A Call for Transparency in Body Corporate Levy Recovery
As Body Corporate Lawyers, we have the privilege of working with bodies corporate across Queensland – from small schemes, to large commercial schemes. We must, in good conscience, put it out to our fellow practitioners and the industry generally – that transparency must be improved in the production of records to owners – especially, when the owners are subject to possible levy recovery proceedings.
We know that at least two of our legal competitors, have published papers to body corporate managers that suggest a single ledger combining unpaid contributions, interest and recovery costs can be produced. We submit the difficulty with this proposal, in that the notice can be confusing for owners to understand and not reflective of an actual liability.
An example of the confusion arises over the question of what constitutes “reasonable recovery costs”. The decision of Westpac Banking Corporation v The Body Corporate for The Wave CTS 3627  QCA 73 has been advocated as a decision upholding a recovery by a body corporate of legal costs on a “dollar for dollar” basis. In fact, the Court concluded:
“The advantage given to the body corporate…of being able to recover recovery costs as a debt is qualified by the express statement that it applies only to costs reasonably incurred by the body corporate in recovering the amount of the unpaid contribution and penalty.” (emphasis added, see paragraph 60)
We remind the industry that Wave was based on the question of whether a mortgagee, which takes possession, can be held liable for costs incurred in the recovery against an owner. The Court did not vary the previous decisions that the amounts charged, and the actual conduct undertaken, must be reasonable – accordingly, a singular ledger suggesting an owner as “non-financial” without a finding as to reasonableness (or agreement) of recovery costs – can (and we suggest will) give rise to a legal liability against managers and committees who refuse an owner the right to participate, charge penalty interest and refuse discounts (because, in fact, recovery costs are not liquidated, even though costs are defined as a debt).
We have also been provided with a statement issued by another law firm, advising body corporate managers not to distribute ledgers to owners, where the recovery costs have been recorded on the singular ledger. The only way an owner can understand the claim is to see the ledger, but this law firm refuses to produce the ledgers to owners – causing an escalation of costs sought as “recoverable” against owners. This is simply vulgar and unethical, in our opinion.
We ask the industry, how is it that an owner can consider the “reasonableness” of recovery costs – if they are not permitted the opportunity to view the costs from the outset? Why is that the costs are only disclosed (noting here, we produce our invoices immediately upon an owner seeking copies) when substantial costs are incurred? Why is not standard practice for the costs and ledgers to be produced to owners on request? Is this not “reasonable”?
Furthermore, we put it to the industry, how is it that “indemnity” costs can be recoverable, when costs between firms vary? Are we all permitted to raise our legal fees to the highest of us, and then we stand united as to the bar for what is “reasonable” in the industry? Who sets what is “reasonable” in the industry? Which one of us sets the “reasonable” indemnity rate? Is it Nautilus? Is it SPG? Is it Hynes? Is it MBA? Is it Success Law? Is it OMB?
Which one of us sets that “reasonable” industry rate? It is sufficient for us merely to have a cost service agreement that says our associates charge $350, an hour – or should there be a quantification of what is being done? Is it appropriate for a senior lawyer, charging $450 an hour, to contact a client with an update – when that same update could be performed by a $110 per hour law clerk? Is it “reasonable” that the owner is charged $45 for a 1 unit call, versus $11 for the same 1 unit call?
Is it reasonable for mercantile agents to charge at lawyers rates, merely because the mercantile agents obtain a sign off by a Committee? Who decides if that is reasonable? I suggest the owner might think differently to a hostile Committee, who might not even care – if they are told the costs will be recoverable “dollar for dollar”.
How can anyone, with a commercial and ethical mind, think that litigation for $3,000, should result in legal costs in excess of $150,000? Yet, it is happening – and we have seen it (not from us, but from a competitor). The premise, of course, being that the body corporate should not be out of pocket – but at what stage is this industry of ours going to take a logical look at itself? How often could commercial strategies have been adopted, to prevent the escalation of costs from $1,000 to $150,000+? If a commercial party tried to withhold evidence, the commercial party would be penalised. Yet, a number of these ridiculous cases are premised on a lack of transparency – whether it’s a refusal to produce records for an owner’s inspection, or a refusal to produce invoices for an owner’s inspection – or simply, a refusal of the lawyer to try and listen to the owner, and find a solution which is commercially reasonable.
