Levy collections guide


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Levy collections guide

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  2. 2. How To Get Levies PaidThe importance in ensuring that levies are paid by all strata unit owners cannot beunderestimated. Problems which arise when levies are not paid include:1. Levies having to be increased to cover the deficit;2. Essential services and maintenance becoming unaffordable;3. Property beginning to appear run down – which in turn reduces property values;4. Shortfalls added to next year’s budgets;5. Borrowing from other community funds e.g. the sinking fund meant for long term capital works;6. Terminating term investments at a penalty and using savings;7. Borrowing from a lender at high interest rates attached to strata lending;8. Disharmony between paying owners and non-paying owners;9. Search agents reporting to prospective purchasers that levy arrears are too high and symptomatic of more serious issues within the community to be avoided; and10. Allegations against serving committee members of dereliction of dutiesThis is not an exhaustive list, but it clearly indicates the significance of having your levycollection policy in order.Running a Tight ShipAdopt a policyAn owners corporation or body corporate should have a clear policy which sets out how levieswill be collected and the system by which those lot owners who do not pay their levies will bedealt with.When creating a policy it is important to be specific as to time periods after which particularaction will be taken, as well as the behavior that will lead to legal proceedings being broughtagainst lot owners – lot owners tend to abide by rules much more when they understandexactly what the consequences of non-compliance are.For this reason you will need to clearly and regularly communicate the policy to lot ownersand ensure you apply it consistently. Do exactly what the collection policy says – If the policysays send a reminder after thirty days, then do just that on the thirty-first day not the thirty-second. This is extremely important to the credibility of the policy and will leave lot ownerswith no uncertainty as to what will happen when they fail to pay their levies. It will also avoid 2    
  3. 3. any allegations that Executive committee members or strata managers are acting in aselective or discriminatory manner.An effective collection policy should be:1. In writing;2. Easy to understand – short sentences, plain English and less than two pages long;3. Specific about the amount of penalties and interest that will be charged and when;4. Within the powers of the owners corporation so that it is utterly enforceable and credible – for example, don’t threaten penalty interest of 20% pa when the legislation caps the rate at 10% (as it does in NSW);5. Outline when delinquent payments will be referred to lawyers and what they must then do to collect the debts with interest and costs;6. Able to accommodate payment plans (provided that all ongoing levies are being paid on time and the backlog is being cleared by regular payments – it is no good having a repayment arrangement, which results in the debt increasing rather than decreasing over the medium to longer term; and7. Explicit about how payments will be applied i.e. firstly towards the principal amount owing and then towards interest and recovery costs.Budget for itIn every group of strata owners it seems there will be a certain percentage of late payers – itdoesn’t seem to matter whether it is a large group or a small one – people are people and latepayers are a reality that owners must anticipate along with the cost of recovery.Each year you must estimate how much money your owners corporation will need to credit toyour administrative and sinking funds for actual and expected expenditure.Delinquency performance ratioIn determining your delinquency rate, focus on the debts over 90 days i.e. beyond the currentlevy period and measure unpaid levies as a percentage of the pro rata annual budget for youradmin and sinking funds. For example, If your yearly admin budget is $100,000 and in September, at the end of the third quarter, the admin levies which have been outstanding for more than 90 days total $15,000 your delinquency rate is 20%. That’s calculated this way: $100,000 x 3/4 = $75,000 budget year to date $15,000 divided by $75,000 is 20 % 3    
  4. 4. Your performance calculatorDelinquency Performance guideperformance ratio0% You are all over those levies! but don’t assume this rate will last for ever – hard times hit owners5% Not bad – this is the average – you are within striking distance of out performing the industry10% Warning bells – this is too high and you will be facing hard questions soon if not already about your recovery processes (or lack thereof)15% + You’re in strife – this will involve some serious application to pull back from here – you have to collect debts and re educate your owners immediately.Teach themThe ability to get along with other members of a strata community seems to be a skill thatmany unit owners are severely lacking. However while some unit owners can drive you crazywith their inconsiderate behavior or recalcitrance towards levy contributions, the root cause ofthese problems can often be found in a lack of understanding of how a strata communityoperates and what it takes to live in one.There will never be a better time than just after settlement to start a conversation about a newowner’s responsibilities