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The effect of strata levies on a winding up

A liquidator has the power to sell all or any part of the property of a company to which the liquidator is appointed under section 477(2) of the Corporations Act 2001 (Cth) (Corporations Act). When the court appoints a liquidator to wind up a company that trades as a property developer, the liquidator can sell any developed or partially developed lots owned by the developer. However, it can be difficult for a liquidator to sell developed or partially developed lots when those lots are burdened by unpaid strata levies for building defects. These levies cannot be amended or rescinded by the developer company because of the effect of clause 15 of schedule 1 of the Strata Schemes Management Act 2015 (NSW) (SSM Act).  As a result, the levies effectively increase the purchase price of the developed or partially developed lots and can make the lots difficult to sell.

Types of strata levies

Strata levies are raised by the owners corporation and paid by all owners to cover the costs of maintaining the common property of a strata property. [1] Levies are generally raised each year from owners for either a capital works fund or an administrative fund.[2]  However, if the owners corporation is faced with expenses it cannot at once meet from either the capital works fund or the administrative fund, the owners corporation can raise additional levies.[3] These are generally referred to as special levies.

Levies are raised by the owners making a resolution at the annual general meeting of the owners corporation. To make a resolution, the owners holding more than 50% of the unit entitlements in the owners corporation must vote in favour of the resolution. The same threshold applies when overturning a previous resolution. The owner’s voting power depends on their unit entitlement (i.e., an owner’s share of ownership in common property).[4] An owner with higher unit entitlement has a stronger voting power.

As a general rule, a developer company that is still developing lots in a strata will have more than 50% of the unit entitlements in an owners corporation. This means the developer generally controls the owners corporation and can ensure that only the resolutions the developer approves of are made. This also means the developer usually controls what levies are raised and the amount of the levies that are raised.

Clause 15 of Schedule 1 of the SSMA

A developer’s control of the resolutions made by an owners corporation is disrupted by clause 15 of Schedule 1 of the SSMA. That section reads as follows:

15      Developer or lessor excluded from votes relating to building defects

The developer or lessor of a leasehold strata scheme is not entitled to vote, or exercise a proxy vote, on a matter concerning building defects in, or the rectification of building defects in, building work to which Part 11 of this Act applies.

A developer is therefore excluded from voting on any resolutions regarding defects even if they own more than 50% of the unit entitlements. This means a developer cannot prevent levies from being raised in relation to defects or the amounts of levies that are raised. The developer can however be left with a liability to pay these levies.

The problem for a liquidator

A liquidator of a developer is in no better position than the developer.  If levies have been raised, the liquidator cannot cause the developer to overturn the levies and cannot prevent further levies from being raised.

If significant levies are or have been raised, the developer will be responsible for the bulk of the levies because it has the highest lot entitlements. The levies run with the land.[5] This means that they are not only the responsibility of the developer but also any purchaser of the partially developed lots from the liquidator. The effect of the levies is to either substantially reduce the proceeds of sale available to the liquidator after the sale of the property or, if the liquidator tries to force a purchaser to pay the levies, to substantially increase the purchase price of any partially developed lots owned by the developer.  The levies can therefore prevent the sale of the land.

In the event the levies cannot be dealt with by negotiation with the owners corporation, a liquidator may be forced to disclaim the lots burdened by levies so that the liquidator can finalise the winding up of the company.[6] The partially developed lots will then vest in the State as per the law of escheat. For further reading about disclaimer of burdened property, please see our recent article.

Key takeaway

When considering whether to accept an appointment to a developer, a liquidator should check whether any levies for defects have been raised against the lots owned by the company. Large unpaid levies may make it difficult for a liquidator to realise the remaining lots owned by the company for the benefit of all creditors concerned.

If you would like to discuss this article with us, please contact David Greenberg, Partner, or Peter Wang, Paralegal on (02) 9261 5900.

[1] Strata Schemes Management Act 2015 (NSW), ss 80-81.

[2] Ibid sections 81 and 83.

[3] Ibid sections 81(4).

[4] Ibid, clause 14(2) of schedule 1.

[5] Ibid section 84.

[6] Corporations Act 2001 (Cth), s 568(1)(c).