VIC: Q&A Protecting Your Building’s Superannuation

This article discusses how an owners corporation can plan for and survive a cash flow crisis.

Table of Contents:

• QUESTION: Our owners corporation decided to call in a strata loan without consulting lot owners. Do they have the authority to do this?
• QUESTION: A committee member’s family owns a plumbing company. That company has been engaged to carry out extensive work in the building. Should the committee member have declared this conflict and been excused from the decision making process?
• QUESTION: How do you persuade a reluctant strata committee and lot owners that we need to increase levies to build a healthy sinking fund?
• QUESTION: Our building has accumulated a significant maintenance fund. What options apart from a term deposit are available for our committee, given what’s allowable in Victoria?
• QUESTION: I find that often people who are short of funds join the owners corporations committee for the sole purpose of stopping or delaying maintenance. Is there a way to deal with this tactic?
• Article: How Can An Owners Corporation Survive a Cash Flow Crisis? [Step-By-Step]

Question: Our owners corporation decided to call in a strata loan without consulting lot owners. Do they have the authority to do this?

Our owners corporation decided to call in the loan taken out about 24 months ago, without consulting lot owners. This amount was added to a quarterly invoice without explanation and, upon querying the additional fee, we were advised that some owners wanted to pay the loan off to save on interest.

Does the owners corporation have the authority to call this loan in without consulting the owners or raising it at the AGM?

Answer: We suggest that you request a copy of the minutes of the meeting wherein the loan was resolved.

Firstly, when deciding to take out a loan, the owners corporation must determine whether a special resolution or an ordinary resolution is required to take out the loan. This will be determined by the total amount being borrowed. If the loan is more than twice the annual budget, the owners corporation will need to obtain a special resolution. Alternatively, if the loan is less than twice the annual budget, the committee have the power to pass an ordinary resolution to take out the loan.

Before agreeing to provide a loan, the lenders have strict requirements and guidelines that they must adhere to, such as requesting copies of the minutes of the meeting where the resolution was passed, balance sheets, insurance details and the financial documentation of the owners corporation over a number of financial years and the details of the committee members who will be authorised to sign off on the drawdown of the loan.

As noted above, the strata loan provider will provide a set of recommended resolutions, which it recommends the owners corporation pass, prior to approving a loan. These resolutions will also contain a delegation to the committee to make decisions on behalf of the owners corporation in respect to any aspect of the loan (such as drawdown, payout or increasing the loan amount).

These resolutions must also take into account the repayment of the loan (principal and interest) over the duration of the loan to ensure that the owners corporation has the necessary funds to make the monthly loan repayment. A levy would likely be resolved at this time to ensure the repayments could be made.

The loan may also stipulate that the owners corporation does not pay interest on the full amount, only on what has been drawn down. You would need to check this with the owners corporation manager or the loan provider.

It is therefore likely that your owners corporation committee have passed such resolutions in the first instance and hold the power to pay out the loan earlier than the agreed term. We suggest that you request a copy of the minutes of the meeting wherein the loan was resolved.

Alternatively, you can also contact the loan provider directly to discuss any technical requirements of the loan and the parameters surrounding the agreement to provide funding.

Sim Firns
The Knight
Email
P: 03 9509 3144

This post appears in the February 2023 edition of The VIC Strata Magazine.

Question: A committee member’s family owns a plumbing company. That company has been engaged to carry out extensive work in the building. Should the committee member have declared this conflict and been excused from the decision making process?

We have a committee member who works for his father’s plumbing company. The committee voted to engage the plumbing company to upgrade the building’s hot water system. The price for the work has gone from $582k to $1.2m. The committee member’s family are gaining financially from this work that could have been done for half the cost with another plumbing company.

The committee have issued owners with a special levy to cover the extra expense. Should the committee member have declared this conflict and been excused from the decision making process?

Answer: You may decide to lodge a formal complaint.

Under section 117 of the Act, committees and their members must perform their duties honestly and in good faith, with due care and diligence and in the interests of the owners corporation. Further, the Act states a member of a committee must not make improper use of the member’s position to gain, directly or indirectly, an advantage.

Also in regards to the costs you have quoted, section 24 of the Act states, in summary, that special levies may be raised to cover extraordinary items of expenditure however a special resolution (75% of lot entitlements) is required if the amount is more than twice the annual budget.

You may decide to lodge a formal complaint in regard to this issue by referring to Part 10 – Dispute resolution – of the Act.

