Strata debt: What happens when strata levies are not paid?

Almost one in five people in New South Wales and 16 per cent of Australians live in strata housing, according to the Australasian Strata Insights 2022 report & infographics, released by the University of New South Wales City Futures Research Centre.

So it’s probably not surprising that issues relating to strata living have been in the spotlight lately. Unpaid levies can sometimes lead to strata debt and, in extreme circumstances, bankruptcy.

According to Allison Benson of Kerin Benson Lawyers, the budget, and the levies payable by each lot is determined every year at a general meeting. Funds for repairs and maintenance of common property are raised through strata levies. However, problems arise where one (or more) lot owners do not or are unable to pay levies.

What happens if people don’t pay?

“Strata debt [is] really, really common. … It is really important not to be in strata debt. One, so that you don’t have action taken against you by the owners corporation. Two, so that the money is actually flowing into the owners corporations’ accounts so it can pay for things and three, so that you have got voting rights,” says Benson.

If a lot owner fails to pay their strata levy, there are different courses of action open to the owners corporation (OC) to recover the amount. For instance, the OC can direct strata managers to issue a letter of demand to lot owners and strata managers will often charge fees for levy recovery. It “could be $60, [or it] could be $70 for a letter of demand to be sent out and they put it on the lot owner’s ledger,” says Benson.

The total amount recoverable by the owners corporation for any unpaid levies will includes fees and interest. The legislation permits the OC to recover interest. In general, lot owners have 30 days to pay the contribution before interest is due. For emergency levies, the levy can be collectible within 14 days.

“Section 85 (of the Strata Schemes Management Act) allows an owners corporation to either collect interest at 10 per cent simple interest, or they can resolve not to [charge interest]. So, they do have a choice,” she says.

According to Benson, if a lot owner is not up to date with their strata levy payments, or is “not financial”, at strata meetings then that lot owner will not be entitled to vote or have their say in any matter being discussed at the meeting. It is a “user pay system in that sense. You don’t pay your strata levies, you don’t get a vote,” she says.

What happens if there’s a dispute?

The Strata Schemes Management Act 2015 (SSMA) sets out the requirements when it comes to determining the contributions payable by owners. Section 81(1) of the SSMA states the “owners corporation must determine the amounts to be levied as a contribution to the administrative fund and the capital works fund to raise the amounts estimated as needing to be credited to those funds.”

Generally, the contributions are divided between lot owners. However, according to Benson, problems arise where there are only two lots in a strata scheme and one lot is paying the levy while the other does not. “One lot owner is either faced with not having enough money in the kitty to do repair work or they have to pay double [the levies] constantly,” says Benson.

If this happens, there are various ways in which an owners corporation can recover outstanding levies. For instance, the owners corporation can seek an order from the NSW Civil and Administrative Tribunal (NCAT), go through the court system and obtain a court order, or by issuing a bankruptcy notice against the lot owner. If the debt is more than $10,000, it is possible to take the bankruptcy option and seek a sequestration order against someone. Benson explains that to obtain a sequestration order, it will be necessary to prove the debt is owed, and it has not been paid. “A defence to a bankruptcy application is that the lot owner is actually solvent,” she says.

Who is responsible for repairs?

There may be other reasons an owner is not paying their strata levy. According to Benson, one of the most contested areas under the SSMA is section 106. Under this section, the owners corporation is strictly liable for the maintenance and repair of the common property and any property vested in the owners corporation. “As soon as a piece of the common property falls into a state of disrepair, the owners corporation is strictly liable for its maintenance and repair,” she says.

An example would be if the waterproofing in the common property has failed. The water enters into a lot and causes damage to the carpet. “The OC would be responsible for the carpet damage. The lot owner is still obliged to pay their levies even if they have a claim against the OC under s 106(5) of the [SSMA],” says Benson.

The lot owner may refrain from paying levies until the repairs have been made but without strata levies, the owners corporation may not have sufficient funds to pay for the repairs. “It can really spiral very, very quickly,” says Benson.

As Benson explains, if there is a dispute about liability for repairs and the owners corporation refuses to undertake the repairs, there are three options available to the lot owner. They can go to mediation to try to reach agreement with the owners corporation so the owners corporation undertakes the works. If agreement can’t be reached, then it would be open to the lot owner to proceed to NCAT to seek orders for repairs and for any damages incurred within the last two years.

Another option is for the lot owner to “cut their losses” and seek a common property rights by-law to be passed where they are allowed to do the repair work at their cost and either the lot owner or the owners corporation is assigned maintenance responsibility for the area. “The third option is really a non-option and it is to do nothing,” says Benson.

While there may often be a stalemate between the parties, disputes can often be resolved at the mediation stage if there is “sufficient goodwill,” says Benson. If the dispute does not resolve at this stage, then proceeding to NCAT is the next step. Pursuing the matter in court is generally discouraged. Section 253(2) of the SSMA states that a lot owner will be responsible for the OC’s legal costs as the Tribunal is available as an alternative remedy.