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 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: info@stratabasemgt.com 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: contact@strataguardian.com P: 1300 482 736
This post appears in the May 2022 edition of The VIC Strata Magazine.
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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