Are you liable to pay your neighbour’s levies?
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Our appeal in the matter of The Body Corporate for 399 Woolcock Street CTS 34700 v Sexton, et al, is ongoing and remains a critical issue in levy recovery strategies across Queensland.
The Facts:
The Body Corporate for 399 Woolock Street (Body Corporate) issued proceedings and achieved judgment against a lot owner. The lot owner failed to satisfy the judgment and the Body Corporate applied to wind up the lot owner. Nautilus did not act for the Body Corporate at this time, but it was understood that the lot owner had sufficient assets to satisfy the judgment and accordingly the winding up application was made.
Following wind up, the mortgagee took possession of the lot and refused to settle the outstanding Body Corporate Debt on the basis that:
1. Judgment for Body Corporate debt was not enforceable against a mortgagee in possession; and
2. Enforcement costs related to recoveries of Body Corporate Debts were personal to an owner, and not enforceable against subsequent owners (including mortgagees in possession).
The mortgagees, represented by Short Punch & Greatorix, lodged an Application with the Body Corporate Commissioner to discharge the liability of the historical Body Corporate debt related to the amounts incorporated within the historical judgment. Nautilus commenced acting for the Body Corporate, and argued that whilst the historical judgment itself could not be enforced against the mortgagee, the Body Corporate Debt remained a liability owed by the mortgagee (in accordance with the Regulations until paid in full). The Commissioner found that the Body Corporate Debt “merged with the judgment” and was not enforceable against the mortgagee.
The mortgagees opined that the Body Corporate could not expect the mortgagee to pay the full amount of the unpaid levies, interest and costs. Instead, the mortgagees offered up as a solution the ability of the Body Corporate to demand a special levy from all owners for the Body Corporate Debt (with the mortgagees only liable for a proportion of the debt proportionate to the Contributions Schedule).
The Law:
The objectives of the Body Corporate and Community Management Act 1997 are to preserve the rights of a Body Corporate to balance the rights of individuals with the responsibility for self management, grant the ability to control and manage Body Corporate assets on behalf of all owners, provide the opportunity for bodies corporate to self regulate by providing flexibility in their operations and dealings to accommodate changing circumstances within the community titles scheme, and deliver to an appropriate level of consumer protection for owners and intending buyers of lots within community management schemes. The costs associated with community title matters are required by the Act to be distributed between the owner in the form of “contributions” consistent with the principles of equality or relativity.
The decision in 399 Woolcock threatens the principles and integrity of Queensland community title schemes.
The Commissioner’s finding in 399 Woolcock is based on a slippery slope flowing from a line of historical opinions. These opinions pre-dated the legislative change removing from the Commissioner the jurisdiction to decide Body Corporate debt disputes. In sum, those decisions are:
1. Liberty: The Commissioner was asked (in part) whether debt recovery costs were “Body Corporate debts” for purpose of the Act. The Commissioner opined that a debt recovery cost must be determined by a court of competent jurisdiction to be “reasonable” before the cost could be enforceable.
2. Pacific Breeze: The Commissioner was asked (in part) to consider whether a Body Corporate could mandate an owner to settle current levies and interest and levies, interest and debt recovery costs incorporated within a judgment upon settlement of sale to a third party. The Commissioner found that the owner was responsible for payment of both. The Body Corporate was directed to take current levies and interest at settlement as a liquidated debt, and seek the judgment amounts in the form of a writ of enforcement against the title. The Commissioner noted that the legislature needed to address whether a Body Corporate debt included a judgment debt, and duly recognised the difficulty such a distinction created for a Body Corporate.
The legislature, after the decision of the Commissioner in Pacific Breeze, did remove the jurisdiction to decide Body Corporate debt matters from the Commissioner, but did not clarify the question raised in Pacific Breeze as to whether a judgment fell within the definition of a Body Corporate debt.
The Arguments:
Returning to the principles of the Body Corporate Act, we have asked the question if a “judgment debt” is not a “Body Corporate debt” – then what is it? The Body Corporate argued as follows:
To summarise:
1. A judgment debt cannot be a Body Corporate asset subject to ownership in proportion to lot entitlements because it is not asset capable of being gifted or purchased, S11 of the Act;
2. A judgment debt is not properly characterised as a contingent liability subject to the solvency of an owner (in personam), because the principles of the Act and Regulations are displaced in that an insolvent owner penalises all owners of the Body Corporate by the necessary reallocation of contributions, penalties and recovery costs in proportion to contribution schedules;
3. A judgment debt is a Body Corporate Debt attaching to the lot (in rem) which must be satisfied by an owner, a mortgagee who takes possession from the owner, or a buyer of the lot from either the owner, a liquidator of the owner, or a mortgagee who takes possession from the owner.
