"Strata wouldn't be Strata without levies but they are a critical and essential part of ensuring you protect the value of your property. They have been, are and always will be a major component of strata life and there wouldn't be a Strata Scheme anywhere that could survive long term without the money received from Strata Levies. The Levies must be determined and administered by the Owners Corporation with levy notices being issued on a regular basis. Here's an idea of what's involved in the whole process."
All Strata Schemes impose a regular strata levy, usually collected quarterly, on all the lot owners. The money collected is deposited into the strata scheme's trust account and is then used to fund the running and maintaining of the strata scheme. To help workout what money goes where, the strata scheme's bank account is effectively split into 2 funds - one for the day-to-day running of the scheme and the other to cover the large capital expenditure items plus the occasional 'emergency' type item. I'll provide more detail on these 2 funds later on in this article.
Without levy payments a Strata Scheme wouldn't be able to pay those running costs resulting in a slowly deteriorating complex and a subsequent drop in the market value of every property in the scheme. Just as a car needs regular servicing and maintenance to remain trouble-free, a Strata Scheme also requires on-going 'maintenance and attention' to many of the parts that makeup the complex.......
It's interesting to note that the amount of money sitting in a scheme's bank account can be a good indicator of what type of future will be faced by scheme's lot owners. If an examination of the account shows that available funding is sufficient to meet anticipated ongoing running, repair and maintenance costs (plus some in reserve for emergencies) then all is well and good. However, if the account is low on funds or, worse still, empty then the future may be a bleak one.
There are three types of Strata Levies:
The Administrative Fund, under the control of the Owners Corporation, is used to pay for all the 'day-to-day' and 'regular' expenses of a Strata Scheme. Things like (but not limited to):
The Sinking Fund, also under the control of the Owners Corporation, is essentially a large capital expenditure fund that pays for both expected (long term) and unexpected replacement, repairs and maintenance. Some things, such as carpet replacement in stairwells, common property painting and the like are easy to budget for....but other things like 'concrete cancer' or 'structural damage due to subsidence or an accident' are very difficult to predict and therefore budget for. Nevertheless, it's advisable to put some money away for the 'unexpected emergencies' that WILL crop up from time to time.
Working out just how much to allocate towards these unexpected events is not an easy task and this is where the help of some experienced and knowledgable people is required to ensure the Sinking Fund does what it's supposed to.
In the not too distant past, it was very common for many schemes out there to avoid 'looking to the future'. These schemes tended to minimise or even totally neglect their sinking funds to the eventual detriment of all the owners in the scheme.
Eventually, the time would come when something simply had to be either replaced or repaired but there were no funds in the sinking fund to do the job. The Owners Corporation therefore had no other option but to raise a Special Levy asking for money to fix whatever had to be fixed.
IMPORTANT TIP - It's always very sensible to allocate extra funds to the sinking fund to cover those unexpected repairs that will eventually turn up and usually at the worst possible times. By handling the sinking fund properly, the owners of the scheme may never have to face the dreaded Special Levy - since sufficient funds should always be available - unless you are very unlucky and have a lot of unexpected events one after the other.
Thankfully, due to increasing pressure from a number of areas, legislation was passed to 'phase in' mandatory 10-year sinking fund plans beginning from July, 2006 for all NSW Strata Schemes. Essentially all NSW Owners Corporations now have to have 10-year sinking fund plans done for their Strata Schemes in an effort to eliminate the problems of 'insufficient long term capital works funding' - especially with the 'older' schemes. However, there's only ONE problem - there's no legislation (yet) to ENFORCE the plans...which is a little crazy, in my opinion.
The 'phase-in' schedule was setup as follows:
By now, every scheme in NSW should have done their 10-year plans with many now having to revisit these (and amend them if required) as per the legislation. You can read the details about this requirement in the NSW Strata Schemes Management Act 1996: Schedule 75A - Owners Corporation to prepare 10-year sinking fund plans.
