NSW Q&A Section 100: The Power to Borrow Money

This Q&A discusses the NSW legislation around Section 110 – the power to borrow money or take out a strata loan to cover such expenses as remedial works.

Table of Contents:

• QUESTION: Our strata report for a new apartment shows the owners corporation has borrowed $1.2M to buy a unit in the building. With a $1.2M deficit in the cap works fund, how will the OC pay for any potential defects etc?
• QUESTION: Our strata complex needs to raise $150,000 quickly for urgent maintenance. If we decide to secure a strata loan, can I pay my proportion in full and not be responsible in any way for the loan?
• QUESTION: Can we be forced into a strata loan by our strata managing agent when we have no way of paying it back? What happens if we don’t pay anything back?
• QUESTION: Our strata has borrowed $2.5 Million. I am responsible for repayments of $11,000 per year for 6 years. If I sell my strata property, am I then responsible to repay the entire amount I owe for the 6 years? Or does the new owner take on the responsibility of the repayments?
• QUESTION: At our next EGM we will be voting on whether to take out a Strata Loan to cover remedial works. What procedure is required for acceptance of this Motion?

Question: Our strata report for a new apartment shows the owners corporation has borrowed $1.2M to buy a unit in the building. With a $1.2M deficit in the cap works fund, how will the OC pay for any potential defects etc?

We are looking to buy into a NSW strata scheme compromised of 309 lots. This is a relatively new building where the first AGM was held almost a year ago.

The strata report shows that the owners corporation has agreed to undertake a loan to purchase a unit within the complex. The approximate cost of $1.2M is to be initially utilised as an onsite manager’s office and could be repurposed for commercial usage.

Due to this purchase, the capital works fund is $1.2M in deficit. How will this loan affect my quarterly levies and how does the owners corporation plan to pay any potential major works with no funds?

Answer: The loan might be serviced/repaid through the sale of the lot as a commercial property, or via rental of the lot to commercial tenants..

It’s difficult to provide a specific response without more information, but I would make the following comments.

While the capital works fund might currently show a deficit of $1.2m, I assume this is because of the loan liability of a similar amount. If this is the case, the current levies should still be available for any capital works expenditure in the short term. Strata accounts usually don’t show the value of property assets on their balance sheet, so it’s likely the value of the unit purchased isn’t recorded on the balance sheet, while the loan used for its purchase is shown. I would add that this is a relatively unusual situation, so it’s hard to know how it has been treated in the owners corporation accounts.

The terms for strata loans are usually relatively short term (3-7 years) and the conditions of these loans would normally require the owners corporation to have a mechanism in place for repayment of the loan principal and interest. This is often done by raising special levies over a period of time. These levies are in addition to the normal quarterly levies you currently pay. In this case, however, the loan might be serviced/repaid through the sale of the lot as a commercial property, or via rental of the lot to commercial tenants.

In the event that the owners corporation does need to raise special levies in coming years to repay the loan, your share of these levies would be equal to your unit entitlement in the strata plan. You have indicated there are 309 lots. If your lot is an average size your unit entitlement might be around 0.33%. So, for example, if special levies of $1.2 million are raised in the future, your obligation would be to pay 0.33% of that amount, or $3,960. If your actual unit entitlement is smaller or larger than that percentage, your obligation would rise or fall accordingly.

Michael Ferrier
Eyeon Property Inspections
E: michael.ferrier@eyeon.com.au
P: 02 9260 5510

This post appears in Strata News #622.

Question: Our strata complex needs to raise $150,000 quickly for urgent maintenance. If we decide to secure a strata loan, can I pay my proportion in full and not be responsible in any way for the loan?

Our strata complex has been ordered to fix 6 staircases costing around $150,000. A vote is coming up to determine if we will raise a special levy or introduce a strata loan.

As a lot owner, I’m capable of making the payment in full. I’ll be voting for a special levy, however, I am fairly most owners will opt for a strata loan.

If the decision is to go with a strata loan, can I pay my share of the loan in full and not be part of the strata loan? Being tied to an unsecured loan and paying unnecessary interest will disadvantage me considerably as a result of others not being in a position to pay their share. If I decide to sell my lot, I do not want any outstanding strata loans affecting my sale price.

Surely consumer affairs or fair trading allows lot owners to pay an amount in full?

Answer: In a strata is a community, the best way forward is one in all in!

When a large project needs to be completed for a strata plan and they do not have the funds, there is only 3 ways to pay for it:

• Save up over a period of time in their maintenance fund
• Raise a special levy
• Secure a strata loan

It can be costly to save over a period of time. The price of the works could go up dramatically and / or the situation could get worse.

Special levy

Each owner is required to pay a lump sum. Finding funds through their own savings, mortgage redraw or personal loan can be difficult for some lot owners, so this option may not suit everyone.

