VCAT rules on landmark test case on ‘reasonable costs’ claimable by Owners Corporations
On 1 December 2021, the Owners Corporations and Other Acts Amendment Act 2021 (“Amending Act”) came into force. The Amending Act has made some key changes to the Owners Corporations Act 2006 (Vic) (“OC Act”), including the introduction of section 165(1)(ca). To see our detailed updates on that legislation, check out our website at https://tlfc.com.au/expertise/owners-corporation/
What does section 165(1)(ca) say?
Section 165(1)(ca) allows VCAT to make an order requiring a lot owner to pay to the Owners Corporation reasonable costs incurred by the Owners Corporation in recovering an unpaid amount from the lot owner (other than costs in the proceeding). In making an order the Tribunal must also consider (s 167 of the OC Act):
- the conduct of the parties;
- an act or omission or proposed act or omission by a party;
- the impact of a resolution or proposed resolution on the lot owners as a whole;
- whether a resolution or proposed resolution is oppressive to, unfairly prejudicial to or unfairly discriminates against, a lot owner or lot owners;
- any other matter VCAT thinks relevant
Owners Corporation 1 Plan No. PS735439F v Singh (Owners Corporations) [2022] VCAT 389
In the matter of Owners Corporation 1 Plan No. PS735439F v Singh (Owners Corporations) [2022] VCAT 389, our Phillip Leaman represented the Owners Corporation in relation to pursuing an order from the Tribunal for the outstanding arrears owed by the lot owner. The test case also involved two other levy recovery cases as well. The Tribunal had to assess whether the following costs were reasonable costs recoverable under section 165(1)(ca) of the OC Act:
- Fees charged to an OC by an OC manager for issuing final fee notices;
- Fees charged for undertaking title searches;
- Fees charged for letters of demand by a lawyer;
- Fees charged for multiple final fee notices and in respect to multiple Owners Corporations in the one subdivision.
The case raised important legal issues regarding the statutory interpretation of ‘reasonable costs incurred’ under section 165(1)(ca) of the OC Act. The judgment provides some clarity for both Owners Corporations and Managers on how section 165(1)(ca) is to be interpreted and what a Tribunal may take into account under this new power.
The Tribunal distinguished section 165(1)(ca) of the OC Act from section 109 of the Victorian Civil & Administrative Tribunal Act 1988 (‘VCAT Act’), noting that:
- it only confers power to an Owners Corporation to claim costs (that is, lot owners are unable to claim costs under the new provision);[1]
- it allows a Tribunal to award costs outside of the legal proceeding (i.e. costs incurred before or after the proceeding commenced);[2]
- both sections are of a discretionary nature;[3]
- there is no presumption that an order should be made under section 165(1)(ca).[4]
The Tribunal noted that it may consider the following factors, when making an order under section 165(1)(ca):[5]
- previous conduct of the lot owner including:
- failing to respond to an invoice by making prompt payment;
- a pattern of non-payment of fees;
- not meeting commitments made to and OC Manager to pay the fees;
- protracting negotiations;
- obfuscation in the resolution of the dispute;
- the conduct of the Owners Corporation or its Manager.
The Elements under s 165(1)(ca)
In order for VCAT to make an order for costs under s 165(1)(ca), the following criteria must be made out on the balance of probabilities:[6]
- Is there an ‘owners corporation dispute’?
- Are the costs ‘incurred’ by the owners corporation?
- Are the costs incurred ‘in recovering an unpaid amount from the lot owner’?
- Are the costs ‘other than costs in the proceeding’?
- Are the costs incurred ‘reasonable’ and does the Tribunal, in the exercise of its discretionary power, consider it ‘fair’ to make an order for payment by the lot owner?
- The element of what is ‘fair’ must involve a consideration of the matters set out in s 167(1).
Meaning of Reasonable & Fairness
‘Reasonable’
The Tribunal noted that ‘in determining whether a cost incurred was reasonable the issue is not simply about the price (namely the cost to the owners corporation) but about whether it was reasonable for the particular service for which the price was incurred to have been engaged in or performed’.[7] It was noted that it should be interpreted in a way to mean ‘proportionate in the sense of being not disproportionate to the fees that are being recovered’[8] but also will entail a question of proportionality.[9]
‘Fairness’
The Tribunal clarified the meaning of fairness to require a consideration of the factors set out in s 167(1)[10], and that it remains to be a discretionary matter for the Tribunal to determine as fair.[11]
There will be some instances that may require different evidence (or further explanation) under the reasonable and fairness requirement, including:[12]
- Where numerous demands or notices have been sent (prior to commencing legal proceedings);
- Where multiple fees were charged for sending a single notice or demand to a lot owner who owns multiple lots; or
- Where there may be different Owners Corporations claiming unpaid fees against the same lot owner in a single development.
The Owners Corporation will need to provide a clear and accurate evidentiary statement (likely by way of a Statutory Declaration) describing why an amount:[13]
- was incurred;
- why it is claimed as reasonable;
- why it was incurred by the Owners Corporation;
- e. through the Contract of Appointment or by resolution at an AGM.
- why it is claimed in its amount;
- identify the relevant cost charged to the Owners Corporation for the services involved in recovering the unpaid amount from the specific lot owner;
- a further statement of explanation providing the reason a debt recovery step was taken for which the cost was incurred.
