Published on March 4, 2014
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 Budget for the inevitable. Reward good behaviour and punish bad. Develop a collection policy to hide behind. Stop the dance of the delinquent debtor. Be firm but fair in collections.
Recommendation 1 - Budget for the inevitable Provision Assess Benchmark Sell Outperform • Provide for out of pocket recovery expenses • Calculate the schemes delinquency rate • Compare the delinquency rate against industry standards • Convince owners to increase the levy budget • Deliver collections in excess of budget
• Provide for out of pocket recovery expenses Provision 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”.
• Calculate the schemes delinquency rate Assess Example 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%
• Compare the delinquency rate against industry standards Benchmark Assess 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
• Convince owners to increase the levy budget Sell Without funds strata communities skimp on repairs and maintenance and, Assess • • • Property values fall Maintenance costs increase when preventative measures slip Personal legal liability risk of owners increases
• Deliver collections in excess of budget Outperform Only by budgeting for delinquencies and out of pocket expenses can we hope to deliver balanced or surplus accounts each year. Outperforming industry benchmark and budgets is a tangible measure of competence for strata managers and committees
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. 2. 3. 4. 5. De-personalises unpleasant consequences of delinquencies Educates owners about responsibilities and consequences Provides a roadmap to guide executive committee and strata manager Answers that the committee is proceeding in a selective or discriminatory way 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 5.1 Operate within ASIC debt collection guideline – – 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
Recommendation 5 – Be firm but fair in collections 5.2 Move to judgement swiftly to recover costs – – Court assessed costs are now the only costs recoverable These costs plus court awarded interest bridge the gap between actual costs and recoverable costs
Recommendation 5 – Be firm but fair in collections 5.3 Enforce judgements by forcing sale of apartments – – – 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
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 Ltd Suite 73 Lower Deck Jones Bay Wharf 19-32 Pirrama Road Pyrmont NSW 2009 p: (02) 9562 6500 f: (02) 9562 6555 w: www.teyslawyers.com.au e: firstname.lastname@example.org
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