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Owners Corporation update: Strategies for the collection of Owners Corporation levies

May 20, 2013

The obligation

Pursuant to section 28(1) of the Owners Corporation Act 2006, lot owners are liable to pay any outstanding fees, charge, contribution or amount owing to the owners corporation in respect of that lot. This can extend to special levies that are charged by the owners corporation to its lot owners.

When a lot owner fails to pay the monies due, the Owners Corporation may recover those monies in any court of competent jurisdiction as a debt due to the owners corporation.

The problem

However, this requires the Owners Corporation to issue proceedings against the lot owner which costs money, takes time and sometimes can be difficult to execute.  This is particularly the case when the lot owner is overseas.

In those circumstances, VCAT does not have jurisdiction. The proceeding must be issued in the Magistrates or County Court, depending on the amount of the claim (the upper limit of the Magistrates Court jurisdiction is $100,000). However, it is also necessary to serve the issued complaint or writ on the recalcitrant lot owner before the proceeding can be progressed.

Overseas lot owners can be difficult to track down and serve with the issued complaint or writ.

Collection strategies

  1. If the lot is managed by a local real estate agent or somebody else who is within the jurisdiction of the Court, the OC may be able to obtain an order from the Court substituting that agent or person as the address for service. If such an order is obtained, the proceeding can continue and judgement can be obtained. It will then be necessary to enforce that judgment to actually extract the money owed from the recalcitrant lot owner.
  2. Enforcement may be able to be achieved by a garnishee against the rental income received by the lot owner from its tenant. An application can be made to the Court essentially requiring the lot owner’s tenant or managing agent to pay the judgment debt out of the income stream to the OC.
  3. Lot owners can be required to provide and maintain a bank guarantee for a sum of money to cover lot fees and other charges levied by the OC. This may be included as a requirement in the sale documents for the relevant lot. However, once the guaranteed sum is exhausted, it may be difficult to extract a further sum from the recalcitrant lot owner.
  4. If the lot owner is an Australian Corporation and there is no dispute about the payment of the monies owing, the OC can serve a creditor’s statutory demand (pursuant to section 459E Corporations Act 2001). The lot owner then has 21 days to pay the demanded sum or make an application to set aside the demand on the grounds that there is a genuine dispute about the debt. If it does neither of those things, on the 22nd day it is deemed to be insolvent and the OC can make an application to wind-up the lot owner and appoint a liquidator to that company.

    The liquidator’s role is to realise any assets that the lot owner company has, recover any preference payments and pursue any uncommercial transactions. This can result in a pool of cash that the liquidator uses to make distributions to creditors including the OC.

    Although the OC may not have the appetite for this process, the threat to the lot owner (created by the service of the creditor’s statutory demand) that it may be forced through this process, may be enough to motivat it to pay the outstanding monies.
  5. Obtain security for future lot fees and levies which is enforceable against third parties (such as tenants and property managers). This is done using the Personal Property Security Act 2009 (PPSA).

    Registration of the security interest on the Personal Property Security Register renders the OC a secured creditor for the debt.

    The security interest will be created by a security agreement entered into between the lot owner and the OC. This agreement can form part of the suite of documents provided to the lot owner when the purchase of the relevant lot is made or anytime afterwards.

    In order to be effective, the security agreement must effectively give an interest to the OC in the rental income stream that the lot owner will receive in respect of the relevant lot in the event that the lot owner fails to pay monies owing to the OC.

    The OC must then register this interest on the Personal Property Security Register.

    Assuming this is all in place, in the event of default by the lot owner to pay monies owing to the OC, the OC can issue a written garnishee notice (which must comply with the requirements in section 120 of the PPSA) to persons who owe money to the lot owner, such as the lot owner’s tenant or property manager.

    Upon receipt of the notice, that person must pay to the OC the amount owing to the OC within 5 business days.

    If the person fails to pay the money within the 5 business days, the OC can issue proceedings against that person for orders compelling that person to pay the money to the OC.

    However, there can be issues of priority of interest between the OC and other parties owed money by the lot owner.

More information

For more information please contact Anton Block, Principal Lawyer and Head of Owners Corporation, on (03) 8600 8833 or ablock@kcllaw.com.au

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