We recently acted for an owner (let’s call him “Homer Simpson”) of an apartment located in a large residential development. The development was divided into 4 blocks – blocks A, B, C and D, which consisted of over 100 lots. Each of these blocks were on the same plan of subdivision, and therefore there was a single Owners Corporation (“the OC”).
Mr Simpson came to see us after receiving a Notice from the Committee of the Owners Corporation that they had convened a meeting and resolved to strike a special levy of $1.4 million (“the Project Levy”), which was to be spread across blocks A, B and C. His block C, which consisted of 20 lots, was to pay a Project Levy of approximately $500,000 to fund works and repairs. His contribution to the Project Levy alone was approximately $30,000. Mr Simpson was alarmed and contemplated applying for a loan in anticipation of paying the Project Levy. Instead, he came to see us to explore his legal options.
We were able to advise that:
- the amount involved to raise the Project Levy was more than twice the total amount of the current annual fees;
- the Project Levy was therefore invalid because it had not been passed by special resolution as required by section 24 of the Owners Corporation Act 2006 (“the Act”);
- given that a special resolution was required, it was not something that could be delegated to the Committee for deliberation, under section 11 of the Act;
- the Notice that was disseminated to the lot owners notifying them of the Project Levy did not properly outline the basis of the Project Levy. There was otherwise no disclosure of due diligence enquiries, reports, calculations, invoices or quotes, to explain the basis of the Project Levy and why it was so high;
- the cost of any levy should also be passed to other blocks of the development, namely block D, in accordance with lot liability, as one of the reasons for the Project Levy was to comply with insurance obligations;
The Owners Corporation (“the OC”) argued that the Project Levy was valid because, among other things:
- the Project Levy was actually three separate levies and therefore not more than twice the total amount of the current annual fees, because the annual budget as resolved at the AGM was $550,000, and this was therefore less than the $500,000 Project Levy for block C;
- a special resolution was therefore not required;
- given that a special resolution was not required, the Committee had the power to make the decision on behalf of the OC to raise the Project Levy, as it had been delegated the powers of the OC pursuant to section 11;
- the Committee was not required to account to the lot owners because it had been delegated the powers of the OC;
- the Project Levy was struck in accordance with the “benefit principle”, or on the basis of “who benefits more, pays more”. Accordingly, the Project Levy should not extend to the owners of block D, because they would not obtain a benefit from the works.
After raising these issues with the Committee, it was conceded that the Project Levy was questionable and its validity needs to be explored further.
The OC’s argument that the Project Levy constituted 3 separate levies (according to three separate blocks) that were less than the annual budget was not only tenuous, but invalid at law. Given that blocks A, B and C were on the same plan of subdivision, any extraordinary fees that were struck had to be treated as a whole in comparison to the annual budget. On that basis, the Project Levy of $1.4 million was more than twice the annual budget of $550,000, and therefore had to passed by a special resolution to be enforced in accordance with section 24(4).
Whether or not the Project Levy is something that the owners of block D should share responsibility for is a question that depends on whether or not block D owners would derive a benefit from the repairs.
Section 24(2A) provides that 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 OC must be levied on the basis that “whoever benefits more, pays more”.
The OC argued that the block D owners would derive no benefit from the repairs undertaken exclusively on blocks A, B and C. However, given that one of the reasons for raising the Project Levy was to comply with insurance obligations, it is arguable that it is in the best interests of the block D owners to ensure the OC is compliant, to minimize the OC’s exposure to third party liability and personal injury claims. It may also be argued that the block D owners would obtain a benefit from improving the development as a whole, which may also increase its value.
This article is intended to provide general information only and is not a substitute for legal advice. To obtain legal advice tailored to your situation please contact RKL on (03) 9519 9888.