This topic contains 15 replies, has 4 voices, and was last updated by Lady Penelope 7 months, 2 weeks ago.

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  • #35495
    Avatar
    Mavcal
    Flatchatter

    Hi, just after some basic advice regarding special levy liability in Victoria…
    I bought an apartment (in Victoria) in 2016 as an investment. My lot is leased to a hotel, along with about 50% of the other units in the complex.
    Late in 2018, the OC engaged an accountant to review the liability of each lot owner with respect to proportioning additional wear & tear costs to certain apartments due to commercial (hotel) use.
    The accountant researched & estimated the total additional cost of wear & tear, maintenance, electricity etc and proportioned this across those lots leased to the hotel. The costs go back over the full 8 year period to 2012 and have been attributed and invoiced to each affected lot owner.
    The outcome of this review is that I have been issued an invoice from the body corporate for ‘special levy’ which dates back approx 8 years to 2012. This well predates my ownership / interest in this apartment.
    I did due diligence prior to purchase and there was no sign of this additional liability at settlement…
    My question is, am I liable for the full fee for the 8 years, or a pro-rata amount (e.g. 3/8 of the total fee)?
    Doesn’t seem fair to be liable for charges which pre-date ownership…

    • This topic was modified 7 months, 2 weeks ago by Jimmy-T.
    #35497
    Lady Penelope
    Lady Penelope
    Strataguru

    Special levies only cover common property. Are the maintenance levies for the common property or are they for the individual Lot?
    Do your by-laws allow this?
    I live in Qld where it would be unlawful for an owner’s corporation to charge certain owners a different levy amount than another owner.
    Are you sure that this is an owner corporation Special Levy?
    It may be a separate fee relating to a separate contract only between owners who lease their apartments through the professional on site manager. This levy may not have anything to do with the owner’s corporation.
    Can you check and let us know, please?

    #35498
    Jimmy-T
    Jimmy-T
    Keymaster

    This is a tricky (and interesting) one. As in most states, levies and fees are to be apportioned according to unit entitlements (or lot liability, in Vic). However, your neighbours who don’t lease their apartments to the hotel have decided that they don’t want to pay for the added wear and tear and damage to common property, as well as additional electrical charges etc, that hotel guests cause.
    So then we find Section 28 of the Act (below). Sub-section 3 says owners are liable to pay for “repairs, maintenance or other works … which are wholly or substantially for the benefit of some … but not all, of the lots.”
    If that’s the clause they are using to make levies more in line with usage, then they may have a case. And then we look at 28(1) which says owners are liable for outstanding “fees, charges or contributions”.

    You and your other holiday letting owners might want to get together and challenge the whole thing at VCAT. You personally might argue that since the debt wasn’t “outstanding” when you bought the unit, you can’t be charged for the portion owing before you bought it.

    But one thing does occur to me – if this charge stands up to a challenge at VCAT, apartment owners in Victoria might have found the magic bullet that will bring the wildfire spread of Airbnb-style rentals to a shuddering halt.

    28. Liability of lot owners
    (1) The owners for the time being and any purchaser in possession of, and any person entitled to receive the rents and profits from, a lot are liable to pay any outstanding fees, charge, contribution or amount owing to the owners corporation in respect of that lot.
    (2) A lot owner is not liable to pay or contribute to the funds of the owners corporation a proportion of any amount required to discharge a liability of the owners corporation exceeding the lot owner’s lot liability.
    (3) Sub-section (2) does not apply to an amount payable to an owners corporation for repairs, maintenance or other works that are undertaken by the owners corporation on common property or a lot and which are wholly or substantially for the
    benefit of some or one, but not all, of the lots affected by the owners corporation.

    #35500
    Avatar
    Mavcal
    Flatchatter
    Chat-starter

    Thankyou for your replies.
    Lady Penelope, I’ll make Enquiries to see if I can get answers to your questions.
    Jimmy T, thanks for your insight – sounds like I need to seek further (formal) advice from a Strata lawyer – any recommendations for someone suitable in the Melbourne region?

    #35509
    Avatar
    Austman
    Flatchatter

    I suspect that the OP’s strata scheme is mixed use. A building that’s part hotel and part residential. These seem to be quite common in Victoria.

    And also that the special levy relates only to the shared common areas.

    In Victoria, the raising of special levies must always consider the “benefit principle” rather than automatically using units of liability. Those lots that benefit more, pay more. Often an accountant or a quantity surveyor is used to determine which lots benefit more and by how much.

    Ordinary levies set according to annual budgets must use units of liability however. The “benefit principle” only applies to special levies.