A Body Corporate Debt includes, within its very description, the ability of a Body Corporate to set penalties for not paying a contribution or instalment of a contribution which is jointly and severally enforceable against a person who is an owner, a person claiming through the owner, a mortgagee in possession and/or a buyer from any of the above. There is, in the our opinion, simply no applicability of what Pacific Breeze referred to as “the general rule that a cause of action merges with a judgment.” Alternatively, 399 Woolcock is wrongly decided in the sense that it did not consider that a judgment debt could be “another amount associated with the ownership of a lot,” – because why else would a judgment debt arise as to unpaid contributions and penalties, if not directly relating to the “ownership of a lot”?
So, the question remains in our opinion, who should bear the “penalty” of paying a Body Corporate debt? As between a mortgagee who takes possession and retains the sale proceeds and the other owners in a Body Corporate, and considering the principles of equity and proportionality as to benefits and expenses running with the lot, who as a matter of public policy ought to bear the “penalty”?
If a “Body Corporate Debt” does not include within its definition a “judgment debt”, then defaulting owners have the ability to manipulate the integrity of the financial status of the Body Corporate because if a “Body Corporate Debt” does not exist once judgment is entered, the defaulting owner is restored to “financial” status and is eligible to under the Regulation Module to:
1. S102, to vote to withdraw discounts for timely payments by financial members;
2. S103, to vote to reverse or set aside any rate of interest on instalments in arrears by themselves and/or other non-financial members);
3. S104(6), to vote to waive penalties and liabilities for recovery costs in whole or in part against themselves (and/or other non-financial members);
4. S107(c), to vote to use sinking funds to fund shortfalls resulting from non-financial members (including themselves);
5. Ss115 and 119, to vote to refuse to maintain common property assets (which are, in part, the basis for levies raised to owners);
6. S117, to vote to dispose common property and/or grant leases;
7. S123(1), to vote to dispose of “Body Corporate assets;
8. S109 and S123(2), to vote to undertake in borrowings secured against Body Corporate assets, subject the rights of all members (including financial members) of the Body Corporate to diminishment of asset values; and
9. S128, to vote to refuse the Body Corporate to enforce the obligation of the non-financial member (and/or others) to require such non-financial (and/or others) to carry out work and/or keep the property free from defects; and
10. Otherwise engage in conduct and decisions which could lead to insolvency of the Body Corporate.
Logically, this simply makes no sense! How can an owner who is non-financial for unpaid Body Corporate Debts, be restored to “financial” status merely because the Body Corporate complied with mandatory legislative requirements to take legal proceedings to recover a Body Corporate Debt resulting in judgment for unpaid Body Corporate Debts?
If we are to consider who should be “penalised” with a Body Corporate Debt, does it not follow that S51 and S104 of the Commercial Regulation Modules (applicable in this matter) support an interpretation of Body Corporate Debt to include a judgment debt which in turn delivers to Queensland community title owners:
1. Deterrence for ongoing failure levy arrears;
2. Encouragement, rehabilitation and restoration of financial status;
3. Protection of the other members of the Body Corporate from self dealing and compromising conduct caused by non-financial owners;
4. Provide retribution to the other financial members of the Body Corporate;
5. Restore the Body Corporate in terms of damages incurred in funding recovery actions;
6. Educate members of the Body Corporate as to the consequences of failure to attend to financial contribution requirements; and/or
7. Denounce non-financial members (who are in fact representatives not as individuals but as properties in a community property scheme)?
In our opinion, it is simply logical and supported by legislative principles in the plain reading of the Act and Regulations that a judgment debt is a penalty, or in the alternative, “another amount associated with ownership” – both of which fall within the definition of what constitutes a Body Corporate Debt for the purposes of an in rem characterisation.
Unlike commercial arrangements, a Body Corporate has no right or opportunity to object or refrain from dealing with a party who takes ownership (including possession) of a lot in a strata scheme and any other litigant to decide if they want to take on the risk associated with adversarial proceedings.
A Body Corporate has no opportunity to mitigate or avoid its exposure to financial losses and is legislatively mandated to take recovery action against a lot (as against its representative at the time, whether it be a person, a company, an alternate entity type, a mortgagee who holds possession and/or any party or person who purchases/takes from them).
In sum, a judgment debt is only created under the legislative mandates of the Regulation Modules which demands (does not give discretion) bodies corporate to enforce the payment and recovery of “Body Corporate debts” jointly and severally against any associated party to a lot until the Body Corporate Debt is paid in full. Therefore, it only follows that a judgment debt remains attached and is enforceable against mortgagees and subsequent owners, until the debt is paid in full.
The Good News:
Nautilus has adopted a proactive approach which applies 399 Woolcock as a sword to cut through the formally drawn out process of enforcement of judgments (including warrant sales – which are largely unsuccessful in this climate). Our clients are experiencing faster returns with lesser outlays on costs.
Should your Body Corporate have any questions on 399 Woolcock, or any other Body Corporate issue, please do not hesitate to contact Katrina E Brown BA JD ATIA TEP SSA, Senior Commercial and Property Lawyer, Nautilus Law Group on
