Fletcher [2005] QBCCMCmr 503 (8 September 2005)

Last Updated: 19 July 2006

REFERENCE: 0307-2005

ORDER OF AN ADJUDICATOR

MADE UNDER PART 9 OF CHAPTER 6

BODY CORPORATE AND COMMUNITY MANAGEMENT ACT 1997

Number of Scheme:	13178
Name of Scheme:	Fletcher
Address of Scheme:	738 Pacific Parade CURRUMBIN BEACH Q 4223

TAKE NOTICE that pursuant to an application made under the abovementioned Act by

Collin William Smith and Ruby Ellen Smith, the owners of lot 3 and Margaret Joy Smith the owner of lot 4

I hereby order that the second instalment of the Administrative Fund Contribution levied pursuant to resolution 6 at the AGM held on 31 January 2005 shall not be pay by owners of all lots in the scheme, and if in the event that such instalment has been levied and paid, then that it shall be refunded to owners within six (6) weeks of the date of this order. I further order that resolution 10 carried at the AGM held on 31 January 2005 headed Administrative Fund Contribution – advance issue be varied so that the interim contribution for the period 01 November 2005 to 30 April 2006 is $682.50 in place of $1350. I further order that the order sought that resolution 18 of the AGM of 31 January 2005 was incorrectly ruled out of order, and that a sinking fund contribution levy for the year to 31 October 2004 be struck, is dismissed. I further order that the order sought that, as per the resolution passed at the AGM on 29th January 04, there be an Audit for the year ending 31st October 2004, is dismissed.

STATEMENT OF ADJUDICATOR’S REASONS FOR DECISION - REF 0307-2005

"Fletcher" CTS 13178

The applicants, Collin William Smith and Ruby Ellen Smith, the owners of lot 3 and Margaret Joy Smith the owner of lot 4, have sought the following orders of an adjudicator under the Body Corporate and Community Management Act 1997 (the Act) quote:

1.	An order that resolution 5 (Administrative Fund Budget and Contribution) passed at the AGM on 31st January 2005 be overturned ... and further, that an new budget for the year ending 31 october 2005 be set of $1365 per lot and that the excess already paid for the year to 31st October 2005 ... should be refuned. And ... that $1550 per lot of the unsued monies in the year to 31 October 2004 should be refunded. ...
2.	An order that resolution 10 of the AGM of 31st January 2005 (Administration Fund Contribution – Advance Issue) be overturned on the basis that it too is based on an unreasonable amount , and that the contribution for the first period of the following financial year be set, of $682.50.
3.	An order that resolution 18 of the AGM of 31 January 2005 ... was incorrectly ruled out of order ...
4.	An order that, as per the resolution passed at the AGM on 29th January 04, there be an Audit for the year ending 31st October 2004 and that this be done by an auditor with no perceived conflict of interest. ...

Section 276(1) of the Act provides that an adjudicator may make an order that is just and equitable in the circumstances (including a declaratory order) to resolve a dispute, in the context of a community titles scheme, about-

(a) a claimed or anticipated contravention of the Act or the community management statement; or

(b) the exercise of rights or powers, or the performance of duties, under the Act or the community management statement; or

(c) a claimed or anticipated contractual matter about-

(i) the engagement of a person as a body corporate manager or service contractor for a community titles scheme; or

(ii) the authorisation of a person as a letting agent for a community titles scheme.

An order may require a person to act, or prohibit a person from acting, in a way stated in the order (section 276(2)). An adjudicator's order may contain ancillary and consequential provisions the adjudicator considers necessary or appropriate (section 284(1)).

The scheme is a subdivision of 6 lots recorded under a building unit plan (now a building format plan) of subdivision. The regulation module applying to the scheme is the standard module.

There has been a previous adjudication regarding this scheme (0613 of 2004) touching upon some of the issues again in dispute. This issue is related in part to the dynamics of ownership within the scheme. In 613 of 2004, then Adjudicator CG Young stated in part in his reasons, quote:

5. A Resort motion for an Administrative Fund budget contribution of $3,000 per lot entitlement / owner was passed.

Under the wide powers granted by section 276 of the Act, an adjudicator has power to reduce or increase budget contributions where those decided are unreasonable (see Item 11 of Schedule 5 to the Act).

