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Pre-shrunk: NCAT Proceedings available when a developer sets initial levies too low

Pre-shrunk: NCAT Proceedings available when a developer sets initial levies too low

Published on January 11, 2017 by Ben Robertson

Purchasers of new strata lots can sometimes find themselves in a situation where levies increase at an alarming rate above the level of the estimates and levies determined by a developer during the initial period.

Under the Strata Schemes Management Act 2015 if lot owners are faced with inflating estimates and levies there may be recourse to seek compensation from the developer.

Action for Lot Owners

  • Where strata levies inflate beyond the levies and estimates set by a developer during the initial period, consider seeking advice in relation to bringing a claim in the NSW Civil and Administrative Tribunal (“NCAT”) within 3 years from the end of the initial period.

Action for Developers

  • A defence is available to developers to a compensation claim sought through NCAT where strata levies and estimates increase beyond the levels set during the initial period. If a developer can show that due care and diligence was used in determining the estimates and levies during the initial period then NCAT must not make a compensation order.
  • Developers should ensure that:
    • adequate records are kept;
    • estimates are provided on all relevant information to hand during the initial period; and
    • the advice of experts who are versed in strata is sought on the appropriate levels to set levies and estimates during the initial period.

What’s The Initial Period?

The “Initial Period”:

  1. Commences on the day that the owners corporation is constituted; and
  2. Ends on the day there are owners of lots in the strata scheme (other than the original owner) who have unit entitlements of at least one-third of the aggregate unit entitlement.

The Levies And Estimates Keep Getting Higher And Higher

From time to time an owners corporation and lot owners may find themselves in a situation where levies and estimates which were determined by a developer during the initial period are inadequate to meet the actual or expected expenditure of the owners corporation.

In those circumstances the owners corporation or lot owner(s) may apply to NCAT for an order that the developer pay compensation.

Such an application must be made within 3 years after the end of the initial period.

Due Care And Diligence On The Part Of The Developer

The increase in the levies and estimates above the levels determined by the developer during the initial period may, in some instances, occur despite a developer taking all appropriate steps to ensure that the initial levels of the levies and estimates were accurate.

In that scenario, if a developer establishes that due care and diligence were used in determining the estimates and levies set during the initial period, NCAT must not make a compensation order against the developer.

The potential for developers to be faced with a compensation order should they fail to exercise due care and diligence in setting estimates and levies during the initial period should sound a clarion call to exercise care when attending to a scheme’s financials during the initial period.

Developers should have regard not only to actual costs but also to the expected costs of maintaining plant and equipment in a scheme such as fire safety systems, security systems, lift equipment and those areas of common property that will require maintenance.  The initial maintenance schedule that is to be provided prior to the first annual general meeting should assist in setting appropriate levels of levies and estimates.

Summary

The Strata Schemes Management Act 2015 affords protection for lot owners and owners corporations which find themselves faced with escalating estimates and levies above and beyond the levels set by a developer during the initial period, in circumstances where that developer failed to take due care and diligence in regard to a setting appropriate levies and estimates during the initial period.

We can assist in relation to any action related to compensation orders where the estimates and levies set during the initial period are too low for the actual and expected expenditure of a strata scheme.

Disclaimer: This article contains general advice only and does not constitute legal advice.  Readers’ own particular facts and circumstances may change the general advice in this article and it is recommended that readers obtain legal advice in relation to their own individual facts and circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

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