The Perils of Applying the ‘Benefit Principle’ Under the Owners Corporation Act

Building Defects

Building defects in common property and repairs required to common property are particularly vexing for owners corporation members. When a defect is discovered or when repairs are required (under the Owners Corporation Act), an owners corporation naturally turns its attention to the following key questions:

  • Who is responsible for arranging the necessary works?
  • Who is liable for the cost of the works?
  • How are the works to be paid for?

 

The Starting Point – Owners Corporation Act 2006

The starting point is that under the Owners Corporation Act 2006 (“Act”) an owners corporation has an overriding duty to repair and maintain common property, and must levy fees for the repair and maintenance of the common property.

If an owners corporation levies fees under section 23 of the Act (i.e. for general administration, maintenance and repairs), then those fees must be based on lot liability.

If:

  • an owners corporation levies special fees and charges to cover extraordinary items of expenditure under section 24 of the Act; and
  • the fees relate to repairs, maintenance or other works that are wholly or substantially for the benefit of a particular lot owner,

then the fees may, be levied on the basis that the lot owner of the lot who benefits more pays more.

This is known as the “benefit principle”. The benefit principle is also stated in section 49 of the Act.

The benefit principle applies where an owners corporation recovers the cost of repairs, maintenance or other works as a debt, as opposed to recovery under section 42 of the Act (contributions to maintenance funds) which applies to works that are budgeted for and levied prospectively.

Recent Supreme Court decision

The Victorian Supreme Court recently considered the application of the benefit principle to the following fact scenario:

  • The lot owner owned a penthouse unit in an apartment building.
  • 34 of the 39 units in the building had balconies, but the applicant’s unit did not have a balcony.
  • The owners corporation levied fees for repair works to the balconies based on a lot liability basis, despite five of the units not having balconies.
  • The repair works were undertaken and paid for out of the levied funds as well as the owners corporation’s maintenance fund.
  • The applicant issued proceedings against the owners corporation, disputing that it ought to contribute to the repair works.

His Honour found in favour of the owners corporation. Significantly, in his judgment His Honour stated that:

“To the extent the benefit principle applies in the Act it applies at the point of levying and collecting monies from lot owners rather than at the point of payment.

There is no provision in any of those sections (sections 43, 44 or 45 of the Act) to the effect that an adjustment (to the levied funds) is to be made at the point of payment out of the fund to reflect the benefit principle”.

The implication of the decision is that an owners corporation will forever lose an opportunity to seek the contribution of more funds from a lot owner under the benefit principle if fees have already been levied on a lot liability basis, or the cost of the works has already been paid out of the owners corporation’s maintenance fund.

What The Case Means For Owners Corporations Act

The decision in that case has serious implications for the way in which owners corporations should tackle defects in and repairs to common property and the allocation of responsibility for the costs of those works.

As a result it is imperative that once an owners corporation becomes aware of a defect in common property or the need for repair of common property, it should immediately consider the issue of whether any lot owner or group of lot owners will benefit more from the works than other lot owners.

If a particular lot owner or group of lot owners will benefit more from the works than other lot owners, the owners corporation should levy fees to fund the works under section 24 of the Act and on the basis of the benefit principle.

Section 49 of the Act suggests that when urgent repairs, urgent maintenance works or other urgent works are required and those works have not been budgeted for by the owners corporation, it can seek to recover the cost of those works as a debt from the lot owners on the basis of the benefit principle even though the fees for those works have not previously been levied.

Owners Corporations law and how it applies to a fact situation is a complex and technical area. Contact Anton should have a query about an Owners Corporation legal matter on T: (03) 8600 8833 or visit KCL Law

The content in this paper is intended only to provide a general overview. It is not intended to be comprehensive nor does it constitute investment nor legal advice. You should seek professional advice before acting or relying on any of the content.

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