Another great reference document to have a look at is the NSW Office of Fair Trading's information page on Strata scheme sinking funds. It covers some of the more interesting aspects regarding what happens if an Owners Corporation doesn't comply with the requirements and what concerned owners can do about that. It also goes over the requirements for small schemes, otherwise known as 2-lot schemes. Make sure you do NOT miss having a read of this.
ANOTHER TIP - you may like to explore (and possibly consider) the alternative of Strata finance loans to fund major works. These loans can be a viable option if many owners don't like the idea of putting away cash for the future. Have a look at the section below on 'Alternative ways to pay....'.
A Special Levy is raised when there aren't enough funds in either the Administrative Fund OR the Sinking Fund to pay for an essential expense. However, not all expenses are essential and many non-essential expenses can be postponed until enough funds are raised via the normal quarterly levy receipts. However, ALWAYS keep in mind the WHS (Work Health & Safety) implications of NOT fixing something. If there's ANY possibility of any danger to anyone then make sure it IS fixed because the penalties for not doing so are simply too great.
Examples of non-essential expenses could be the painting of the common property's external walls, replacing the 'tired' carpets in stairwells or adding extra landscaping to the scheme's garden area. Conversely, fire safety compliance or repairing damage to the scheme's main driveway would be two examples of essential items.
I have yet to meet an owner who likes to receive a Special levy so it's important to be aware that, eventually, there will be things that will need repairing or replacing. But, if enough money hasn't been raised along the way, Special Levies WILL be required.
In the instance where there IS enough money in the scheme's bank account to pay for an essential expense but the particular fund required to pay the expense doesn't have sufficient money available, the Owners Corporation is permitted to pay for the expense with money from the other fund - for example: paying an administrative expense from the sinking fund - provided the amount paid is refunded within 3 months by way of a special levy.
Why must it be paid back? - because paying the expense out of other fund effectively results in the original fund going into deficit and, under current NSW Strata legislation, "any deficit must be cleared by the raising of a special levy within 3 months of such deficit occurring".
If required, this special levy can be financed via a Strata finance loan. See the next section on "Alternative ways to pay" for more details.
Many Strata Schemes, for a variety of reasons, may find themselves in the position where money is desperately needed to pay for essential repairs or renovations but the bank account is 'bare'. Now, when this situation occurs there are a couple of options open to the Owners Corporation including:
While the idea of taking out a loan may seem abhorrent to many, it might just be the best (and sometimes ONLY) solution to ensure the work actually gets done before the problem gets any worse and more than likely resulting in a 'cost blowout'. If left unchecked, and the problem involves WHS safety concerns, it could develop into something even worse - litigation due to negligence along with heavy penalties from Workcover prosecution - and no one wants any of that. Yes, interest on the loan must be paid but at least the necessary works are done, the dreaded Special levy is avoided and everyone is safe from harm.
To get the full rundown on this 'ever increasingly popular' option, read my information page on Strata Finance Loans.
The Owners Corporation must determine what both the administrative and sinking fund levies will be for the scheme on an annual basis. The amounts decided upon must be supported by a budget which must be presented at each Annual General Meeting. All the owners can then vote to either accept or reject the proposed budget which must take into account actual and expected expenditure as well as the existing financial situation of the Owners Corporation.
The levy amount set is payable by every owner based on the unit entitlement of each lot. Basically, the larger the unit entitlement of a lot, the greater the portion of the levy amount to be paid by the respective owner.
Levies are usually payable quarterly and a levy notice is issued by the treasurer of the Owners Corporation or by the Strata Manager, if one has been engaged to look after the scheme.
For brand new schemes the Owners Corporation must make its first determination of levies within 14 days from when the Strata Scheme is registered. From then on, levies are generally determined at each annual general meeting as per all Strata Schemes.
NOTE - Initially, when a scheme is very new, it can be difficult to accurately determine the correct amount for the levies. As time passes, there can be all sorts of expenses that suddenly appear because someone didn't think of them when the initial 'budget' was done. This is, unfortunately, difficult to avoid. So, for those of you involved in new schemes, be prepared for the initial levy amount to increase as a truer pattern of expenses begins to develop.
