This question about cost allocation for improvements to common property has been answered by Tim Graham, HWL Ebsworth Lawyers.
Question: Is there a recent Victorian ruling related to expense recovery / cost allocation to the effect that the cost recovery of improvements made by the committee must only be allocated only to Lot Owners who benefit from the common property in question?
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As I recall, in an earlier message/ mailout, you touched on the recent Victorian ruling related to expense recovery/cost allocation to the effect that (loosely) the cost recovery of improvements made by the committee must only be allocated to Lot Owners, based on a factor related to their “Proportional Benefit” that the Lot Owner receives.
Conceptually it sounds reasonable and I understand its now Law, but practically I have a problem in attempting how the Owners Corporation could/would apply it.
Where do I find the Ruling, and most especially examples or models of the calculation in action?
For instance, consider as an example an Owners Corporation of 12 Lots which are in linear Horizontal Grouping ( i.e. Cluster housing – not Vertical Multi-story building).
There is a common concrete driveway up the center, (a “spine”) passing between the first two houses (lots 1,2), then on between Lots 3,4 and then on between each pair, until it meets the edge of 11 and 12.
If a replacement to the concrete is required at a location just before Pair 1 & 2, then the cost is divided evenly to all 12 Lots because ALL share its benefit, right?
But, if the common driveway needs replacement of a section after 7 and 8, then that cost is only borne by 9,10,11 & 12. This is because Lots 1 through to 8 don’t benefit. Is this correct?
Maybe Unit 12 are Elderly and have no car, so we could argue they, therefore, have no benefit of the driveway and cost are allocated only to three other Lots.
In the past, I would have expected all lot owners to share the repair /replacement of any parts of the common areas but I believe now this is not so.
Hence my interest in understanding the Detail of the new ruling/interpretation…
Surely it would be of wide reader interest to Other Victorian Village/Cluster style Owners Corporations also….
Answer: In my opinion, all owners should contribute to the costs of the maintenance of the driveway.
In my opinion, all owners should contribute to the costs of the maintenance of the driveway.
The seminal decision of McCarthy v Dandenong Region Body Corporate Services (Aust) P/L t/as DR Strata Management concerned repair & maintenance of a driveway, among other common property. The tribunal found that the relevant sections deal with four different categories of liability for payment: fees, charges, contributions and other amounts owing as follows:
- Fees: the combined effect of Sections 23(1) and (3) and Section 28(1) of the OCA is that an owner must pay an amount based on lot liability.
- Special fees and charges: a combined effect of Sections 24(1) and (3) and Section 28(1) of the OCA is, likewise, that fees must be based on lot liability.
- Contributions and other amounts: the effect of Section 28(2) and (3) of the OCA is that there is a general rule and an exception. The general rule is that owners must pay fees in proportion to their lot liability. The exception operates where a requirement to pay a contribution or other amount has resulted from repairs, maintenance or other works which were wholly or substantially for the benefit of some or one, but not all, of the lots. In that case, the lot owners who have benefited more may be required to pay more than their lot liability.
The tribunal made a distinction that fees and charges are amounts that are set and levied prospectively (for example a budget prepared in anticipation of future expenditure) with contributions or other amounts that demanded of lot owners retrospectively, (being particular expenditure, not budgeted for and which has become necessary. The Tribunal found that:
“For the purpose of the retrospective demand, it becomes relevant to enquire whether the expenditure has conferred a benefit upon some lot owners more than others. If it has, the exception referred to above may apply. It never becomes relevant to enquire whether fees and charges, set and levied prospectively, might become spent on things that benefit some lot owners more than others. The fees and charges must be set and levied according to lot liability. There is no right for a lot owner to try to make an adjustment of them later by reason of them actually having been spent upon things that have not benefited that lot owner, or to try to make an adjustment to the setting of them by reason of a likelihood that they will be spent upon things that do not benefit that lot owner.”
In the subsequent decision of Mashane Pty Ltd v Owners Corporation RN 328577, the Supreme Court of Victoria agreed that both annual fees and special fees must be levied on lot liability. However, the court found that the two exemption provisions, ss.28(3) and 49(2), collectively point to a legislative intention that, when levying fees for repairs and maintenance, the OC should generally apply the benefit principle: the lot that benefits more pays more. The Court said:
“ss 28(3) and 49(2) would otherwise have little or no work to do, a reading of the whole Act evinces a legislative intention that a different basis of levying applies to the specific category of fees for repairs and maintenance. That is, where annual fees or special fees are levied for repairs, maintenance or other works undertaken by the owners corporation on common property or lots, which works are wholly or substantially for the benefit of some but not all lot owners, the levy for that component of the fees is to be on the basis of “who benefits more pays more”.
The section was subject to legislative amendment by the Owners Corporations Amendment Act 2013 which commenced on 18th December 2013. Since the amendments the so-called “benefit principle” may be described as follows:
- Under s.24(2A) of the Owners Corporations Act 2006 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 owners corporation must be levied on the basis that the lot owner of the lot that benefits more pays more.