to pay their levies on time. Some strata managers will have awelcome pack of information but usually these are poorly put together and cause informationoverload. A simple letter introducing the strata manager and creating a clear expectation ofwhat’s required regarding payment of levies is a more useful document. The introductionletter should include the levy collection policy.Another opportunity to educate lot owners is at AGMs - Take a moment at the AGM to talkabout levies. The audience may include new owners and a short discussion will go a longway to improving knowledge and understanding of the importance of paying on time.Great noticesWhile certain unit owners attend general meetings and are aware of levy budgets and unitowners’ responsibilities for contributions, other unit owners are not so levy savvy. For theseowners a levy notice through their post box can be their awakening to their levy obligations.For this reason levy notices need to not only identify clearly the outstanding levies and thedate for payment, but they should also include a statement as to the unit owner’s obligationsto pay the amount and the strata community’s policy for late & non-payers so that all unitowners understand what action will be taken against them when levies are not paid. 4    
  5. 5. Tips for increasing the effectiveness of levy notices:1. Remove, or reduce the prominence of the strata managers’ logo – otherwise owners will think the whole levy is for management fees rather than common property ownership costs.2. Include a sentence in the body of the invoice describing generally what levies cover e.g. “FYI – Administration levies pay for expenses like gardening, repairing and maintaining common property and insurance”3. Change your notes on the levy notices every quarter eg. “ Administrative levies are for recurring expenses – and sinking fund levies are for non recurrent or capital items”4. Include a cover slip or flyer occasionally with a pie chart showing how levies are expended on the basics – building repairs, utilities, management fees, gardening, insurance and group other expenses – this will focus attention on the big-ticket items.5. Use an occasional mail-out to thank the owners for their business and explain in twenty words what you do.6. Include a note thanking owners for paying on time and reminding those that haven’t that penalties apply for late for payment.Dealing With The Late PayersCharge interest and offer a discountThe default position under the Strata Schemes Management Act 1996 (NSW) is that interestaccrues on late levies at a rate of 10% per annum starting one month after the levy becomesdue (this is also the highest amount of interest which can be charged in NSW). The rate ofinterest chargeable and the rules for calculating that interest differ between the states.However, whichever legislation applies to your strata scheme it is important that youmaximise the penalties for late payment,In addition to charging the maximum interest prescribed by law, another thing which ownerscorporations can do to beef up the penalty for late payment is to resolve to apply a discount toearly payments of levies. This must be done by special resolution at general meeting.To allow for unit owners paying 10% less than normal under the discount, it is advisable toincrease the budget by 11.11%. This increase in the budget means that if every lot ownerwere to receive the discount the contributions received would still meet the budget.Hand write itWhen sending out levy notices to lot owners it is important that that you grab the attention ofthe lot owner and that the notice doesn’t go into the pile of ‘junk’ or ‘it can wait’ mail.We have already discussed the importance of the content which is included in notices,however the presentation of the notice is equally important. We advise hand writing 5    
  6. 6. addresses on envelopes to differentiate the notice from other automated mail. This of coursewill not be practical in situations where you are dealing with hundreds of unit owners.However it is a policy that can be adopted when sending out reminder notices to those lotowners who are more that a quarter in arrears.Another quick and easy method of differentiating your notice from other invoices is toannotate or highlight the important points with red pen. This is such an effective methodbecause the lot owner receiving the notice can see that it is not simply an automated invoice,but that there is somebody who is chasing their outstanding contributions.Use the phoneGetting into discussions with late payers is a key step in the recovery process, and one whichcan dramatically shorten that process. In the majority of cases outstanding levies can becollected without the need for drawn out legal proceedings. This is beneficial to both the late-payer and the owners corporation because the owners corporation get their outstanding feesmuch more speedily and the lot owner avoids paying the legal fees associated with protractedlegal proceedings.Good recordsRecord correct information. Wrong data will be the number one excuse for not paying. Checkthat you have the names and addresses correctly recorded in your system as per the ownersnotification of change of ownership – remind owners that they have a responsibility to updateyou of changes in their contact details.Take as much detail as you can during the process and record this where it will be accessibleto all for future reference. Take down a telephone number – being able to contact the lotowner