Mariners Village 3 [2006] QBCCMCmr 56 (10 February 2006)

Last Updated: 19 December 2006

REFERENCE: 0722-2005

ORDER OF AN ADJUDICATOR

MADE UNDER PART 9 OF CHAPTER 6

BODY CORPORATE AND COMMUNITY MANAGEMENT ACT 1997

Number of Scheme:	3872
Name of Scheme:	Mariners Village 3
Address of Scheme:	41A Broadwater Street RUNAWAY BAY QLD 4216

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

Geoffrey Longhorn, the Owner(s) of lot 32

I hereby declare that the resolution by the committee to obtain a report from Leary & Partners Pty Ltd on a possible reallocation of the contribution lot entitlements is invalid and that the committee has no authority to spend $4,000 from the sinking fund for that purpose. I further order that, within two weeks, the body corporate must send a copy of this order and reasons for decision to all owners.

STATEMENT OF ADJUDICATOR’S REASONS FOR DECISION - REF 0722-2005

"Mariners Village 3" CTS 3872

Application

Mariners Village 3 Community Titles Scheme (Mariners Village) is a 34 lot scheme under the Body Corporate and Community Management Act (Act) and the Act’s Standard Module Regulation (Standard Module).

This is an application by Geoffrey Longhorn, an owner of lot 32 (applicant) seeking orders against the body corporate for Mariners Village (respondent).

The dispute concerns whether the committee has acted improperly in passing a resolution to engage Leary and Partners (Surveyors) Pty Ltd (Leary and Partners) to prepare a report on the reallocation of contribution lot entitlements at a cost to the body corporate of $4,000.

Submissions

Submissions indicate that the majority of committee members believe that contribution schedule lot entitlements for the scheme should be altered. The committee resolved that the body corporate appoint Leary and Partners to prepare a report concerning possible changes to lot entitlements.

The applicant has opposed the committee resolution to obtain this report. In particular, the applicant alleges that the chairperson and secretary are acting in a conflict of interest because they want the lot entitlements changed in their favour.

Other owners have also provided submissions. All submissions are available for the parties to inspect upon request and it is unnecessary for me to summarise these submissions here. However, as a generalisation, some owners consider the current lot entitlements are unfair and that it is appropriate for the body corporate to gain the report as a step towards varying these entitlements. Other owners consider that any owners who want to have the contributions changed should themselves bear the costs of trying to get the contributions changed rather than seeking to have reports prepared at the body corporate’s expense.

Decision

Issues

The real matter at issue appears to be that approximately one third of the units in the scheme have a lot entitlement of three with the remaining units only having a lot entitlement of two. This means that some units are making proportionally higher contributions to the expenses of the body corporate but the legislation states that contribution lot entitlements should be equal except to the extent to which it is just and equitable in the circumstances for them not to be equal (Act, 48).

If even one owner opposes a proposed change to lot entitlements then the only way to change those lot entitlements is for an owner or owners to bring an application before the District Court or a specialist adjudicator seeking and order that the lot entitlements be altered (Act, 48). The body corporate would automatically be the respondent to the application by the owner or owners seeking to make the changes (Act, 48(2)). As the basis for a determination of any reallocation of lot entitlements it is typically useful to look at a report of all likely expenditure by the body corporate in the foreseeable future and determine the ratio at which contributions to that expenditure by different lots would be equitable. Typically, the applicants would obtain their own report in support of a change to lot entitlements and the body corporate may then obtain its own report either opposing the change or suggesting an alternative change.

Given this background, one of the issues raised by the applicant is whether there is a conflict of interest in one of the owners who is proposing a change to lot entitlements proposing that the body corporate obtain a report on the lot entitlements. The legislation provides that, at a committee meeting, a committee member is not entitled to vote on a motion being considered if the member’s direct or indirect interest in an issue being considered could conflict with the appropriate performance of the member’s duties about the consideration of the issue (Standard Module, 34).

Another issue that has become apparent is that the committee intended to spend $4,000 from the sinking fund to pay for the report on the lot entitlements. Questions have been raised about whether it was proper to use sinking fund reserves for this expense. If the expense was not properly budgeted for then owners should have voted on whether or not to raise a special levy to pay for the report.