The body corporate committee compiled an Administrative Fund budget and proposed it to the January annual general meeting where it was rejected by the majority vote of Resort. The budget was for a gross amount of $4,000 with a $667 contribution for each lot entitlement/owner (equal lot entitlements). Resort proposed an alternative budget of $18,000 gross or $3,000 per owner. This motion was ruled out of order as no supporting budget was presented.

At the (July) meeting, the committee proposed a revised Administrative Fund budget for a gross amount of $2,978 and a contribution of $500; its budget was again rejected by Resort. Resort resubmitted its Administrative Fund budget for the same amount but with an itemised supporting budget.

By including the Body Corporate Management fee of $2,000 omitted by the committee, the budgets stand at $5,000 for the committee and $18,000 for Resort, a significant difference of $13,000 in the year’s costs.

It is not an adjudicator’s role to question budget decisions and choices by bodies corporate, except where there are conflicts with the legislation or exceptional circumstances.

The applicants have always carried out some of the lawn and garden maintenance themselves, but have paid $20 for mowing/weeding every 2-3 weeks as necessary (approximately $500 annually). Resort can require, by its majority vote, that the maintenance be carried out professionally and to professional standards. It cannot go beyond that to improvements without requiring the authorisation I have referred to earlier in these reasons. However, even where no improvements are involved, it will depend on the amount as to whether a service may be merely included in the budget or must meet other legislative requirements. For instance, the item "Contract Cleaning & Gardening" for $4,420 cannot be merely included in a budget without meeting the Major Spending requirements of section 104 of the Standard Module (cost exceeds threshold of 6 lots x $250 = $1,500).

That is, at least two tenders for the contract must be provided to owners by way of an alternative motion for owners to decide. A reading of sections 103(3) and 104 shows that owners cannot relinquish this choice to the committee let alone authorise it as a line item in a budget.

The applicants have submitted that the common property lawn is less than 5 metres by 15 metres in area and the estimated cost of $4,420 for cleaning and gardening is grossly excessive. It is a difficult task for me to decide a reasonable cost, though here because of the error I have only to strike out the item as being in contravention of the legislation and leave it for the body corporate to meet and determine the matter in the proper manner, and for a cost that is reasonable in terms of market cost. The tenders obtained by the committee should be independent and at market value.

I do not intend to examine each of the budget items except to say that while the $1,750 cost for "R & M Garden & Grounds" is an improvement (which the accompanying notation "rejuvenation" identifies as such) within the limit for an ordinary resolution (and I accept that its description and separation here is sufficient in meeting legislation requirements) the service provider must still be chosen it according to the Major Spending requirements. The committee should review the budget items and their reasonableness of cost with the above information in mind.

Accordingly, my order is to reduce the budget from $18,000 to $13,580 by the removal of the $4,420 item. It may be that there are other budget items that are excessive as the applicant’s contend however without any evidence in support of the contention no excess is obvious and, as I have stated, I am loath to intervene in budget choices. The committee should review them, and owners may of course monitor the selection of service providers, the services performed and the costs expended or proposed to be expended in comparison to market costs.

In summary, the meetings have not followed the legislation in quite a number of areas and, for the reasons given, I have made orders to remedy those contraventions and omissions. Resort should also be aware that while it has a majority vote, both the legislation and the common law provide protection to the applicant minority owners.

Essentially the same issue considered by the adjudicator and described above is raised again in this application; the applicants are seeking, by way of a complicated set of refunds etc, to reduce the amount of contributions to the administrative fund, for the 04/05 financial year. Also, with some irony, I note that the applicants also seek to impose a contribution for the sinking fund, at least for the preceding year. In contrast, the majority owner, Resort Corporation Australia (No 2) Pty Ltd (RCA) is seeking to preserve the validity of the present administrative fund contributions.

Generally, I agree with and reiterate three comments of the adjudicator:

• It is not an adjudicator’s role to question budget decisions and choices by bodies corporate, except where there are conflicts with the legislation or exceptional circumstances. ...