    So the question here is not whether a special levy can be raised using the “benefit principle”, but rather can a special levy be used to retrospectively “adjust” ordinary levies?

    I doubt it.

    It might be possible to retrospectively adjust earlier special levies, but even that seems doubtful to me.

    If you look at recently published VCAT cases, you’ll see several about the “benefit principle” and on how it’s been interpreted. It’s rather complex.

    Possibly one way for OCs to invoke the “benefit principle” without the need to adjust units of liability would be to raise the majority of maintenance funds using special rather than ordinary levies.

    I agree that that the OP, possibly together with other hotel lot owners, needs to get legal advice.

    • This reply was modified 7 months, 2 weeks ago by Austman.
    #35519
    Lady Penelope
    Lady Penelope
    Strataguru

    Any allegation of additional wear and tear, and electricity usage etc being the responsibility of any particular subset of owner rather than being the responsibility of all of the owners must be proven rather than merely assumed.The ‘benefit principle’ is to be used honestly and reasonably. (See the 2017 ‘Grundl case’ at [16] and [20]. The Grundl case involved an expensive one off repair to a roof which did not form part of the roof of Mr Grundl’s lot.
    The maintenance works must be wholly or substantially for the benefit of some but not all of the lots. Note the words ‘wholly’ or ‘substantially’. The corollary must be that the other lots must derive no benefit or negligible benefit only.
    The accountant may have found a ‘creative’ way to compartmentalize these charges but this would be open to challenge and is not proof, in itself, that the hotel guests caused the damage or the additional charges.Levies are generally prospectively applied and not retrospectively applied.
    Was the Special Levy approved at a General Meeting?

    • This reply was modified 7 months, 2 weeks ago by Lady Penelope.
    #35521
    Lady Penelope
    Lady Penelope
    Strataguru

    Mavcal – You might like to seek the services of a legal firm familiar with this area of law e.g. R. Berman Lawyers, who acted for the Respondent in the recent decision of Owners Corporation PS407621Y v Grundl (Owners Corporations) [2017] VCAT 1550.
    https://www.linkedin.com/pulse/i-lot-owner-act-honestly-reasonably-considering-whether-berman/

    #35523
    Avatar
    Austman
    Flatchatter

    From my chats with strata lawyers in Victoria, there’s quite a demand for quantity surveyors by OCs wanting to implement the “benefit principle”.

    It seems that a quantity surveyor’s assessment is an accepted way of determining cost distribution.

    How it all unfolds in VCAT remains to be seen.

    In Victoria, the committee alone can approve special levies up to an amount of double the current annual budget.

    There have been several VCAT published cases (particularly by Senior Member Vassie) since the GRUNDL case that have given more guidance on how the “benefit principle” is to be implemented.

    #35526
    Avatar
    Mavcal
    Flatchatter
    Chat-starter

    Great advice everyone – I can see that this is a complex issue to navigate. I will consult legal advice – thankyou for pointing me in the right direction 🙂

    Further to the information I’ve already provided above, I thought I’d provide some further detailed background information directly from the Accountant’s report (included below). There are a couple of key assumptions which don’t seem right to me:

    1. In determining the amount of liability for each lot leased to the hotel, the Accountant assumed “short term accommodation is replaced with permanent residents”. I think this assumption is flawed, as it essentially assumes the hotel traded the entire time at 100% occupancy rate…

    2. In regard to the Accountants’ point about increased wear and tear on the common areas due to increased traffic, I would argue that when I’ve attended the complex to perform an inspection of my lot, have noticed passing private residents in the corridors wheeling bicycles and those 2-wheel tote-type shopping trolleys. The use of cleaning trolleys has been raised in the Accountant’s report regarding increased wear and tear of common areas (corridors), however these private items (bicycles, shopping carts etc) have not.

    I accept that the use of lots for short-term (hotel) may result in increased insurance premium (the Accountant estimates a 25% reduction in premiums if the complex was not used as a hotel).

    I accept that the use of lots for short-term (hotel) may result in increased electricity usage (e.g. laundry facilities).

    I am concerned that I am being levied (retrospectively) for fees based on these assumptions which seem to be in the OC’s favour.

    On another point, the invoices I’ve received have 7 day terms (e.g. issued on ½, due on 8/2), but I believe Section 31(2a?) of the Owners Corporation Act 2006 stipulates that the due date needs to be 28 days from the date the invoice is issued. Am I reading that correctly?