And what of 2.5% interest per month? That is 30% per annum (simple interest). Is this a windfall, when indemnity costs (set at who knows what standard) are recovered? If the managers charge for issuing late notices, and then charges for producing its records and secretarial duties – and these costs are all claimed in the proceeding against the owner, then what is the 30% used for? We have seen the 30% interest fall in excess of $200,000 in some large developments in which the owners are developers – what is that interest going to? Most certainly, in smaller debts, the 30% interest is necessary to settle the costs of dealing with committee issues, finance and alike. However, when we are talking substantial amounts of interest, for example upwards of $40,000, is this not intended, in part, to compensate for costs incurred…so how is it that anyone in our industry would not consider raising the use of interest as a potential negotiation tool (having regard to the costs incurred and ensuring interest is withheld to cover such costs) when dealing with committees to assist in settling matters earlier? Certainly, there is no legislative or court decisions which would suggest the offset is a requirement, but is this not what we do when we deal with our commercial clients? We try to balance the scales of justice, to deliver an outcome benefiting the whole.
But who really wins, even if a scheme recovers its indemnity costs and interest? Is no one concerned about the damage to the industry this practice could effect in the long term? Where will banks and finance institutions stand on lending to acquire body corporate properties? Will they start to set higher interest rates, to address the risks of lending (because if they end up taking possession, their liability for the bodies corporate lawyers recovering $12K, may exceed $350,000!)? If they increase interest rates, does anyone think that will be a good outcome for property values in bodies corporate? If there is less interest in the body corporate market, does anyone not see a problem in the long run for our industry?
And what of the situation when the legal fees charged by a law firm exceed the value of a property? We are reviewing a case in which the legal fees charged on what started as a $3,000 debt are now in excess of $180,000! The property is valued at $220,000! Is it not the lawyer’s duty to advise the owners that even if they win – there may be a substantial shortfall which can only be raised by a special levy charged to all owners (because not all costs charged are recoverable – as we are seeing in cost assessments and legal proceedings)? And what happens if that $3,000 debt was actually calculated incorrectly – and the court finds against the body corporate? In the present case (with $180,000+ in legal costs) – that means every owner is going to wear a percentage of that failed litigation – even the owner who was sued, and won! How can any of us see this as fair to the industry to which we serve?
We have had our fair share of extraordinarily difficult debtors who have incurred recovery costs of $20-$30K in protracted litigation. We appreciate this can and does happen. There are some owners who, no matter what you do, are habitual and defiant debtors, vendetta driven debtors and/or irrational debtors.
Our thought is this:
- The industry must make transparency a priority! If an owner asks for a document, produce it! Do not go to lawyers to avoid production, simply produce it. If an owner wants an invoice, produce it. If the cost is “reasonably incurred” – what’s the problem? Why hide anything?
- The industry must question legal practices and rates. Lawyers and mercantile agencies need to be held accountable for spending. The legal and mercantile industry in the body corporate arena must be held to commercial standards, and not “anything goes” standards. It reflects poorly on our entire industry – although only a handful of firms and agencies are abusing the situation.
- The industry need to be problem solvers, not instigators. If there is an easier solution, try it first. If that does not work, then go the distance. But at least try the easier solution. For example, if you have judgment – go back and try and negotiate again – don’t simply go to bankruptcy! Find out if the owner can raise additional finance, or consider whether superannuation access can be acquired through hardship. However, the debtor is someone’s parent, sibling or best friend; therefore, start the process by affording each debtor the disclosure and respect you would want provided your family or friend to be granted, if they were in a similar situation. If the debtor nonetheless refuses to act reasonably, then costs necessarily follow.
KATRINA ELIZABETH BROWN BA ATIA TIA SSA
NAUTILUS LAW GROUP
Suite 7, 128 Bundall Road
Bundall Queensland 4217
(07) 5574 3560