over it.
The other option is a strata loan, but that has higher interest rates than normal so it can seem unfair to people who have the money or could extend their mortgage at much lower rates.
The problem is that the whole building has to do it one way or the other. There is no simple, regulated structure by which those who want to pay up front can do so while others can choose to contribute to a strata loan.
“We’ve heard of various bodgy arrangements being attempted, but we don’t recommend them,” says Paul Morton, CEO of Lannock Finance, one of a tiny handful of strata loan providers, which also includes Macquarie Bank and Strata Loans.
“Simply put, strata is complex and uncertain enough without adding to complexity and uncertainty with these kind of arrangements.”
So what’s the answer? It’s something that could probably be achieved by a change in regulations.
If owners corporations could create separate loan-plus-levies funds that allowed some owners to opt out of the additional levies and avoid interest by making a lump sum payment, then everyone would be able to fix their defects in a way that best suited their financial realities.
A simple, officially sanctioned mechanism that allowed strata schemes to create one fund into which some could pay directly as a lump sum, while others contributed via a strata loan that only they paid off via their levies, would have to be better than the no-size-fits-all system that we have at present.
A version of this column first appeared in the Australian Financial Review.