    Unfortunately this situation does sound more and more like a cash-grab as I dig further and there seems to be a fair amount of animosity towards the hotel owners from the owners of residential lots (who form the majority of the OC) 🙁

    Appreciate any further thoughts 🙂

    ———–
    The following is some information directly from the report which provides further background to my above points:

    Instruction 1 to Accountant from Owners Corporation:

    “To review the expenditure of the owners’ corporation and identify what costs and expenses substantially benefit the owners’ whose units are used for the short-term accommodation business. So far it appears that insurance costs are higher, and it is thought there will be a higher rate of wear and tear to the common parts.”

    Response from Accountant to instruction 1:

    1.1. I reviewed the reported income and expenditure during the Review Period to identify costs incurred by the Owners Corporation, which were likely to be of a lesser amount if short term accommodation was not provided. In my opinion, the relevant costs are predominantly those that may vary due to:
    a. foot traffic (residents, guests and or cleaning staff and frequency of passage)
    b. insurance requirements (insured cover and incremental risk)
    c. elevated compliance requirements arising from changes (if any) in building classification.

    1.2. Short term accommodation facilities represent 59.75% of all Lots and 56.16% of all Entitlements. These facilities are spread throughout the Latrobe Building and vary on a level by level basis.

    1.3. Prima facie, short term accommodation is likely to attract increased foot traffic and perhaps a lesser care factor (behaviour of permanent residents versus short term guests) resulting in increased wear and tear and higher cost for cleaning, repairs and maintenance. For example, I assume that every time a short term accommodation room is vacated it is cleaned. Therefore, the cleaners and their trolleys are likely to move through the Common Property areas more frequently (than if short term accommodation was not provided).

    1.4. In addition, I understand that buildings are classified depending on their scale and use. Buildings that include “hotel like” accommodation usage attract a higher classification, which may contribute to additional compliance requirements (perhaps in terms of fire protection facilities and insurance cover etc) and additional costs.

    1.5. To allocate cost based on usage is problematic because there are many variables that impact usage including foot traffic statistics (by type of user) and the relevant data is not maintained.

    1.6. In the absence of the data, I have relied on cost estimates provided by third party service providers on the assumption that short term accommodation is replaced with permanent residents (or self- occupied) and 24-hour reception is not required.

    1.7. In this regard, I note the following:
    a. Cleaning costs are estimated at $43,884 per annum based on an undated quote from XXXXXX Pty Ltd for $45,168 per annum (excluding GST) and a quote dated 15 October 2018 provided by YYYYYYY of $42,600 per annum (excluding GST). For the purposes of my assessment I have adopted the midpoint of $43,884. These quotes were obtained by [the OC management company] and I assume that they meet the requirements of the Owners Corporation.
    b. Insurance premium is estimated at 25% less (based on correspondence with the current insurance broker).
    c. Utilities (laundry electricity usage) estimated at $3,701.25 (for the 3 year period to 30 June 2018 based on $4,935 over the 4 year period 1 July 2011 to 30 June 2015 or simple average of $1,233.75 per annum)

    1.8. In addition, in my opinion, the following expenses are likely to be lower but quantification of the potential saving is speculative:
    a. Lift and garage door maintenance
    b. Air conditioning service and maintenance.

    Instruction 2 to Accountant from Owners Corporation:
    “To provide a schedule of charges by Owner (in accordance with Lot Liabilities for the plan of subdivision) for extraordinary items to the managers, so that they can raise the appropriate invoices.”

    Response from Accountant to instruction 2:

    2.1. For the purpose of my assessment, I assume that the Lots and Entitlements identified as currently “short term use” have been continuously used in that way during the Review Period.

    2.2. Appendix 8 contains a schedule of paid expenses (cleaning and general caretaker expenses $930,627 and insurance of $274,314) together with estimated allowances.

    2.3. As at 30 June 2018, but for the short term accommodation and 24-hour reception services provided to the Apartment Building during the Review Period, in my opinion the Owners Corporation’s operating expenses would have been lower by some $695,718, (during the Review Period) represented by savings in:
    a. Cleaning and caretaker costs of $627,140 ($623,439 and further adjustment of $3,701 for estimated laundry electricity usage for FY16 to FY18)
    b. Insurance premiums of $68,578.

    2.4. For the purpose of my assessment, I assume that $695,718 is to be charged by way of a special levy payable by the Lot Owners involved in short term accommodation (based on Entitlements per Lot, on a pro-rata basis). Short term accommodation accounts for 17,244 Entitlements (across 141 Lots) or 56.16% of total Entitlements of 30,703.