TIP - Professional Strata Managers, usually with many years experience in setting levies for new schemes, will probably get a lot closer to the true level from the very start.
For a medium-to-large Strata Scheme, the time period from 14 days after registration till when all available lots are sold and settled can be the most difficult in terms of running the scheme. This is because there may only be a few 'settled' owners, along with the scheme's original owner (usually the developer or builder), who are responsible for the costs of running the entire scheme - particularly if the real estate market is slow and properties are difficult to sell. In a slow market, it's entirely likely the scheme's original owner may still own a majority of the lots and must therefore carry the lion's share of these costs.
Some original owners have been known to offer what is called an undertaking to maintain the complex until enough owners are on board (ie until enough lots have been sold and settled) to allow the scheme to run under its own steam. This way, the original owner isn't forced to pay out many thousands of dollars in levies while waiting for the rest of the sales to come through - which can be many months in some cases.
Usually too, a Strata Manager is engaged very early on to oversee the scheme and ensure the original owner complies with any undertaking as mentioned above. It's very important the scheme looks pristine at all times to expedite any sales because the quicker the sales happen, the quicker the scheme can operate normally.
Believe it or not, there are still some selfish owners out there who simply will not pay their levies....but the laws are pretty watertight on levy payment compliance and the authorities frown heavily on those who default.
However, the road to 'recovery of the unpaid funds' can be a long one but eventually, especially if the defaulter is forced to sell their property, you should get all that's owed and, possibly, any costs you incurred along the way. In the meantime, you must ensure your scheme remains financial until the defaulter is brought to justice. Just make sure you don't give up the chase too early or too easily!!
Still, regardless of your best efforts, some others are either a little more stubborn (or desperate) and more forceful ways will be needed. Many Strata Managing Agents have developed their own effective ways, over many years, of dealing with these sorts of issues so ask for their help. If your one of the 'self-managed' schemes, things can get a little tougher as you'll need to work out what actions you need to take to recover the funds.
Prior to 2010, owners corporation approval at a general meeting was required if legal action was needed to be taken to bring some of the 'levy rogues' into line. This created all sorts of unnecessary time and money costs for everybody involved. Well, now "any legal action taken to recover overdue levies will no longer need to be approved by an owners corporation at a general meeting - no matter what the cost". All I can say here is: "And about time too".
To learn more about the various ways to try and solve the problem of owners who won't pay, have a read of the Resolving disputes information page. It might just help you in some of the more 'problem' cases.
An unpaid levy attracts interest at the rate of 10% simple interest a year if not paid within one month after it's due and, sometimes, this penalty can be enough to bring some of the slow payers into line. Many times too, a simple discussion with the offender(s) can result in both parties agreeing to the setting up of some sort of time-period arrangement allowing the defaulters to catch up over a number of months. It's amazing what a little bit of negotiating and understanding can do here.
Interestingly (excuse the pun...:), the owners corporation cannot increase or decrease the interest charged but it can make a special resolution to charge no interest. I'm sure there ARE certain situations when this applies but, in most circumstances, I expect the 10% to be charged. This particular bit of legislation can be found in the NSW Strata Schemes Management Act 1996: Schedule 79 - Interest and discounts on contributions.
Here are a few extra resources to help you understand levies even more along with some other relevant and important information that also might prove useful.
Information pages, booklets, publications
- Strata scheme sinking funds - obligations for 10yr plans
- Strata Living booklet: Refer to Levies section (about page 15)
- [UPDATE - May2014 - The webpage below seems to be "inaccessible" right now but I will check it in a few days to make sure it just wasn't having some web access problems] Levies and the Administrative And Sinking Funds (nice concise summary)
NSW Strata Schemes Management Act 1996 references
- Sections 66 thru 74 - Administrative & sinking funds & account of owners corporation
- Sections 75 thru 80 - levy of contributions
- Section 149 - Order for variation of contributions levied
- Section 230 - Restrictions on OC levying contributions for expenses
NSW Strata Schemes Management Regulation 2010 references
If you need to know the meaning of one or more of the common terms mentioned above then have a look at the Strata Terms and Jargon Information page.
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