When you buy a property in Australia, you are buying either a Torrens Titled property (i.e. a house on a block of land) – or a Strata Titled property (i.e. a residential or commercial lot within and part of an Owners Corporation).
When you are an owner in an Owners Corporation you become a member of the OC and that won’t change until the day all owners agree to sell the building and land to a developer.Owners Corporations are the legal entity that owns the common property and owners corporations in Victoria are governed by the Owners Corporations Act 2006.
The Owners Corporation is also legally responsible and obligated to manage and maintain the common property, assets, shared services, facilities, and amenities.
Section 23 of the Act gives the owners corporation, the powers to issue annual OC levies:
23 Owners corporation may levy annual fees
(1) An owners corporation may set annual fees to cover—
(a) general administration; and
(b) maintenance and repairs; and
(c) insurance; and
(d) other recurrent obligations of the owners corporation.
(2) If the owners corporation has an approved maintenance plan, the annual fees must include fees that are—
(a) designated for the purpose of the maintenance plan; and
(b) sufficient to allow the maintenance plan to be implemented.
(3) Subject to subsection (3A), the annual fees set must be based on lot liability.
Know Your Fees
The reality of owners corporations is that owners, investors, and Committee Members are too busy with their full-time jobs and other duties to properly check through the financials of the OC.
Owners and Committee Members then therefore leave the OC manager with the task of ensuring expenses are reasonable and funds are properly managed. Issues arise when the OC manager does not go through proper processes to obtain the best and most appropriate quotes and service contracts for the OC.
Committees should take the time familiarise themselves with the breakdown of their OC fees and understand all the expense lines items in the owners corporation’s budget and financial statements.
A few tips for OC Committees in better understanding their OC levies and expenses:
- $930 for an accountant or accounting – ask the question what ATO obligations (in terms of lodging ITA and BAS) does the OC have or even needs to have?
- Caretaking fees divide by 52 weeks in the year then ascertain the quantum and value of work that the OC is receiving
- ESM costs (these look a bit high in this building) depend on what ESM assets you have and how often your OC manager is re-quoting these certification services. We have also heard of plenty of stories of some ESM providers replacing things that didn’t need replacing.
If you’re not sure what it all means or can’t seem to get straight answers from your OC manager – feel free to ask a Strata Consultant to review your OC’s financials by contacting us at firstname.lastname@example.org
Assessing Common Facilities
- Identifying shared amenities and facilities
- Evaluating the necessity and cost-effectiveness of each
- Strategies for optimising the use of common spaces
In owners corporation – especially with more recently built larger buildings, shared amenities and facilities can be a driver of OC costs. An assessment should be made to understand the facilities at the building, their usage frequency, and their maintenance requirements.
There are things that can be done to reduce or minimise costs as we’ve seen achieved with some buildings. Some examples include:
- switching to motion sensor or switch activated lights in basement car parks vs a timed system;
- installing solar on the common rooftop of the building for common electricity usage;
- water-saving measures and waste management initiatives; and
- communal gardening days to save on gardening costs.
Proactive Participation in Meetings
Regular attendance at OC meetings will ensure that the OC manager knows that the building has an active, proactive, and interested set of owners. Meeting attendance also gives owners the chance to discuss cost-savings measures and also ask any questions necessary to ensure financial transparency.
When it comes to the owners corporation budgeting process the Committee should work with and be guided by the OC manager. The setting of the annual OC budget is always a fine balance between adequately forecasting costs vs keeping OC levies at reasonable levels for owners and investors.
Priority should be given to expenses for items that could become a healthy or safety risk, or repairs that would be become more costly if left unattended.
Committees and owners should also be mindful that years of under-budgeting can result in owners being hit with large and unexpected special levies.
DIY Maintenance and Repairs
Committees and owners need to be very mindful when it comes to residents undertaking even minor maintenance tasks. We worked with a building in Doncaster whereby the OC manager was incapable of providing the Committee with a handyman to do some small jobs. Some Committee Members got frustrated after months of waiting and decided to do the work themselves.
Two of Committee Members who should be enjoying their retirement took it upon themselves to get up on a ladder and repair the plaster and paint of a common hallway. The two gentlemen also took it upon themselves to drill into the concrete basement for the purposes of installing a bollard to protect a wall in the car park.
The risks for the OC can be substantial even if the residential strata insurance policy stipulates some coverage for ‘voluntary works’. As always, Committees should always seek the relevant professional advice from their OC manager and insurance specialists.
Negotiating Service Contracts
Good and proactive OC managers obtain competitive quotes and pricing – and they ensure all service agreements are suitable and good value for the OC.
The proactively OC manager firstly tracks and knows when service contracts are getting close to renewal, then they get to work. This work might entail discussion with the Committee, reviewing the scope, and re-tendering key services such as lift servicing, car-stacker servicing, building management, concierge, and cleaning.
Legal Considerations and Challenges
Owners Corporation levies in Victoria are allocated based on the lot liability of each lot (which can sometimes be different from the lot entitlement). Lot liabilities (and lot entitlements) are determined by the land surveyor prior to the registration of the Plan of Subdivision with Land Victoria. The lot liability is often calculated or derived using predominately the size of the lot and potentially other influencing factors.
There can be times when lot liabilities have been fairly or appropriately set – or there arises an expense that disproportionately benefits one or more owners to a greater extent than others.
The Act has made allowances for such scenarios in Section 23 (3A & 3B). The Committee should discuss with their professional OC manager about whether or not to apply these sections of the Act to their owners corporation.
(3A) The owners corporation may levy an additional annual fee on a lot owner if—
(b) an annual fee set on the basis of the lot liability of the lot owner would not adequately take account of those additional costs.
(3B) Any additional annual fees under subsection (3A) must be levied on the basis that the lot owner of the lot that benefits more from the use of the lot pays more.
It is also important for Committees, OC’s, and especially ‘self-managed’ OCs to be aware that if OC levies not issued correctly and on the basis of lot liabilities then they have little chance of pursuing owners for payment.
Building a Reserve Fund
Owners corporations in Victoria can build a maintenance fund through a number of ways:
- Smaller and non-prescribed OCs can and often build a ‘financial safety net’ through surplus or budget allowances through and in their administrative fund;
- Ascertaining, nominating, and agreeing an amount that should be contributed by owners towards future maintenance; and
- Obtaining a formal maintenance plan/report from a quantity surveyor / building consultant then choosing to adopt it formally (if not a prescribed OC and obligated to do so) or using the plan/report as a guide.
The goal is with any maintenance / sinking / reserve fund is to twofold: 1. To ensure there’s no unexpected costs to owners 2. To ensure that every pays their fair contribution towards wear and tear over the years. We’ve covered OC maintenance funds in-depth in this article.
If owners and investors want to avoid body corporate fees or rather avoid high owners corporation levies, they should research before they buy. Through researching and understanding the building that they’re buying into they will minimise unknown costs later.
Prospective owners and investors should obtain then pour over all the OC documents that they can obtain – this including going through the financials and reading prior years AGM minutes. Look at the balance sheet and look at the funds held by the OC the consider the age of the building. Many years ago we had a lady call us a bit upset as she had bought into a building only to be hit with a special levy notice weeks later to contribute to replace the common hot water system.
Below is a video from Strata Consultants’ YouTube channel from a buyer’s advocate speaking about his favourite type of strata properties:
Ultimately the OC levies are determined by the building and in setting OC fees/levies there’s always a balancing act between maintaining affordability, reducing unnecessary expenses, optimising/prioritising use of funds, and maintaining long-term asset values.