    #35527
    Lady Penelope
    Lady Penelope
    Strataguru

    Definitely seek legal advice and take this to VCAT. This will be a case that pushes the ‘benefits principle’ further than it has previously gone before. The Grundl case is here: http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VCAT/2017/1550.html?context=0;query=grundl
    You may be able to seek costs for fee recovery if you are successful.
    Check the procedural validity of the imposition of the special levy of the $695,718. If the amount of the proposed special fees is more than double the amount of the owners corporation’s annual fees, it must be approved by a special resolution. A special resolution requires support from at least 75 per cent of all lot owners or lot entitlements.
    I am not certain that your OC will be successful if this matter goes to VCAT as I am not convinced that the benefit to those who are Lot owners of Hotel apartments are substantial, nor am I convinced that the non Hotel apartments derive no benefit or only negligible benefit from the maintenance that has been described.
    All owners benefit from a well maintained building that is professionally managed as this raises the value of all Lots in the building.
    Is your building a stratum subdivision and if so does it have a registered purpose outlining the obligations of the various stratum- see Subdivision Act 1988 (Vic) ss 27B(2), 27C(2)
    As you have pointed out there are a LOT of assumptions being made in that Report! There are a lot of statements that have been made that were not proven, but were mere ‘thoughts’. A lot of assumptions that have been made are merely speculative.
    What is the occupancy rate of the your Lot and the other Lots in general? The accountant appears to be basing his figures on 100% occupancy – how accurate is that assumption? Are some Hotel lots rented out more frequently than others? Your Hotel Manager should be able to give you these figures.
    How and where are the hotel linens laundered – is there a commercial laundry onsite, or are the linens sent off site? Do non Hotel Lots also use the laundry? Is there a restriction or are there any guidelines on how often Lot owners may use the laundry?
    Why would the cleaning trolley create more damage than a pram or a bike? Take a photo of it and its wheels. If it has rubber wheels then I don’t see an increased problem.
    How often would the common property carpets be cleaned if there were no Hotel guests? Have the carpets in the areas occupied by the Hotel been replaced at a higher frequency than other areas in the building where there are no Hotel guests? If you see damage to carpets in other ares of the building not occupied by the Hotel then take photos of it to prove that general damage occurs throughout the building.
    Has painting of the common walls been undertaken at a greater frequency in the areas occupied by the Hotel guests?
    Would an onsite caretaker be employed if there was no Hotel, and if so are they paid a flat fee for hours worked? If paid a flat fee why would their fees be any higher if there is a Hotel onsite?
    Why would electricity charges be higher when I presume the lights are on in the common areas and the Lots whether there is a short term lease or an owner occupier?
    How many resident owners own a car and use the garage compared to the number of Hotel guests that have cars? It is often the case that Hotel guests, particularly international guests, don’t use cars so why would the use of the garage door be any greater for Hotel guests?
    Why would insurance be any higher on the common property for a user who is a short term tenant than a user who is an owner occupier? What reasons are given for the higher insurance premiums? If the insurance is 25% higher than usual then perhaps the OC should shop around and get a better deal?

    #35528
    Avatar
    Austman
    Flatchatter

    As there appeared to be no general meetings called, this action is probably the work of the committee.

    One thing that I think you can be pretty sure of is that if the levies raised over the past 8 years were ordinary levies set according to annual budgets, the OC hasn’t a chance of retrospectively applying the “benefit principle” to them.

    VCAT has ruled on this, several times I think. The “benefit principle” cannot apply to ordinary levies set by annual budgets.

    But what the OC tries to do re future levies remains to be seen. It might try raising more of its income by special levies where the “benefit principle” actually is required to be considered.

    I doubt the other hotel lot owners will take this without a fight. And being in the majority, they could get all of this overturned and reversed with enough organisation.

    I suspect there will be legal fireworks coming.

    #35537
    Avatar
    Mavcal
    Flatchatter
    Chat-starter

    Further information received today indicates that the “special levy” was approved by the OC committee, not a vote by members of the OC.

    Not sure what impact this has on my liability for invoices which span financial years which pre-date my ownership of the apartment…

    #35549
    Lady Penelope
    Lady Penelope
    Strataguru

    In my opinion your Committee are acting unlawfully.

    The Committee does not have the authority to authorise a Special Levy. Special levies must be authorised at a General Meeting.
    Special levies of up to twice the amount of an Owners Corporation’s current annual fees can be raised by ordinary resolution. Special levies higher than that can be raised by special resolution.

    OWNERS CORPORATIONS ACT 2006 – SECT 24
    Extraordinary fees
    (1) An owners corporation may levy special fees and charges designed to cover extraordinary items of expenditure.

