Owners Corporation Fees – How to recover when the lot owner fails to pay

In the current economic climate many lot owners may find it financially challenging to pay owners corporation fees. This can be problematic for an Owners Corporation where cash flow is crucial in order to fund the ongoing cost of maintaining the common property.

Initiating the fee recovery process

The Owners Corporation Act 2006 (Vic) (the OC Act) prescribes a number of rules relating to setting annual fees and extraordinary fees and the recovery of them. To recover fees involves:

• the issue of a Fee Notice (section 31 of the OC Act); and
• if the lot owner does not pay the Fee Notice within 28 days, then the Owners Corporation may issue a Final Fee Notice giving notice that the Owners Corporation intends to take action under Part 11 of the OC Act to recover the amount due if the amount stated is not paid within 28 days after the date of the Final Fee Notices (section 32 of the OC Act).

Recovery proceedings at the VCAT

If recovery proceedings are initiated at the Victorian Civil & Administrative Tribunal (VCAT) then section 140 of the Victorian Civil & Administrative Tribunal Act 1998 does not require personal service so the application may be served by ordinary post. This can be a real bonus if there are a number of absentee owners.

When considering whether to commence a legal proceeding an Owners Corporation should be aware that if the Owners Corporation succeeds in obtaining a decision in its favour that does not necessarily guarantee that costs will be awarded in its favour. Ultimately the award of costs is always at the discretion of the presiding member.

If a lot owner refuses to pay an amount ordered by the VCAT then the next step is to look at registering the VCAT award in a Court such as Magistrates’ Court and then if the lot owner refuses to pay, initiate insolvency action to compel the lot owner to pay. In the worst case scenario an Owners Corporation could issue bankruptcy proceedings for non-payment of levies, although this is a very rare occurrence.

Recovery proceedings at the Magistrates’ Court

If an Owners Corporation passes a special resolution to collect outstanding Owners Corporation fees, then the Owners Corporation may issue recovery proceedings in a Court of law in Victoria, which is typically the Magistrates’ Court. Conversely no special resolution is required to commence recovery proceedings in the VCAT. Obtaining a special resolution is quite time consuming and for this reason the VCAT is usually the preferred forum to recover Owners Corporation fees.

The advantages of issuing proceedings in the Magistrates’ Court include:-

1. The award of costs based on a Court scale, as opposed to VCAT where the Tribunal may award a nominal amount for costs.
2. There is a procedure for obtaining default judgment whereby judgment can be obtained quickly against a recalcitrant owner (there is no procedure for default judgment in VCAT).
3. The Magistrates’ Court has its own mechanism for enforcement of judgments. Any Order obtained in the VCAT must be registered in the appropriate Court before it can be enforced.

Calculation of fees

During the course of recovery proceedings some issues that may be raised are:-

• Have the annual fees been struck in accordance with lot liability?
• Have the annual fees been approved by a resolution at an Annual General Meeting?

In respect of extraordinary fees other matters that the Tribunal will inquire are whether the fees have been based on lot liability or based on the benefit principle – the benefit fee principle meaning that those who benefit more pay, pay more. Other issues that may be raised would include if the extraordinary fees have been approved by an appropriate resolution and have the fee notices been issued?

The Owners Corporation and Other Acts Amendment Bill 2019 which is presently before the Victorian Parliament seeks to clarify matters relating to the calculation and imposition of fees. One of the amendments will allow an Owners Corporation to levy an additional annual fee on a lot owner if the Owners Corporation has incurred additional costs arising from the particular use of the lot by the lot owner where an annual fee set on the basis of lot liability would not adequately take account of those additional costs.

Recovery of costs

A delinquent lot owner who caused the Owners Corporation manager to issue the notices is only responsible for paying their share of the manager’s fees on a lot liability basis. This means that an Owners Corporation cannot charge a lot owner any other fees or charges, such as “administration fees” for overdue Owners Corporation fees.

However, an Owners Corporation can charge penalty interest on overdue fees. The amount of interest is determined by the Penalty Interest Rates Act which presently prescribes the Penalty Interest Rate in Victoria to be 10% per annum in effect from 1 February 2017. The right to recover penalty interest must have been authorised by a resolution at a general meeting.

Action items

It is important that the Owners Corporation Managers:

• keep up to date with the current contact details of all lot owners to ensure they receive all the important notifications regarding committee meetings, general meetings and fee notices; and
• ensure that Owners Corporation fees are properly calculated and levied and appropriate records are kept.

Authored by:

Tony Greenaway, Partner
Adrian Clifford, Senior Associate