Stratabase Holdings
E: [email protected]
P: 0412 247 589

This post appears in the February 2023 edition of The VIC Strata Magazine.

Question: How do you persuade a reluctant strata committee and lot owners that we need to increase levies to build a healthy sinking fund?

How do you persuade a reluctant strata committee that we need to increase quarterly levies or raise a special levy to build up a very low sinking fund? What tips can you give to help the community to convince lot owners to get an unhealthy fund back to a healthy balance?

Answer: Lower levies may be more money in your pocket right now, but is that always the case at the other end?

Show them our recent video: A Healthy Sinking Fund Means Healthy Property Values. Hopefully, this will get lot owners and committees talking about what happens when things go wrong and talking about what happens if we haven’t got enough in the sinking fund and something happens.

There is always scheduled, or unscheduled, maintenance that needs to happen. If there are no funds available for these works, is everybody happy with a large one-off or what could be ongoing special levies, increases or loans to meet that necessary expenditure? The money has got to come from somewhere.

If the work has to do with safety, it could be a huge priority that needs to be done with little or short notice. It may not be able to be put it off. Lower levies may be more money in your pocket right now, but is that always the case at the other end?

Tim Fuller
Strata Guardian
E: [email protected]
P: 1300 482 736

This post appears in the May 2022 edition of The VIC Strata Magazine.

Question: Our building has accumulated a significant maintenance fund. What options apart from a term deposit are available for our committee, given what’s allowable in Victoria?

Our building has accumulated a significant (>$1.5m) maintenance fund over the last 10 years.

Currently our maintenance plan shows that our bigger estimated costs of refurbishment of pool, a heating plant and outdoor areas are more than 6 years away. It seems a shame that this money should sit in term deposits over this time, whilst my superannuation has done so well this year. What options are available for our committee, given what’s allowable in Victoria?

Answer: The Victorian regulations allow you to consider other solutions.

It seems crazy that, after a remarkable year in equity markets, we have seen such strong performance in our superannuation investments. Yet for most Owners Corporations, accepting half a per cent return on their own building’s superannuation is supposed to be acceptable.

Much of this is due to a combination of factors arising from the pandemic and central bank responses, lowering the typical ‘risk-free rate’ to the point that pushes nearly everyone into riskier and higher returning assets. This reaction has seen a shift in asset prices like shares and property, as cash moves from being an asset class to just a short term holding class on the basis that over time, inflation will leave you with a negative real return if held for too long.

A Look at the Legislation

Thankfully, the Victorian regulations allow you to consider other solutions. In rare legal plain speak, Section 26 of the Owners Corporations Act 2006 (VIC) offers owners corporations the ‘Power to Invest Money’ (and that’s it!) in the building’s maintenance fund detailed in Sections 40 through 45.

Unlike NSW and QLD legislation, there appears to be no clear link between the Owners Corporations Act 2006 (VIC) and the relevant Act governing the operation of funds held in trust. Still, by virtue of the fact that owners corporation maintenance funds are held in trust, it is fair to assume that this would also be the case. So off to Part 1 of the Victorian Trustee Act 1958 (VIC), we head for further clarification.

Sections 5 and 6 of the Victorian Trustee Act 1958 (VIC) offers a series of confirmations and considerations when working through some alternatives for your longer-term savings as a trustee:

• An initial review of your trust deed is required to ensure no limitation on the allowable investments above and beyond what is prescribed in the Act.
• Notwithstanding the above, the ability to invest in ‘any form of investment’ and at any time vary any investment is then permissible.
• Exercise the care, diligence and skill that a prudent person would exercise in managing the affairs of another person.
• Implement annual performance reviews of the trust investments

Like all well-considered investments, Sections 7 and 8 of the above Act details a list of further factors that should be addressed to ensure the validity of the decision when exercising the power of the investment. Here are a few points of note, but not all of them:

• A duty to invest trust funds in investments that are not speculative
• A duty to take advice and the power to use trust funds to obtain this advice
• The purpose of the trust and circumstances of the beneficiaries
• The desirability of diversifying the trust’s investments
• The nature of and accompanying risks of the proposed investment
• The potential for capital appreciation, along with the prospect of capital loss
• The length of the term of the proposed investment against the probable duration of the trust
• Consideration of tax liabilities, likely income return and timing of this income
• The liquidity and marketability (i.e. ability to sell) of the investment
• Costs and fees of the investment – are they reasonable?
• The likelihood of inflation affecting the value of the trust and its investment

In a similar fashion to what is allowable in NSW and QLD, the Victorian legislation is also demonstrative of the allowances for owners corporation committees to consider broader investment options above and beyond the less than desirable cash and term deposit rates.