quickly by telephone, as discussed above, can make the debt collection process muchmore swift and easy.If the debtor gives you their mobile number or work address or details of when they will paybecause another asset they have is being sold – write this down and tell your lawyer. Thisinformation could be very useful in enforcing a judgment once obtained. (Gulp) Going legal…In levy collection, litigation should be a last resort but when the last resort is used, it should beemployed with all its might to get a result - when you have to sue to recover levies, then makean example of the case to encourage others not to go down this path and to educate ownersthat a collection policy will be followed to the bitter end if required. This is only fair to thosewho pay on time and who are being disadvantaged by the behaviour of the delinquent.Once lawyers are involved, let them do the talking. There are two reasons for this. Firstly, itwill ensure that there are no mixed messages to the debtor. Secondly, it will be a pointer tothe gravity of the situation. The debtor now has to start with someone new and someone whois trained to deal with conflict. This can often be the circuit breaker you need to get a changein behaviour on the debtor’s part. 6    
  7. 7. Letter of demandJust as with levy notices, the letter of demand must be attention grabbing and for this reasonwe always handwrite envelopes and annotate important sections of the letter to catch the eye.The letter of demand should not be the only attempt that is made to get in contact with a latepayer before commencing legal proceedings. Its common for people to avoid paying bills untilthe last possible moment – some lot owners need to understand that court proceedings areabout to be brought against them before they pay their debts.Getting into active debt payment dialogue with late payers over the phone is normally themost effective way to recover levies. For this reason it is a key part of our debt recoveryprocedure to supplement letters of demand with a number of phone calls to the late payer toget the debt payment dialogue moving.Taking it to courtThe following section is an outline of the legal steps that levy collection will take when a lotowner simply will not pay their outstanding fees.Statement of claimIn the event that the letter of demand does not bring about the desired results the first stagein commencing legal proceedings is for the lawyer to file a statement of claim with court.A statement of claim is a court document that will set out the owners corporation’s claim forrelief against the non-paying lot owner.The court in which the statement of claim will need to be filed will vary according to the size ofthe debt and the location of the strata scheme.The statement of claim will set out the details of the levies, interest and recovery costs whichare owed by the lot owner.Service of claim on lot ownerOnce the statement of claim has been filed it will need to be served on the lot owner.Generally this service will be personal service, which will be done by a process server whowill attend the residence of the lot owner, ascertain their identity and hand the statement ofclaim to him/her.Service can take time to effect where the location of a lot owner is not known and in somesituations your lawyer may have to apply to court for substituted service which means thatservice is effected by another method such as service on a relative of the lot owner - thisprocess will be much more straightforward when good records of the lot owner’s details havebeen kept. 7    
  8. 8. 28 Day period for lot owner to respondOnce the statement of claim has been served the lot owner has 28 days in which to respond.He/she may do this by disputing the debt (this is rare), by paying the debt, or byacknowledging the debt and asking for further time to pay.On receiving an application for further time to pay, it will be up to the court to decide on theevidence before it whether to grant the extension.Obtaining judgmentJudgment is the court’s decision on the matter and will generally set out the amount of thedebt which the lot owner owes together with interest.In the event that the 28 day period elapses with no response by the lot owner your lawyer canapply for default judgment against the lot owner – this is a judgment which is made by thecourt in the absence of any evidence from the lot owner and will be based on the informationcontained in the statement of claim and the application itself.Alternatively if the lot owner acknowledges the debt in full then judgment will be enteredwithout the need for a default judgment application.In the event that the lot owner defends the claim (or part of the claim) then a trial of theevidence before the court will be required before any judgment is made. However, as notedabove this not common in levy collection proceedings and providing the levies have beenproperly raised at general meeting and good financial records have been kept it is unlikelythat the lot owner will have a valid defence for not paying their levies.Collecting money awarded by the courtThe judgment obtained from the court will set out the amount owed by the lot owner under thejudgment. If, following the judgment being awarded, the lot owner still does not pay, thefollowing options are available to assist in recovering the debt: • Examination summons • Garnishee order • Writ of execution • Bankruptcy proceedingsExamination summons - “Show us your finances”This is not so much a mechanism for the actual recovery of the debt, but rather a means offinding out the financial situation of the debtor.The first step is to fill out a request form, which is sent to the lot owner requesting financialinformation of his/her income and assets including bank statements, credit card statementsand income tax assessments. 8    
