Rope over wooden backgroundWe are pleased to report our appeal in the matter of The Body Corporate for 399 Woolcock Street CTS 34770 v Sexton & Ors [2013] QCATA 055 (399 Woolcock) was successful.  Unfortunately, the decision has sparked a new line of dispute in the industry as to whether debt recovery costs are “liquidated,” despite the Regulations granting the right to recovery only those costs which are “reasonably incurred” (See for instance, Section 145 of the Standard Regulations).

The question on appeal in 399 Woolcock was whether subsequent owners of a lot were liable to pay a body corporate debt in circumstances in which the body corporate had obtained a judgment for the outstanding levies and recovery costs against the previous owner.  It was held that the body corporate was entitled to pursue the new owners, and that the recovery of the “body corporate debt” did not “merge with the judgment.”

Importantly, in our opinion, the decision did not deal with the question of what costs are “reasonably incurred” (for instance, Section 145, Standard Regulations).   Whilst 399 Woolcock does settle the position that recovery costs are a “body corporate debt”, it remains the body corporate’s burden to prove the costs are “reasonable” if challenged by a debtor.

In the decision of Body Corporate for Sunseeker Apartments v Jasen [2012] QDC 51, Judge McGill opined at paragraph 36:

“…the mere fact that the body corporate and its lawyers have agreed that costs are to be payable in a particular way, for example at a certain hourly rate for certain partners and staff, is not something which in itself makes those costs reasonable. In determining whether the costs in fact charged on a certain hourly rate are reasonable, it is therefore necessary to consider whether that hourly rate is reasonable. That is an objective matter, and does not depend simply on the fact that parties have agreed to a charge at that rate, subject only to the qualification that the amount payable under s 97(1)(c) could not exceed the amount in fact charged to the body corporate, because of the requirement that the costs be “incurred”.

In this review, Judge McGill determined that not all recovery costs which the body corporate submitted, by way of assessed costs, were reasonable.

In the earlier decision of 3 Parkland Boulevard [2007] QBCCMCmr 437, the Adjudicator stated that:

“The body corporate needs to claim those costs as a debt and await either agreement by the defendant or a court order specifying which recovery costs are “reasonably incurred”. If the applicant and the body corporate cannot agree on what recovery costs have been reasonably incurred then the body corporate can initiate court action seeking its reasonable recovery costs.”

Also, in Body Corporate for Liberty v Alotier Pty Ltd & Stewart Silver King and Burns CCT KA009-08 (11 February 2009), the Commissioner found that a body corporate was entitled to treat recovery costs as debt when those costs were determined as either “reasonable” per agreement between the parties, or when determined by order of the Court. 

The decision of 399 Woolcock does not supersede or reverse the findings of any of these cases, and in fact is consistent with these findings.

We appreciate that some practitioners in the industry (who were not involved in 399 Woolcock) opine that recovery costs, as a “debt” are “liquidated” in nature.   Importantly, however, the Regulations only provide for the recovery of costs which are “reasonably incurred.”  The question of “reasonableness” is, and remains, an objective standard of review – and not one that can be unilaterally determined by a body corporate in isolation.  Certainly, bodies corporate and debtors are at liberty to determine between themselves what costs are “reasonable,” and are encouraged to do so as the quantum of recovery costs can quite quickly exceed the value of the outstanding levies and interest for which the recovery costs are incurred.

We strongly warn Managers and Committees to consider the possible claims which could be waged against the body corporate for “getting it wrong.”  If a body corporate treats all recovery costs as “liquidated” and apply the costs to the OSA (in lieu of a separate unliquidated ledger), and those costs are carried forward on a running total showing a combined debt (arising out of levies, interest and costs), there stands a real and certain risk that the body corporate could interfere with the legal rights of an owner if the body corporate is found to have incurred costs “unreasonably”.

Consider the following two examples as to why Judge McGill espouses the correct interpretation of recovery costs:

Example A:  ABC Mercantile Agency/XYZ Law Firm –

Presume Joe Bloggs owns a Unit and  he owes $5,000 in outstanding arrears, with continuing interest at 2.5% per month.  The Body Corporate Manager (affiliated with DEF Body Corporate Management Company (“DEF”)) recommends to the Body Corporate that they use ABC Mercantile Agency (“ABC”), who carries out legal work under an agency arrangement with XYZ Law Firm who “oversee” the legal work.  The costs of recovering the $5,000 debt exceed $8,000, because the “negotiations” in relation to legal fees and charges are conducted by employees of the sister companies in the same head corporate group without influence of outside competition.   Joe Bloggs, on advice from his lawyer who reviews the charges, pays $5,000 to the Body Corporate  for outstanding arrears and interest, and $5,000 in costs he deems “reasonable” as a debt. He then challenges the Body Corporate to prove the “reasonableness” of the balance.  The Court finds in favour of Joe Bloggs, and finds that $3,000 in claimed recovery costs were “unreasonable” (as the Court agrees with Joe that the prices charged by the mercantile agency and law firm were above market and not reasonable in the circumstances, thereby finding of the $8,000 incurred by the Body Corporate – only $5,000 was in fact reasonably incurred).  As a result of the loss of vote because whilst the Body Corporate deemed him “non-financial” as the Body Corporate treated the outstanding “$4,000” as a debt due and payable, he has been prevented from participating in the voting and administration of the Body Corporate.  End result:  Joe Bloggs has a cause of action against the Body Corporate for interference with his legal rights as an owner, and the Body Corporate is out $3,000 in costs (plus whatever further costs are incurred in trying to prove the outstanding recovery costs).

Example B:  123 Law Firm

Presume the above example of Joe Bloggs, but instead of incurring $8,000, 123 Law Firm takes the same steps, but the fees for that same process cost only $4,000.  Is it reasonable for 123 Law Firm to mark up their fees to $5,000 (which was allowed by the Court as being reasonable in Example A), just because ABC and XYZ do?  Who has standing to decide the question?

In sum, our advices despite 399 Woolcock are as follows:

1.         Separately record debt recovery costs incurred against a debtor (most preferably in a “Debt Recovery Ledger”).  If the costs are agreed as “reasonable,” then apply the debtors payments to the Ledger directly.  Do not intermingle the Ledgers, to ensure transparency is maintained at all times;

2.         Whilst debt recovery costs can be plead as “liquidated” without particularisation in the Claim, the body corporate must bear in mind at all times that the burden of proving those costs as being “reasonably incurred” remain with the body corporate.  Chances are, if charges are at industry standard and strategic rationale can be demonstrated for the costs and charges, all recovery costs will be recovered as a debt;

3.         If a debtor pays an amount of recovery costs the debtor argues is “reasonable” and disputes the balance, the body corporate needs to consider whether to treat the debtor as “financial” if the levies and interest are paid in full, excepting for the disputed amount of “recovery costs.”  The body corporate can proceed against the debtor, the further costs incurred in proving the initial costs as “reasonable” are also recoverable on a finding of the Court; and

4.         Update by-laws to address the manner in which costs and expenses are treated by the body corporate.

If your Body Corporate has questions about levy recoveries, we welcome you to contact our offices on (07) 5574 3560 or email info@nautiluslaw.com.au. We thank you for considering Nautilus Law Group.

Submitted by:  Katrina E. Brown BA JD ATIA TEP SSA