Conclusion

Given the above, as the financial controller, or member of your owner’s corporation committee, the task now is to confirm that your buildings trust deed does not impede your options, and a professional legal check is highly recommended. Once verified, you can start the search and review what options are in front of you for selection. If you have no experience in the sometimes-hazardous world of investments, there is always help available.

We are happy to say that support is at hand, so if you feel you would like to explore some options, feel free to reach out to Strata Guardian and see if our investment service can help your strata savings diversify away from negative real returns and the prospect of rising strata levies.

Tim Fuller
Strata Guardian
E: [email protected]
P: 1300 482 736

This post appears in the October 2021 edition of The VIC Strata Magazine.

Question: I find that often people who are short of funds join the owners corporations committee for the sole purpose of stopping or delaying maintenance. Is there a way to deal with this tactic?

One issue I see is often people who are short of funds join the owners corporations committee for the sole purpose of stopping or delaying maintenance. One tactic they use is aggression to try and dismiss or shut down discussions of maintenance.

The other tactic is to get endless quotes over a prolonged period of time.

A third tactic is endless discussion on the quotes & what is necessary.

A final tactic is to try and bully the committee into not increasing the owners corporations fees thus the owners corporations has little money for maintenance.

You have to be brutal with some of these committees. One approach is to get an engineers report on the building outlining all the faults & then go to the consumer affairs website and download the official complaint form. If that doesn’t work, take them to the administrative appeals tribunal and get an order to complete the works.

I think there needs to be a reform. All owners corporations should have a sinking fund and a maintenance plan. A lot of buildings are deteriorating quite badly.

Answer: Everyone has a different agenda or financial position. Sometimes, unfortunately, that can lead to a negative approach to repairs, maintenance or increasing fees.

Good points. Everyone has a different agenda or financial position. Sometimes, unfortunately, that can lead to a negative approach to repairs, maintenance or increasing fees.

The reality is, costs to maintain buildings, improve or even just sustain are always increasing. In some cases, there are improvements with technology or increased efficiencies, but most of the time, it still results in rising costs.

On a primary level, an Owners Corporation has a duty to repair and maintain common property (Sec 46 & 47). When a Committee looks to comply with this duty, they must always be mindful of Section 117 of the Act. This sets out that a member of a Committee or Sub-Committee must act honestly and in good faith, exercise due care and diligence, and ensure they do not make improper use of their position to gain an advantage or benefit for themselves.

A fundamental issue with why a Committee or members can be reluctant to spend money is there might be limited justification or evidence to support the proposed expense. Often, when preparing budgets, very little time is spent on proper analysis of prior expenses, contracts, projected costs and allowing an appropriate surplus for unforeseen repairs and maintenance. This can translate into a budget that is difficult to justify, resulting in members reluctance to adopt it.

I agree with you, there needs to be a legislative move to obligate all Owners Corporations to undertake a Maintenance Plan (regardless of size). This should then extend to the implementation of the plan and raising appropriate funds. Even under current legislation, there is no obligation for a Prescribed Owners Corporation to implement a Maintenance Plan, so in theory, what is the point of obtaining one if it isn’t implemented?

Some owners don’t realise that a deteriorating or underfunded Owners Corporation is actually a turn off for prospective purchasers. As the industry matures and people become more informed, they are now looking at fees, funds and how the buildings are being managed. This can weigh heavily on their decision to purchase or look elsewhere.

We have a long way to go in this industry to get to a point where owners can be confident that their assets are going to be maintained correctly, without the need to fight with those who don’t believe in a pro-active approach.

Joel Chamberlain
Horizon Strata Management Group
E: [email protected]
P: 03 9687 7788

This post appears in Strata News #375.

How Can An Owners Corporation Survive a Cash Flow Crisis? [Step-By-Step]

In uncertain economic times, Owners Corporations can be financially vulnerable. Imagine a time when a lot of people are losing their jobs. The current climate in Australia is a perfect example of how rapidly a global incident can affect local business within a matter of months.

In these circumstances, affected people will have less disposable income and thus prioritise how they spend it. Owners Corporation fees may fall a long way below food, mortgage payments, utilities, etc.