    S. 24(2) substituted by No. 78/2013 s. 4.

    (2) Subject to subsection (2A), the fees must be based on lot liability.

    S. 24(2A) inserted by No. 78/2013 s. 4.

    (2A) Fees for extraordinary items of expenditure relating to repairs, maintenance or other works that are undertaken wholly or substantially for the benefit of some or one, but not all, of the lots affected by the owners corporation must be levied on the basis that the lot owner of the lot that benefits more pays more.

    (3) The owners corporation may determine the times for payment of the special fees and charges.

    (4) A special resolution is required when exercising a power under subsection (1) if the amount involved is more than twice the total amount of the current annual fees set under section 23.

    (5) Subsection (4) does not apply if the fees are levied to pay for or recoup the cost of repairs or maintenance carried out to any part of the property for which the owners corporation is responsible where immediate expenditure is or was necessary to ensure safety or to prevent significant loss or damage to persons or property.

    My advice is for you to seek legal advice ASAP and then take this issue to VCAT. If you can encourage other owners to join with you then that would obviously offset the costs.
    This issue is far too complicated for you to fight on your own.
    Ask for costs to be awarded to cover your legal costs if you win.

    #35553
    Avatar
    Austman
    Flatchatter

    Committees most certainly do have authority to raise a special levy in Victoria.

    The committees that I sit on do so quite frequently.

    They can’t exceed their spending limit or any others restriction placed on them by the OC Act, the OC or a rule.

    Generally, at each AGM, committees are given full authority to represent the OC for all matters except for matters that the OC Act states that they can’t (eg special and unanimous resolutions).

    I agree that the committee’s actions are probably illegal but not because they have no authority to raise a special levy.

    My advice is not to pay the levy. It’s likely that all or most of the hotel lot owners will protest it and a dispute will result.

    If I were you I’d be directly contacting some of the bigger hotel lot owners to discuss a combined action.

    • This reply was modified 7 months, 2 weeks ago by Austman.
    #35555
    Lady Penelope
    Lady Penelope
    Strataguru

    Thanks for the correction Austman, although being a Queenslander I find it bothersome that a Committee would be apparently authorised to impose such a significant and differential cost burden on its lot owners with no owner’s corporation input by way of a general meeting resolution.
    It appears to me that it is very debatable whether the supposed additional day to day maintenance burdens of the Hotel apartment owners would be those that would trigger the necessity for a Special fee being imposed, and whether the Special fees have been considered within the owner’s corporation duty to act in “good faith”.
    Consumer Affairs Vic gives the examples of Special fees as being “to urgently repair the building or to cover other costs such as legal action against the owners corporation”. The term “extraordinary works” is also used.
    The Grudl case involved an issue of total roof replacement so it fitted within the definition and/or example of being an “urgent repair” or “extraordinary works”. The cost of the roof repair was genuinely verifiable. The Mashane case involved urgent safety repairs to balconies when the lot owner was one of the few owners who did not own a balcony.
    This is in stark contrast to Mavcal’s situation where, rather than an “urgent” one off event such as a roof replacement there are instead claims of non urgent, intangible, unverifiable and unsubstantiated ongoing wear and tear costs, management fees, and electrical charges over a number of years.
    Would the framers of the Act have intended a broadening of the imposition of Special fees based on such speculative claims?
    It will be interesting to see where this goes.

    From a “Madgwicks Australia” online article “Amendments to the Owners Corporation Act – The Mashane effect?” is this extract regarding the Owners Corporation Amendment Bill 2013.

    During the second reading of the Owners Corporation Amendment Bill 2013, Ms Heidi Victoria, the Minister for Consumer Affairs noted that:

    *The bill seeks to confirm the intention of the Owners Corporation Act 2006, namely that the annual fees of an owners corporation should be set according to each member’s lot liability, as set out in the plan of subdivision, and to overcome the effect of the Supreme Court case of Mashane Pty Ltd v Owners Corporation RN328577 [2013] VSC 417

    *Mashane’s case held that the benefit principle must be applied to levies of annual or special fees that are for repairs, maintenance or other works.

    *There is no objection to the benefit principle applying to levies of special fees for extraordinary works.

    *However as Mashane’s case sets out, the application of the benefit principle for levies of annual fees will require owners corporations, when setting fees, to identify prospective works, allocate an appropriate proportion of the annual fee to those works, identify who will benefit more by those works and by how much, and issue different fee notice to each member based on those estimates.

    *The changes to the act ensure there is no ambiguity about the way the benefit principle should be applied in owners corporations.

    • This reply was modified 7 months, 2 weeks ago by Lady Penelope.
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