The Tribunal noted that simply stating that the fee was charged pursuant to the Contract of Appointment is not sufficient evidence.[14]
Decision
Title Searches
Whilst in the test case, the Tribunal had already made orders for the payment of legal costs including the title search claimed, the Tribunal noted that title searches in other cases may still be claimed under s. 165(1)(ca) as a reasonable cost if it were not in connection with the actual proceeding. It will be a question of fact to be determined by the Tribunal in each case, and it will depend upon the timing of such a search, and its purpose.[15] It is likely that title searches that are conducted prior to litigation occurring may be claimable but title searches that are conducted for the purpose of litigation will be claimable as a cost in the proceeding instead.
Final Fee Notices
The Tribunal was satisfied that the Owners Corporation had incurred the cost of the Final Fee Notice in recovering an unpaid amount from the lot owner.[16] However, in future cases, the Tribunal will require an evidentiary explanation justifying why the cost incurred by the Owners Corporation is contended to be reasonable. This may include:
- A description of the work involved;
- The time taken to generate, prepare and send the Final Fee Notice (or other demand) for payment of arrears to the lot owner.
The Tribunal ordered that the lot owner pay an amount toward the costs incurred by the Owners Corporation for the manager sending out a final fee notice on the owners corporations’ behalf.
In another test case known as Owners Corporation 1, 3, 4 &5 Plan No. PS501859N v JDR Property Developers Pty Ltd run by another firm, the Owners Corporation claimed $1,900 as reasonable costs for issuing 19 final fee notices (across multiple lots) owned by the same lot owner. The main issue was whether the costs claimed had been reasonable incurred and fair to award them. The Owners Corporation had passed an unlawful resolution at their Annual General Meeting stating that lot owners had to pay the Owners Corporation’s costs of any debt recovery action. The Tribunal found that such a resolution was unlawful and did not provide a legal basis to charge the lot owner certain amounts as a debt.[17] The Tribunal was not satisfied that it would be fair and reasonable to award the full amounts claimed under section 165(1)(ca).[18]
The Tribunal determined that it was fair and reasonable to award $300, despite an amount of $1,900 being sought.[19]
Other Costs
Depending on the evidence relied upon by the Owners Corporation, the Tribunal noted that other costs that may be claimable under s. 165(1)(ca) of the OC Act may include:[20]
- Solicitors’ fees for preparing a payment plan before legal proceedings were commenced.
- A fee for the OC Manager liaising with lawyers including;[21]
- The handover of the file;
- Pre-litigation attempts at resolving the dispute including:[22]
- A letter of demand;
- Preparation of a payment plan.
It is important that when making a claim to VCAT that the Tribunal has sufficient evidence and information to set out what costs an Owners Corporation has incurred so that a claim for reasonable costs can be sought.
Costs claimable under s 109 of the VCAT Act
The Tribunal also noted that costs usually claimable under s 109 may include:[23]
- A letter of demand from a solicitor, for example, sent just before legal proceedings;
- A title search to establish ownership. However, if incurred at a significantly earlier stage in the debt recovery action, it might more properly be characterised under s 165(1)(ca) of the OC Act.
Summary
It is important that Owners Corporations work out what costs have been incurred in the recovery of levies from lot owners and make a claim for reasonable costs (or under Section 109) to VCAT. The Tribunal has clearly confirmed that in some cases the costs incurred will be recoverable (if they are reasonably incurred) but it is seems that the Tribunal proposes to take a global view of reasonable costs in a particular case and make a determination as to what it considers in that matter to be a fair amount to be paid. Unfortunately, the decision does not provide any certainty to owners corporations as to what can be recovered under Section 165 as the orders made by the Tribunal may differ in each case. It may be that when Government reviews the Owners Corporations amendments (which it must do between 1 December 2023 and 1 December 2026 they will provide some greater certainty and powers to Owners Corporations to directly charge such amounts without the need to go to VCAT to seek formal orders.
Owners Corporations will need to weigh up the costs of proving a claim for reasonable costs when deciding whether to make a claim for them. Likewise, lot owners who have not paid their fees should be wary not to dispute a claim for reasonable costs where there is no proper basis to do so. It could be that the Tribunal awards a larger amount of costs under Section 109 against the lot owner as a penalty for wasting the Tribunal’s time and the further resources of the Owners Corporation.
It should also be noted that future cases are not bound by this precedent as each case must be decided on its own merits, but the decision (absent any subsequent decision) will likely be applied by Tribunal members as their current attitude to application of the legislative provision for now.
The case demonstrates that levy recovery matters are not simple straight forward box ticking claims. It is important that Owners Corporations obtain legal advice and assistance for levy recovery to ensure that they can maximise recovery and deal with any issues raised by lot owners.
For assistance with levy recovery or general owners corporations matters, please contact our levy recovery team at [email protected] or on 03 8600 9333.
Disclaimer
The material contained in this publication is meant to be informational only and is not to be construed as legal advice. Tisher Liner FC Law will not be held liable or responsible for any claim, which is made as a result of any person relying upon the information contained in this publication.
[1] Owners Corporation 1 Plan No. PS735439F v Singh (Owners Corporations) [2022] VCAT 389 [18].
[2] Ibid [19].
[3] Ibid [21]–[28].
[4] Ibid [38].
[5] Ibid [37].
[6] Ibid [103]–[190].
[7] Ibid [154].
[8] Ibid [164].
[9] Ibid [166].
[10] Ibid [168].
[11] Ibid [177].
[12] Ibid [192].
[13] Ibid [194]-[197].
[14] Ibid [196].
[15] Ibid [211].
[16] Ibid [212].
[17] Ibid [256]-[257].
[18] Ibid [231]-[251].
[19] Ibid [251].
[20] Ibid [127].
[21] Ibid [223].
[22] Ibid.
[23] Ibid [124].