Arrears have always been a focus for competent Managers but in circumstances described above, normal procedures may not stop the Owners Corporation experiencing cash flow problems. Collection of arrears can be a lengthy process taking years, in some circumstances, resulting in a severe shortfall of available funds. If expenditure remains the same or increases, it has to be carried by the remaining owners.

In this article I will propose some steps which can help your Owners Corporation plan for and survive a cash flow crisis.

Does your owners corporation have a plan to cope with a crisis event?

Prescribed Owners Corporations can be similar to running a business. They have clients and suppliers, cash flow management challenges, etc plus numerous legislative rules to follow above those in the Owners Corporation Act. These might include Taxation obligations for GST, PAYG or requirement to lodge an Annual Income Tax Return. The point here is that successful businesses usually have an adequately prepared business plan identifying potential weaknesses or threats to their business.

An Owners Corporation ideally would be the same, with the Committee having formulated in their plan a contingency for a crisis event. That plan would typically include things like building an Administrative Fund reserve and having a proposed schedule of services which can be trimmed or cut altogether.

The first thing to recognise is that in most circumstances, difficult economic times will not last forever. If there is no plan for such an event as outlined above, you have to ensure safe operation of the building is the top priority.

It is always helpful to identify those falling into arrears for the first time. They could have lost their job or have unexpected short term financial problems. In addition to simply continuing to issue notices, communication can be the key.

A polite conversation will open up communication which can lead to unpaid fees being discussed in a respectful manner allowing a more likely collection arrangement being made. A heavy-handed approach in stressful times can result in communication shutdown with the only solution being a drawn-out collection period. Your Owners Corporation Manager must have this technique in their protocols and Committees should be prepared to listen.

In addressing any shortfall, it is important to realise that it is risky to move funds from one Owners Corporation to another if one has funds, and the other not. It must be understood that each Owners Corporation is a separate legal entity and that under the Owners Corporation Act 2006 there is no power for one Owners Corporation to loan money to another and doing so could result in a breach of the Act.

So, what do you do if your Owners Corporation is facing a financial dilemma?

Step-by-step: how help your Owners Corporation plan for and survive a cash flow crisis

1. Ensure the preparation of a good financial plan which is flexible and able to identify the potential shortfall as well as determine areas of top priority to keep funded. This plan then has to be monitored on a regular basis to enable changes as circumstances unfold.
2. Consider a special levy. This is possible but, of course, those Owners in arrears won’t be able to meet their obligation, so the remaining financial owners will carry the burden. This is not really fair and is probably a last resort.
3. Examine carefully the budgeted expenditure components and identify where cuts are possible. Most basic building operations require power and/or gas so those are a priority. Having said that, provided safety is not compromised, cutting some services or introducing power saving protocols can help if things are precarious. This might include introducing power saving light globes all the way through to closing one of several lifts.
4. Consider deferral of non-essential items.
5. If a Maintenance Plan is in place and the Owners Corporation is raising fees to meet the plan, consider deferring Maintenance Fund contributions for a short period and increasing Administration Fund contributions to meet the short fall in operating expenditure. You should then form a catch-up plan for the Maintenance Fund going forward. This might mean that the overall fees paid by each lot owner remain the same, however, they are directed towards the Administration Fund to meet essential expenditure. Some Maintenance Plans have been prepared years ago and may have been built on assumptions which are now inaccurate. Perhaps getting a plan reviewed can result in a lower accumulation and thus resulting in the opportunity to defer contributions temporarily.

   Under the Act you have an obligation to fund an adopted Maintenance Plan to meet long term maintenance items as and when they are anticipated. Both the Administration Fund and the Maintenance Fund are associated with the same Owners Corporation, so you do not have the same problem as loaning funds from one entity to another. The correct approval process must be followed by the Committee or Owners Corporation to implement this type of solution.

6. External loans may be available to the Owners Corporation to fund a particular expenditure item, thus saving that money for operational expenditure. Organisations such as StrataLoans and Macquarie Bank have facilities available.

Finally, I stress that it is important Owners Corporations do not panic when confronted with difficult financial situations. Good financial planning and a vision to meet difficult circumstances should result in a sustainable and satisfactory outcome.

Colin Young
Chartered Account
Horizon Strata Management Group
E: [email protected]
P: 03 9687 7788

This post appears in Strata News #334.

Have a question about how your owners corporation can plan for and survive a cash flow crisis or something to add to the article? Leave a comment below.

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