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Owners Corporation update: Fee recovery — Act early or suffer the consequences

Apr 29, 2016

When pursuing outstanding owners corporation fees, suing the right person or entity at the right time is critical. 

If you get this wrong, you will not recover any money.

So, who is the owner?

Section 3 of Owners Corporations Act 2006 and the Subdivision Act 1988 state:

“an owner is a person who has an estate in fee simple in the land (except a mortgagee), or is empowered by or under an Act to convey an estate in fee simple in the land in an identified folio under the Transfer of Land Act 1958.”

Also relevant is section 28(1) of the Owners Corporation Act 2006 which states:

“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.”

The words ‘The owners for the time being’ in this section suggest that there can be more than one owner for the purposes of the section.  This interpretation was confirmed by a recent VCAT decision.

What happens when a lot owner becomes a bankrupt?

Fees levied before the date of bankruptcy cannot be sought from the lot owner. Instead the owners corporation must lodge a proof of debt for the outstanding fees with the lot owner’s trustee in bankruptcy. 

The trustee may pay those fees out of the money pool described below and this may result in the owners corporation receiving less than the full amount owed. Alternatively, the fees may be paid if the lot is sold by the trustee.

When a person becomes a bankrupt, a number of things happen. These include:

  1. A trustee takes control over the person’s assets (other than limited personal assets) and financial affairs for a period of at least 3 years;
  2. The bankrupt must give his/her passport to the trustee; and
  3. The bankrupt cannot be a director of a company.

The job of the trustee is to pay out the creditors of the bankrupt as at the date the person became a bankrupt.  This is achieved by selling any assets owned by the person as at the date of bankruptcy and pooling the proceeds of those sales with all income earned by the bankrupt during the bankruptcy period in excess of a prescribed amount.  The bankrupt is entitled to retain a prescribed amount from his annual income during the bankruptcy for living expenses.

However, any debts incurred by the bankrupt after the date of bankruptcy fall outside the bankruptcy and are not the responsibility of the bankrupt’s trustee.  Accordingly, the bankrupt is liable to pay those debts.

Section 82(1) of the Bankruptcy Act 1966 sets out the rule as follows:

…all debts and liabilities, present or future…to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may be subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.

In a recent VCAT case, the lot owner argued that his liability to pay the owners corporation fees as at his date of bankruptcy included his future liability because as at the date of bankruptcy he owned the relevant lot.  In other words his acquisition of the lot in 2004 gave rise to his obligation to pay owners corporation fees in the future.  Therefore, by reason of his bankruptcy, the obligation to pay the fees was the responsibility of his trustee and he was no longer liable despite having been discharged from bankruptcy.

VCAT held that the obligation to pay a lot fee arises when the relevant fee notice issued.  Accordingly, if the fee notice is issued after the date of bankruptcy, the obligation to pay the debt belongs to the lot owner, not to the trustee.

VCAT also suggested that this may be different if after the date of bankruptcy the trustee received rental income from the lot. 

The owners corporation cannot compel the lot owner or trustee in bankruptcy to sell the property.  However, it can sue the lot owner (even once bankrupt) for fees that accrue after the date of bankruptcy.  However, the lot owner is unlikely to have any assets or income to pay the fees.  Therefore, the owners corporation will have no choice but to wait until the property is sold by the trustee or a secured lender (i.e. mortgagee) to the lot owner. 

Accordingly, it is possible from the following scenario, which we have seen, to cause an owners corporation to suffer loss of cash flow from the fees incurred before and after the date of bankruptcy of the lot owner.

  • The lot owner owes a substantial amount of lot fees, say $80,000;
  • The lot owner becomes a bankrupt and the owners corporation receives only a minimal proportion of the outstanding fees from the trustee, say $0.01 in the dollar, being $800;
  • The relevant lot is subject to a substantial mortgage to a relation of the bankrupt lot owner;
  • The mortgagee does not exercise its power of sale;
  • The bankrupt lot owner remains in possession for the whole of period of his bankruptcy.  During that time an additional $50,000 of lot fees are incurred; and
  • The bankrupt lot owner does not have resources with which to pay the owners corporation fees incurred after the bankruptcy is discharged.

In this scenario the owners corporation will have to take action against the lot owner to secure court orders which it can execute by forcing the sale of the lot.  On sale of the lot the purchaser will become liable for the owners corporation fees incurred after the date of bankruptcy and will require those fees to be paid out of the settlement funds payable to the lot owner or his/her mortgagee.

Implications for owners corporations

  1. To maximise the prospects of driving the recovery process and recovering the fees, owners corporation must not delay in bringing its claims.
  2. Before an owners corporation issues a fee recovery proceeding, it must consider whether the fees it is pursuing accrued before or after the date of bankruptcy of the relevant lot owner.
  3. In respect of those fees which are levied or charged before the bankruptcy date, it must lodge a proof of debt with the person appointed as the lot owner’s trustee as a result of the lot owner’s bankruptcy.
  4. In respect of those fees which are levied or charged after the bankruptcy date, the lot owner will be liable.  However, if the trustee receives rental income from the lot during the bankruptcy, VCAT is likely to determine that the trustee is liable for those fees during the bankruptcy period.
  5. It may be worthwhile for the owners corporation to reach an agreement with the trustee in bankruptcy to fund the trustee in connection with a sale of the relevant lot.  This may result in payment of the lot fees in arrears and avoid a scenario whereby significant future lot fees are allowed to accrue until such time as the relevant lot is sold by the lot owner’s mortgagee after it has taken possession of the lot.

More information

For advice and assistance on fee recovery matters, please contact Anton Block, Principal Lawyer and Head of Owners Corporation, on (03) 8600 8833 or ablock@kcllaw.com.au.

Note: This update is a guide only and is not intended to constitute legal advice.