Strata Loan

A strata loan is like a reverse maintenance fund, with the advantage of the works being completed straight away, saving costs. This option may not suit everyone, as some owners may have easy access to their own funds and they may not want to pay interest.

As will most things strata, you need an understanding that the decision is a democratic one that has to be agreed by owners and may not suit everyone. That is the decision that has to be adhered too. There is no consumer affairs or fair trading that would deem this unfair to a consumer.

So, if a loan is agreed upon, can some lot owners opt to pay up front? You can also look at this the other way. If we agree to a special levy, can some owners have a loan?

A strata loan is a loan to the strata plan, therefore all owners are liable for the debt should it ever go into arrears and the strata have difficulty paying.

Those owners that pay up front have no ability to recoup the special levy if they decided to sell, whereas the loan will pass to the new lot owner at purchase, which in reality means that user pays and enjoys the benefits of a property and their asset that is actually worth more.

An owner selling with a loan could negotiate with the purchaser, but this is something between vendor and purchaser during the sales process, not the strata plan.

If a corporation agrees to some owners paying up front and others being part of the loan, they need to understand that it can be an administrative nightmare for the strata manager or treasurer and fees may be involved.

In a strata is a community, the best way forward is one in all in!

Debbie Barker
StrataLoans
E: Debbie.Barker@strata-loans.com
P: 1300 785 045

This post appears in Strata News #587.

Question: Can we be forced into a strata loan by our strata managing agent when we have no way of paying it back? What happens if we don’t pay anything back?

We are a 15 lot complex. Can we be forced into a strata loan by our managing agent when we have no way of paying it back? What happens when we don’t pay anything back? What is the law likely to do?

Answer: Strata Managers don’t have the legislative power to force the owners into a strata loan.

I’m not sure why the strata manager is voting on such a matter. I presume that they may have proxies, but in which case, they’re only entitled to have one. I’m not really sure why the strata manager would be forcing anyone into a strata loan. Maybe you feel forced?

So first of all, Strata Managers don’t have the legislative power to force the owners to vote in a strata to put in a strata loan for you. Section 106 states that the owners cooperation must maintain common property. Maybe the Strata Manager is referring to the need to maintain common property.

In terms of what would happen if you had a strata loan and it wasn’t being paid, as I understand it, strata loans are effectively loans secured against the cash flow, so they’re unsecured, however, they probably have rights to recover from the strata scheme. I’m not sure if all owners are bound personally, however, I think that the next step if a strata loan wasn’t repaid, would be a compulsory order from the NCAT. The first thing that the new strata manager under compulsory appointment would do would be to raise a special levy on the owners. I think you would have to pay it back in any case, if that makes sense.

Rod Smith
The Strata Collective
E: rsmith@thestratacollective.com.au
P: 02 9879 3547

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

Question: Our strata has borrowed $2.5 Million. I am responsible for repayments of $11,000 per year for 6 years. If I sell my strata property, am I then responsible to repay the entire amount I owe for the 6 years? Or does the new owner take on the responsibility of the repayments?

Answer: A strata loan is taken out but the strata corporation, not individual owners, so if an owner sells the debt stays with that lot and the incoming owner takes on the responsibility of those levies.

Debbie Barker
StrataLoans
E: Debbie.Barker@strata-loans.com
P: 1300 785 045

This post appears in Strata News #472.

Question: At our next EGM we will be voting on whether to take out a Strata Loan to cover remedial works. What procedure is required for acceptance of this Motion?

At our next EGM we will be voting on whether to take out a Strata Loan to cover remedial works. What percentage is required for acceptance of this Motion and does everyone have to participate in the loan, despite organising finance themselves?

Answer: A resolution approving the relevant loan has to be passed at a general meeting of the owners corporation.

Section 100 of the Strata Schemes Management Act, 2015 (NSW) is set out below and the power to borrow only requires an ordinary resolution/majority vote.

100 Power to borrow money

1. An owners corporation may borrow money and secure the repayment of money and of any interest in any manner agreed between the owners corporation and the lender, otherwise than by charging the repayment on the common property.
2. An owners corporation must not borrow money, or secure the payment of money and interest unless a resolution approving the relevant loan has been passed at a general meeting of the owners corporation.

Because the borrower is the Owners Corporation and would need to issue levies to cover repayments, it isn’t possible that some owners could opt out as levies are due and payable by all owners part of the scheme.

Leanne Habib
Premium Strata
E: info@premiumstrata.com.au
P: 02 9281 6440

This post appears in Strata News #369.

Have a question about Section 100: power to borrow money or something to add to the article? Leave a comment below.

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Read next:

• QLD: Q&A Using a Strata Loan to Pay for Painting of the Complex
• Strata Owners: Why refinancing your home loan may be a good idea … and why it could prove difficult
• Strata Finance: The guide for Owners Corporations

These articles are not intended to be personal advice and you should not rely on it as a substitute for any form of advice.

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