Loans to Owners Corporations – Tips and Tricks
What happens when an Owners Corporations has a major project that they need to fund and they do not want lot owners paying the cost upfront by way of levies?
The only option is a loan.
Section 25 of the Owners Corporations Act 2006 provides that by ordinary resolution, if the amount borrowed does not exceed the amount of the current annual fees of the Owners Corporation it can obtain a loan. For amounts in excess of this, a special resolution is required to be obtained. There is no limit on the loan amount an Owners Corporation can obtain. However, an Owners Corporation must act in good faith and in the best interests of the Owners Corporation. Sometimes it is appropriate that a project be funded in part by a loan and in part by the striking of a levy.
So what should the Owners Corporation consider?
- The Owners Corporation is not able to charge or mortgage common property under section 17 of the Owners Corporations Act 2006. So it is important that there is no charging provision;
- Liability should be limited to the Owners Corporation. Lot owners and committee should not provide personal guarantees;
- How the loan is to be repaid and when should be carefully considered to ensure that the loan is manageable;
- The term of the loan needs to be realistic. Most loans last from 1 year to 15 years;
- A loan will impact on future purchasers and ultimately on the value of a lot;
- Payments for principal and interest should be made from the start. Interest only loans should be discouraged;
- The loan should only be used for the project and not for general annual expenditure;
- Every lot owner is liable for the loan repayment. It is not possible to have some lot owners liable for the loan and other lot owners pay a levy and not be liable for repayment;
- What are the reporting obligations to the lender and are they appropriate. This might include quantity surveyors and other milestone reporting for the project;
- Do interest rates change? How and when can that occur?
- Can payment be made early and if so, does that involve a penalty to be paid;
- Can there be multi drawdowns. There is no point in paying interest on funds you don’t yet need;
- Are the rates and terms competitive. Do your due diligence before agreeing to a particular provider;
- Is the lender a lot owner? Careful of conflicts of interest;
- What are the rights if a default occurs?
- What will mean the OC is in default?
- What can trigger the full repayment of the loan early;
- Are there admin fees payable in addition to interest?
It is important that the loan is carefully drafted and legal advice on the loan document is obtained particularly if the lender says they are “standard documents”.
Tips for an Owners Corporation
- Get legal advice early;
- Carefully review the commercial terms and check that you are getting the best deal in the market;
- Make sure that you strike levies to ensure repayment. This may mean collecting levies well before repayment dates;
- Allow for extra funds to be collected in case one or more lot owners are late paying their levies (or simply don’t pay them); and
- Make sure the loan is authorised by the proper and lawful resolution and it is documented properly.
Need assistance?
For expert assistance and advice concerning what Owners Corporations can and cannot do with funding agreements and to assist with the review and negotiation of loan documents please contact Phillip Leaman, head of our Owners Corporations team at Tisher Liner FC Law.