The legislation includes provisions to the effect that:

• The body corporate must, by ordinary resolution, adopt two budgets for each financial year (Standard Module, 94(1));
• The administrative fund budget must contain estimates for the financial year of necessary and reasonable spending to cover the cost of maintaining common property and body corporate assets, the cost of insurance, and other expenditure of a recurrent nature (Standard Module, 94(2));
• The sinking fund budget must allow for raising a reasonable capital amount to provide for anticipated spending from the sinking fund over at least a ten year period (Standard Module, 94(3));
• If a liability arises for which no provision, or inadequate provision, has been made in the budget the body corporate must fix a special contribution to be levied on the owner of each lot (Standard Module, 95(2));
• The body corporate must keep a sinking fund into which it must pay contributions raised to cover spending of a capital or non-recurrent nature, amounts received under policies of insurance for destruction of items of a major capital nature and interest from investment of the sinking fund. All other amounts received by the body corporate must be paid into its administrative fund (Standard Module, 100);
• Funds must not be transferred between the administrative fund and the sinking fund (Standard Module, 100(7));
• The sinking fund may be applied towards spending of a capital/non-recurrent nature, the periodic replacement of major items of a capital nature, and other spending that should reasonably be met from capital. All other spending must be met from the administrative fund (Standard Module, 101).

Conflict of interest

If any lot owners brought an application for an adjustment of lot entitlements against the body corporate then it would be a clear conflict of interest for those lot owners to still be involved in committee decisions relating to the body corporate’s defence of that application (Standard Module, 34).

The present circumstances are more ambiguous as there is at least a theoretical possibility that all owners may have wished to obtain a report on lot entitlements and then vote to adopt new lot entitlements on that basis. However, in reality, at least some committee members were opposed to the report and it would seem that all members of the committee would have had some form of conflict in respect of whether a change of lot entitlements was likely to be to their personal benefit or detriment. There is an expectation that committee members will make decisions for the benefit of owners generally rather than for their own benefit or the benefit of a specific group of owners. On balance, I conclude that the decision to obtain a report of lot entitlements should not have been made in committee meeting due to issues of conflict of interest.

Use of sinking fund moneys

Apart from the issue of whether a committee can vote to take a certain course of action, a question arises as to whether the committee has authority to engage in the proposed spending.

A resolution by the committee is sufficient to authorise spending where the budget adopted by owners has sufficient funds available and the spending is within the relevant limit for committee spending. However, for any accrual of a liability for which inadequate provision has been made in the budget, it is necessary for a resolution to be made by owners in general meeting to fix a special contribution to pay for the liability (Standard Module, 95(2)).

From the information provided, I conclude that the budget did not properly allow for spending by the committee of $4,000 in order to obtain a report on lot entitlements. In particular, while the budget appears incomplete, it lists only the amount of $1,200 for "Consultants Fees & Reports". There is an amount of $10,000 reserved as "Prov. For Major/Future Expend" but payment for a report on lot entitlements could not fairly come under this description.

In fact, it is questionable whether it is appropriate to use sinking fund moneys at all for the obtaining of a report on lot entitlements. The sinking fund is designed to facilitate owners, over a period of time, accruing funds for all works of a capital/non-recurrent nature that are anticipated to be required in the next ten years. This fund is not intended to be a general fund to cover any expenses that arise above and beyond the administrative budget. Rather, for the sinking fund, it is important that the body corporate identify the scheme’s predictable major/capital repairs (eg painting, replacement of waterproofing membranes, re-surfacing of driveways/carparks, pump replacement, intercom and security replacements etc). The body corporate must then estimate the likely cost of each repair and how many years away the repair will be. A proportional amount of each expense must then be reserved to ensure there are sufficient funds for each particular expense at the start of the year in which the expense is likely to be incurred.

In short, the sinking fund operates like a trust fund where moneys for separate projects are kept separately in an individual ledger even though the funds for the various projects are held in the one bank account. Contributions paid by owners in respect of a particular project, and expenditure for that project, are accounted for by recording the transactions in the relevant ledger.^[1]

A brief example may be as follows:

(A) Repair Item	(B) Years Away	(C) Estimated Cost	(D) Existing Balance	(E) Amount to Raise	(F)  Next Levy Amt.
				=(C - D)	=(E [rparenmid] B)
Painting	7	$250,000	$70,000	$180,000	$25,714
Waterproofing Mem.	10	$130,000	$0	$130,000	$13,000
...
TOTALS (30/06/06)		Total Balance:	$70,000	Next Levy Total:	$38,714

Four years later, contributions by owners would have accumulated against each item in the ledger and the example for the year 2010, with revised estimates and interest accrued on existing balances, may be as follows:

(A) Repair Item	(B) Years Away	(C) Estimated Cost	(D) Existing Balance	(E) Amount to Raise	(F)  Next Levy Amt.
				=(C - D)	=(E [rparenmid] B)
Painting	3	$252,000	$177,856	$74,144	$24,715
Waterproofing Mem.	6	$135,000	$54,600	$80,400	$13,400
...
TOTALS (30/06/10)		Total Balance:	$224,856	Next Levy Total:	$38,115

The administrative fund and sinking fund budgets are prepared to assist in the planning and management of the body corporate’s finances.^[2] In particular, the sinking fund budget is required to cover anticipated expenditure over at least a ten year period so that a reasonably consistent annual levy can result in significant funds being accumulated to pay for anticipated expenditure rather than very large special levies being needed at the last moment to pay for major expenditure that should have been anticipated a number of years in advance.