All parties should note however that this office is not resourced to, and will not undertake a line item by line item review of the reasonableness or otherwise of budget inclusions. In particular, this office does not have the resources or capacity to micro-manage schemes. Further, one of the secondary objections of the Act is to balance the rights of individuals with the responsibility for self management as an inherent aspect of community title schemes.

• It may be that there are other budget items that are excessive as the applicant’s contend however without any evidence in support of the contention no excess is obvious and, as I have stated, I am loath to intervene in budget choices.

The legislation contains a number of checks and balances in the ability of the body corporate to engage services. These checks and balances, some of which were outlined by Adjudicator Young, should be relied upon to ensure the reasonableness or otherwise of budget items. However, perhaps the best indicator of the reasonableness or otherwise of the cost of a service to the body corporate is the actual cost of the provision of that service for the preceding year. For example, if pest control cost $x the previous year, then it might be reasonable to budget that the cost of this item would be $x + 10% or thereabouts the next year.

• Resort should also be aware that while it has a majority vote, both the legislation and the common law provide protection to the applicant minority owners.

I would go further and say that all owners must act reasonably. Failing this, this office has the power to intervene in decisions made and will do so, if necessary. However, similarly no owner should misinterpret this and seek to have this office intervene in every body corporate decision that owners disagrees with. There is a power to dismiss applications, with costs, if they are considered to be frivolous vexatious, misconceived or without substance (see section 270(1)(c) of the Act).

Practically, reasonableness might require:

•	That the majority owner Resort not seek to include in budgets unnecessary items or items at inflated cost;
•	That the minority owners, Smith, might not seek to object to minor or insignificant variations in cost of items.

I now intend to consider the four orders sought by the applicants in turn.

The proposed invalidation of resolution 5 headed Administrative fund budget.

The applicants’ state:

The proposed annual budget for the year ending 31^st October 05 for the Administration Fund has not taken into account the above residual sum held as at October 04, and as well, it has items and amounts which are unrealistic. In particular ...: Audit $650. We have independent quotes for $500 to $550 for a 6 unit block ... we have allowed $525 in our suggested budget.

The applicants’ then proceed to go consider each individual line item in the budget from the point of view of reasonableness.

RCA has responded in its submission that:

Administrative fund budget has been set on what the committee believes is the ongoing maintenance requirements for the building. The building prior to our ownership was owned by a family group who ran the building and maintained the building as a family owned property. They did not expend in our view the sort of monies that are required to continue to upkeep and maintain the building to the standard to which it should be up kept.

Again, I reiterate, adjudicators will be loath to interfere in budget choices. This in my view is an essential part of the requirement of schemes for self management. This office does not and cannot micro-manage the management and operation of disputing schemes. Contrary to the applicants suggestion regarding the budgeted cost of the audit, I am satisfied that an allowance of $650 is within the bounds of reasonableness. Of course, you will be able to find cheap quotes, but there might be any number of reasons you would not proceed with such quotes. Secondly, I am satisfied that there is an inherent disincentive for RCA to engage services at inflated prices; namely that it pays two thirds of all invoices levied on the body corporate.

However, the applicant’s other point is a valid one, and RCA has not sought to provide an explanation of it. It is clear from the budget that the administrative fund is in surplus of $14431.94 going into the financial year. The budget then proposes to raise contributions in the financial year of $16200. Consequently, it will have in excess of $30,000 to fund budgeted expenses of $16200. Section 94 of the Standard Module provides relevantly:

94 Budgets
(1) The body corporate must, by ordinary resolution, adopt 2 budgets for each financial year--
• the administrative fund budget
• the sinking fund budget.
(2) The administrative fund budget must--
(a) contain estimates for the financial year of necessary and reasonable spending from the administrative fund37 to cover--
(i) the cost of maintaining common property and body corporate assets; and
(ii) the cost of insurance; and
(iii) other expenditure of a recurrent nature; and
(b) fix the amount to be raised by way of contribution to cover the estimated recurrent expenditure mentioned in paragraph (a).

