Effective levy recovery

The StrataSessions webinar

28 October 2010

The new threat to strata finances in Australia

USA has the opposite problem but the results are the same

View later at http://www.youtube.com/watch?v=NU-VLp3lYDc&feature=email

A quick quiz on this story to focus our discussions

1. Why do people like Mr and Mrs Pilot pay their mortgage before their strata levies?

2. What should the Pilot’s have done when they decided to pay the mortgage first?

3. What is the downside to the lawyer calling and demanding a cheque by 5.00 pm to stop foreclosure?

On loosing the debtors war on fee recovery

1. Owners are fighting back against strata management and legal fees billed to owners ledger without legal authority.

2. Courts have backed the owners in NSW (Dimitriou), QLD (Liberty) and VIC.

3. Only VIC has legislated for greater cost recovery effective 1 January 2011.

5 suggestions for more effective levy recovery

Recommendation 1 - Budget for the inevitable

Out of pocket recovery budget = No. of owners at 90 days plus unpaid x $1,000• No. of owners beyond 90 days for last full

quarter levied excluding current period• $1,000 is the average out of pocket

difference between actual cost of recovery and court assessed recoverable costs for typical $3,500 debt

• Add this sum to the annual budget for administration levies under “out of pocket levy recovery costs”.

Provision

• Provide for out of pocket recovery expenses

Assess

• Calculate the schemes delinquency rate

1 Yearly admin and sinking fund budget $100,000

2 Budget year to date (third quarter) $75,000

3 Amount of levies outstanding > 90 days + $15,000

4 Delinquency rate (Line 3 divided by line 2 x 100) 20%

Example

Assess

Benchmark

• Compare the delinquency rate against industry standards

90 + days unpaid as a % of pro rata total annual budget

Your performance guide

0% You’re a genius but don’t assume this rate will last for ever – hard times hit owners

5% Not bad – this is the average – you are within striking distance of outperforming the industry

10% Warning bells – this is too high and you will be facing hard questions soon if not already about your recovery processes (or lack thereof)

15% + You’re in strife – this will involve some heavy lifting to pull back from here – you have to collect and re educate your owners immediately

Assess

Sell

• Convince owners to increase the levy budget

• Property values fall• Maintenance costs increase

when preventative measures slip

• Personal legal liability risk of owners increases

Without funds strata communities skimp on repairs and maintenance and,

Outperforming industry benchmark and budgets is a tangible measure of competence for strata managers and committees

Outperform• Deliver collections in excess of budget

Only by budgeting for delinquencies and out of pocket expenses can we hope to deliver balanced or surplus accounts each year.

Recommendation 2 – Reward good behaviour and punish bad

“When changing bad habits and driving peak performance, its handy to have both a carrot and a stick. In strata levy collection, the carrot is the discount and the stick is interest.”

Michael Teys “The strata guide to levy collection without being out of pocket 2010”

The carrot …

The stick …

An OC at an AGM strikes a levy of $4,000 to be paid in four installments of $1,000 each due on the first day on the following months of October, January, April and July.

An owner pays the October levy on 7 December. The interest payable is $91.66 calculated as $1,000 x 10% x 11/12 = $91.66.

In NSW calculate interest from date due plus one month i.e. the first month is interest free

Recommendation 3 – Develop a collection policy to hide behind

1. De-personalises unpleasant consequences of delinquencies

2. Educates owners about responsibilities and consequences

3. Provides a roadmap to guide executive committee and strata manager

4. Answers that the committee is proceeding in a selective or discriminatory way

5. Protects committees and managers against claims of negligence

Recommendation 4 – Stop the dance of the delinquent debtor• The owner is late in paying, • The strata manager issues an arrears notice

(and another, and another), • The committee resolves to get tough, so they

instruct the strata manager to write a letter, • Then the solicitor gets involved, and writes

another letter (same stick – different dog!),• Another quarter goes by and a new set of

levies comes around, go back to the beginning and repeat until everyone is exhausted and the costs of collection are more than the levies, then pay, then start the dance again.

When you have had enough of the dance, do this …

1. Be consistent with your collection policy

2. Be seen to be consistent with your collection policy

3. Do exactly what the policy says when the policy says

4. Don’t do things that are not in the policy

5. Once solicitors are involved, let them do the (barking)

Recommendation 5 – Be firm but fair in collections

– Privacy laws apply to debt collectors and solicitors

– Statements that additional fees or charges will be added where there is no contractual right to add these will constitute misleading and deceptive conduct under fair trading and trade practices laws

5.1 Operate within ASIC debt collection guideline

Recommendation 5 – Be firm but fair in collections

– Court assessed costs are now the only costs recoverable

– These costs plus court awarded interest bridge the gap between actual costs and recoverable costs

5.2 Move to judgement swiftly to recover costs

Recommendation 5 – Be firm but fair in collections

– For judgements over $5,000 including court assessed costs bankruptcy proceedings are most effective

– For judgements under $5,000 warrants of execution against property are more difficult but get the same result

– Other forms of enforcement are useless

5.3 Enforce judgements by forcing sale of apartments

Today’s 5 suggestions for more effective levy recovery

1. Budget for the inevitable.2. Reward good behaviour and

punish bad.3. Develop a collection policy to

hide behind.4. Stop the dance of the

delinquent debtor.5. Be firm but fair in collections.

Learn more with Teys Lawyers

• www.teyslawyers/facebook for daily updates on advice given

• Enroll for next StrataSession webinar on building defect rectification

• Read our next StrataGuide – “The strata guide to levy collection without being out of pocket” due out 1 November 2010.

Teys Lawyers Pty LtdSuite 73Lower DeckJones Bay Wharf19-32 Pirrama RoadPyrmont NSW 2009p: (02) 9562 6500f: (02) 9562 6555w: www.teyslawyers.com.aue: service@teyslawyers.com.au