  9. 9. In the event that the lot owner fails to properly respond to the request for information within28days of receiving the form, your lawyer can apply to court for orders requiring the lotowner’s attendance at court to be orally examined about his/her financial affairs.The main purpose of this examination is to identify assets or sources of income, which maybe pursued in order to recover the debt.Garnishee order - “We will take some of your wages”A Garnishee order is a document that is served on the lot owner’s employer or bank. Itrequires the employer to deduct funds from the debtor’s wages, or the bank to deduct fundsfrom the debtor’s account, and forward these amounts to the court.This can also be done against rent if the lot owner is receiving rent from a tenant.This method of recovery is generally only effective where the lot owner has a steady sourceof income.Writ of execution - “We will sell your stuff”A writ of execution is a court order that directs the court sheriff/bailiff to seize and sell the lotowner’s personal assets to pay off the debt.The usual procedure in enforcing a writ of execution is for the sheriff/bailiff to attend the lotowner’s address or place where their goods may be found. A demand is made on the lotowner to pay the debt and if the debt is paid the matter is finalised.If the debt is not paid the sheriff/bailiff will usually take an inventory of the lot owner’s goods.This is called a "seizure”. The sheriff/bailiff will then either appoint a person as custodian ofthe goods or remove the goods.The goods will then be sold at public auction if the debtor fails to make payment before thisevent.In some cases where there are not sufficient personal assets to cover the debt the court willalso allow a writ of execution to be enforced against the Land owned by the debtor.Bankruptcy proceedings - “The big one”Where a judgment has been made, if the judgment is for $5,000.00 or greater, your lawyercan use the judgment to apply to the Insolvency and Trustee Service Australia (ITSA) for abankruptcy notice to be issued against the lot owner.The bankruptcy notice will need to be served on the lot owner.Following a bankruptcy notice being issued and served on the lot owner, he/she will have21days in which to pay the debt.The next step will be to file a creditors petition with either the Federal Court or the FederalMagistrates Court. The creditors petition is an application to the Court for the bankruptcy of 9    
  10. 10. the lot owner – it sets out the reasons why the lot owner should be made bankrupt.On filing of the creditors petition the Court will give a return date at which a hearing will takeplace. The petition will also need to be served on the lot owner prior to this hearing.There may be a number of hearings before the Court decides whether the lot owner shouldbe made bankrupt, but once it is satisfied that the lot owner should be made bankrupt it willissue sequestration orders – these are orders which make the lot owner bankrupt and allow atrustee to be appointed to oversee their financial affairs and to pay off their debts. The trusteemay be ITSA operating in its capacity of Official Receiver. Alternatively an accredited privatetrustee can be appointed.On bankruptcy the debt will be recovered by the trustee in bankruptcy realising the fundswhich are locked up in the lot owner’s assets (including their land) and paying the debts fromthese funds.Because bankruptcy has a major effect on the bankrupt individual, these proceedings arestringently overseen by the courts and consequently the costs of making an application andthe evidence required by the court can both be substantial. 10    
  11. 11. Our Fees(Prices are not inclusive of GST)Letter of demand $87.00Effective debt negotiations(This is an optional stage in the process which we offer to owners corporationsbecause we find it so effective in recovering levies. After sending out a letter ofdemand we will follow up with a series of telephone calls from one of our staffexperienced in debt recovery negotiations. The fee for this service is only paidon successful recovery of the levies through negotiation with debtor) $300.00Statement of claimClaim less than $2,500 $350.00Claim $2,500 - $5,000 $430.00Claim $5,000 - $10,000 $520.00Claim $10,000+ $600.00Default judgment $320.00Examination notice $70.00Examination summons $360.00Wage/bank garnishee order $250.00Bailiff saleEnforcement warrant $450.00Our fee on bailiff sale $800.00Defended claims(Costs will be on a time basis) $200.00/hrBankruptcyBankruptcy notice $450.00Creditors petition $1,500.00Hearing of creditors petition and filing of sequestration orders $1,800.00External Disbursements(Prices include GST)Local Court filing feeNSW claim less than $10,000 $166.00NSW claim $10,000+ $410.00Service of claim on defendant $35.00 - $150.00(costs vary according to attempts made to serve claim and method of servicerequired)Court fee - examination summons $62.00Bailiff saleFee execution of writ $70.00Bailiff sale fee (including advertising etc) $2,600.00BankruptcyITSA fee for bankruptcy notice $440.00Federal Magistrates Court filing fee $1983.00Current at June 2011, but subject to change 11