Managing Arrears in your Body Corporate
A friend of mine recently asked me to take a look at their Body Corporate documentation as they were being hit with a $700.00 special levy and she wasn’t sure what it was all about.
After a brief review of their Annual General Meeting documentation it was clear that the building was a scheme of 6 and needed to raise around $4,200.00 in legal costs for pursuing one of the lot owners for unpaid levies. The unpaid levies were further impacting their Body Corporate as they were struggling to meet their day to day expenditure. The unit ended up being sold at a Bailif sale and the Body Corporate was paid out the majority of their costs. In the interim however those costs had to be covered by the owners until it could be resolved.
But why did it get that far in the first place and what could have been done to manage the debt better?
Here’s what we suggest to our clients:
1. Penalty Interest
Consider introducing penalty interest for levies that are outstanding. The body corporate can introduce a penalty to be paid by owners should their levies not be paid on time. The maximum rate of interest that can be charged is 2.5% simple interest for each complete month that the debt remains outstanding[i]. This helps the body corporate motivate the owners to pay on time and also penalises those who don’t pay on time rather than penalising the other owners who have to carry the body corporate’s costs. If there are no penalties for late payment the body corporate levies will receive the lowest priority.
2. Discount for paying arrears on time
The body corporate can allow a discount for levies paid by their due date. This has to be accounted for in the budget of course but it ultimately motivates the owners to ensure levies are paid on time. The legislation permits the body corporate to provide a discount of up to 20%[ii] which most owners in a scheme are keen to take advantage.
3. Follow up outstanding debt and keep an eye on it
Legally under Qld Legislation, the Body Corporate is only obligated to send a debt to debt collection once it has been outstanding for two years.[iii] It is best practice though to keep on top of these debts and address them as soon as possible. The longer these debts are left the more they mount up and the harder it becomes for the owner to pay. In our office we issue the owners with notice 30 – 45 days before the levy is due for payment. Owners are then sent a reminder 14 days after the due date. 14 days later the if it is still unpaid they are issued with a notice that the debt remains unpaid and 14 days after that they receive a final notice. If the debt remains unpaid after that period we will try to contact the owner by phone or email. Finally we will approach the Committee to see if they want the matter to be sent to debt collection. If it is sent to debt collection, the collection costs are on charged to the lot owner in question along the way.
4. Become known as a no nonsense Body Corporate who is firm but fair
Remember that there are sometimes owners who may have extenuating circumstances. On occasion persons may not have been in debt before and are unsure of how to deal with it. Some people resort to shutting down and not communicating with the body corporate. The body corporate should show empathy and try to resolve debts where possible in a timely and fair manner. However, the committee it should not let the body corporate be taken advantage of. The most effective solution in our experience is where the owners agrees and commits to a payment planthat addresses the arrears while keeping ahead of levies that become due.
– Henry Wheeler
Click here to read the Body Corporate and Community Management (Accommodation Module) Regulation 2008.
Click here to pay your arrears