I consider the relevant wording is contain estimates for the financial year of necessary and reasonable spending. Unlike the sinking fund, the administrative fund only needs to contain provision for the year in question. It is not an accumulation fund like the sinking fund. Optimally, what is raised in a particular year should be what is expended in that year. In determining what is raised, I consider it relevant to take into account the then existing balance or that carried forward. Similarly a deficit, presumably small and able to be carried, should be considered. In this instance, the existing balance it is all but the equivalent of the amount proposed to be raised. This in my view is unnecessary. Whilst it might be prudent to maintain in the administrative fund some "fat" for unforseen expenses (perhaps a margin of 20-25% although this figure is arbitrary), this must also be balanced with the fact that the legislation provides a clear mechanism for a body corporate to raise further contributions for "a liability (which) arises for which no provision or inadequate provision has been made in the budget" (see section 95(2)).

However, I am not prepared to consider the convoluted refund proposal of the applicants. Given the surplus in the administrative fund going into the financial year, and the provision for 2 levy contributions this year, I simply intend to order that the second proposed contribution levy for the period 1 May 05 to 30 October 05 shall not be collected, and if, as I assume that it has, that it be refunded to the owners of each lot. Given the levy of $1200 per lot, then this will reduce the amount in the administrative fund by some $7200 going into the next financial year. The issue of the surplus can then be re-considered in the context of approving the administrative fund budget for 05/06 at the AGM early next year.

The proposed invalidation of resolution 10 headed Administrative fund contribution – advance issue. The resolution proposed the issue of an interim contribution of $1350 per lot for the first half of the next financial year.

The applicants propose the halving of the amount of this contribution, stating that they feel it is based on "an unsubstantial budget and the unreasonable levy for the year of $2700 per lot".

RCA has responded that its position is the same as adopted for resolution 5.

Given that there is still potentially a significant surplus in the administration fund, and that future administrative fund contributions should be considered in light of comments herein made, I conclude there is good reason to vary resolution 10 as proposed. That is, that resolution 10 carried at the AGM held on 31 January 2005 be varied so that the interim contribution for the period 01 November 2005 to 30 April 2006 is $682.50 in place of $1350.

The proposal that motion 18 be reinstated on the basis that "it was incorrectly ruled out of order" at the AGM.

Motion 18, submitted by one of the applicants, proposed that "the sinking fund levy for the year ending 31 October 2004 be $3000" and that a contribution of $550 per lot be levied. I note the anomoly that 6 lots by $550 is in fact $3300 and not $3000.

The applicants’ state:

... on the basis that (motion 18) had nothing to do with motion 8 (which was for sinking fund levy for year ending 31 October 05). At the AGM on 29 January 04, the proposed budget was voted out, and at the EGM on 17^th July 04, it was resolved that a sinking fund forcast be obtained and this was done in late August 04, but only for the next financial year and onwards. Subsequently, no sinking fund levy was paid for the year ending 31 October 04, and our motion requested that we do pay money. Otherwise the sinking fund will be deficient for urgent work and it is not in the interest of the care of the building.

RCA has responded:

We agreed at an EGM on 15 July 2004 that the issue of sinking fund levies for the period should be deferred until a sinking fund analysis was to hand. Such a report was obtained from Solutions IE ...

I confirm that a sinking fund analysis dated 19 August 2004 has been provided by Solutions IE Pty Ltd for the use by the body corporate and further that it is for the 10 year period commencing 1 November 2004 to 31 October 2014. The commencement date of 1 November 2004 is based on "year to" with the first stated year being 31 October 2005. The applicant’s motion 18 is in respect of the year immediately proceeding the period of the sinking fund analysis.

Whilst I acknowledge that on the face of it, sinking fund contributions were not raised for the year covered in the applicant’s proposal, I accept that a sinking fund analysis has now been undertaken and that contributions and anticipated expenses for the next 9 years are dealt with. I further note that the year to 31 October 2005 does acknowledge an opening balance of $2650. Whilst this might not have been accumulated in the applicant’s period, it nevertheless is an "opening balance" and for an amount not dissimilar to that proposed by the applicant in the motion. In the circumstances, I am satisfied that the body corporate has taken appropriate steps in respect of its sinking fund, and that the order proposed by the applicant should not be made.

That there be an audit for the year ending 31 October, 2004.

I am satisfied that an audit for the relevant period (1 November 2003 to 31 October 2004) has been undertaken. I have a copy of such audit undertaken by PKF. In these circumstances, I intend to dismiss the final order as sought by the applicants.