- For the principle to trigger some or one but not all of the lots must benefit wholly or substantially from the repair, maintenance or other works. The corollary must, therefore, be that for you to avoid or enjoy a reduction in fees relating to such works if must derive no benefit or negligible benefit only.
- In Owners Corporation PS 331362S v Boothey (Owners Corporations) [2014] VCAT 174 (18 February 2014) the OC claimed more than $100,000 from the owners of lot 701 for entire cost of restoring the historic copper dome located on common property above their lot in the Grand Central Hotel on Spencer Street. VCAT decided:
- For ss.28 and 49 to apply it must be established the works were undertaken wholly or substantially for the benefit of lot 701;
- Having made that determination the committee was required to make apportionment of costs if any;
- The domes formed an integral and important part of the façade of the building which the lot owners are required to conserve and protect in accordance with the building’s heritage listing. The OC was required to perform the works with the funds being accumulated on the basis of lot liability.
- In Collett v A&E Konstantopoulos Nominees Pty Ltd (Owners Corporations) (Corrected) [2017] VCAT 345 VCAT found that works will confer benefit on all lots, even lots without balconies, because the danger to visitors would be removed, insurance could be obtained and the appearance was enhanced.
- In Owners Corporation PS407621Y v Grundl (Owners Corporations) [2017] VCAT 1550 (28 September 2017) the OC committed a legal error in failing to turn its collective mind to the question of whether the benefit principle should apply. The tribunal went on to distinguish the case from its earlier decision in Boothey, which concerned one continuous roof, which was common property, covering two lots.
The Senior Member set out the following test [at 16]:
In my view, in the light of the Mashane decision on appeal and of s.24 as it now is, the law requires an owners corporation to act as follows when it sets special fees to cover extraordinary items of expenditure relating to repairs, maintenance or other works.
It must first turn its collective mind to the question of whether all lots benefit substantially from the works or whether some lots substantially benefit more than others.
If, acting in good faith and exercising due care and diligence, as s.5 of the Act obliges it to do, it decides that all lots substantially benefit, it must set fees in accordance with lot liability. There will be no legal error in the decision, and the Tribunal will not interfere with it on the application of an aggrieved lot owner, unless the decision was one which no members of an owners corporation, acting honestly and reasonably, could have made.
Failure to turn the collective mind to the question is a legal error. The error is unlikely to lead the Tribunal to interfere, on the application of an aggrieved lot owner, with a decision to set fees in accordance with lot liability if in reality all the lots benefit substantially from the works. Otherwise the legal error exposes the owners corporation to the risk that the Tribunal will declare the resolution invalid.
If the owners corporation decides that the works are substantially for the benefit of some, but not all, of the lots, it must set fees not in accordance with lot liability but in accordance with the benefit principle, so that the owner of the lot that benefits more pays more.
The owners corporation must decide the extent to which the various lots benefit and apportion the fees accordingly. In making the decision it must act in good faith and with due care and diligence. If it does, there will be no legal error in the decision, and the Tribunal will not interfere with it on the application of an aggrieved lot owner, unless the decision was outside the range of reasonableness so that it was one which no members of an owners corporation, acting honestly and reasonably, could have made, or unless there has been some other legal error.
However, if the lot owners cannot decide which principle to adopt or cannot decide upon the proper apportionment, and ask the Tribunal to decide, the Tribunal may do so.
Except in a case of urgency, there must be a special resolution for levying the amount of the extraordinary expenditure if it is more than twice the amount of the current annual fees.
In Jalowicki v Owners Corporation Plan No SP35671B (Owners Corporations) [2017] VCAT 50 VCAT applied benefit principle because whilst all lots had use of a walkway the verandah & canopy were a convenience structure, non-essential to the development. I believe Jalowicki was incorrectly decided, because the tribunal applied a differential benefit test, rather than a whole or substantial benefit test, but you may assert it to the manager in an effort to receive a reduction. Moreover, section 24(2) does not distinguish between structural and non-structural elements.
The bottom line is this:
Before issuing the special levy the OC was required to consider whether the works wholly or substantially for the benefit of some or one, but not all, of the lots;
- if not, fees must be based on lot liability;
- if so, fees must be charged on the basis that the lot owner of the lot that benefits more pays more.
- if the OC fails to consider to consider the application of the legal principle it has committed a fatal error and the fees are not payable.
The OC must act in good faith and exercising due care and diligence (see Grundl [at 16]) and honestly and reasonably in considering whether the benefit principle applies (see Grundl [at 20]).
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This post appears in Strata News #218.
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Tim Graham
HWL Ebsworth Lawyers
E: tgraham@hwle.com.au
This article is not intended to be personal advice and you should not rely on it as a substitute for any form of advice.
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