I have some concerns over whether the sinking fund budget of Mariners Village is complaint with the legislation as some funds are seemingly unreserved for any purpose. The intent of the regulation is that the moneys in each fund are allocated for specific and identified anticipated body corporate costs.^[3] There will be occasions when there is a liability for which no provision, or inadequate provision has been made in a budget. However, when that occasion arises the body corporate can then fix a special contribution to meet the liability (Standard Module, 95(2)). I also cannot see any reason why owners cannot vote to reallocate moneys held in the sinking fund according to a new or revised budget provided the liabilities are properly payable from that fund.^[4] However, the body corporate cannot transfer moneys between admin and sinking funds (Standard Module, 100(7)). Also, any reallocation of moneys within one fund would be effectively altering the budget adopted by ordinary resolution of owners in general meeting so the decision to re-allocate would also need to be by ordinary resolution rather than just by committee resolution (Standard Module, 58).

Sequence of events

A submission from the body corporate manager is to the effect that:

1. On 23 September 2005 one of the committee members presented a signed authority from 25% of owners requesting an extraordinary general meeting to vote on a motion proposing the appointment of Leary and Partners to prepare a report on lot entitlements at a cost of $4,000;
2. The body corporate manager told the committee member that it would be expensive for the body corporate to call an extraordinary general meeting just on this issue and that the committee could approve expenditure of this amount;
3. Some committee members discussed whether the motion should be determined by the committee rather than owners and the committee subsequently voted in favour of the body corporate obtaining this report;
4. On 10 October 2005 a minute of the committee vote was sent to all owners. No objections were received by owners in the following seven days and on 17 October 2005 Leary and Partners were asked to provide the report;
5. On 7 November 2005 the body corporate manager received a copy of the application to stop the report and this application was distributed to committee members on 8 November 2005; and
6. On 28 November 2005 the body corporate manager received a copy of the adjudicator’s order stating that the body corporate was not to rely upon a committee resolution as authority to expend body corporate funds to prepare the report. The body corporate manager emailed Leary and Partners to tell them not to proceed with the report but received a response that the report had already been completed.

I have concluded above that the decision to obtain the report on lot entitlements should not have been made in committee meeting. Firstly, it seems likely that all members of the committee would have had some form of conflict in respect of whether a change of lot entitlements was likely to be to their personal benefit or detriment. Secondly, there were insufficient funds available for this purpose in the budget adopted by owners so an ordinary resolution would have been necessary to either raise a special levy or reallocate funds through a new budget. The question that arises is the consequences of the above conclusion given the work by Leary and Partners has apparently been completed.

Costs of work already done

I have concluded that the commissioning of the report and the associated spending could not have been properly made by committee resolution.

However, even though the committee may not have had authority to incur this expenditure it seems that Leary and Partners have performed work on the committee’s instructions and may be able to require payment on the basis they honestly and without notice of an irregularity entered into a transaction with a member of the committee (Act, 310). I understand that Leary and Partners were not even informed of the application questioning the validity of the committee resolution or asked to suspend work at the time of the application. This may have resulted in substantial additional costs being incurred.

As a result, owners may find it necessary to approve a special levy to settle any claim for expenses by Leary and Partners. If so, it appears likely that some owners will want the body corporate to seek recompense for this amount from the body corporate manager or individual committee members. This question is not, however, an issue for determination in the present application. It will be for individual owners to seek any independent legal advice they desire and submit any motions proposing the body corporate take a certain course of action.

Order

If an owner or owners had brought an application for a change of lot entitlements then the body corporate would be the respondent to that application. It would be expected that the body corporate would raise a special levy in the amount expected to be necessary to defend that application. The committee could then have spent these funds, up to their relevant limit for spending, to obtain a lot entitlement report for the purpose of defending the application against the body corporate.

However, at the present time, the body corporate has no lot entitlement application to defend. I have concluded that committee members had a conflict of interest in voting to obtain a lot entitlement report and that there were insufficient funds available in the budget for the committee to engage Leary and Partners without owners voting to raise a special levy or reallocate budgeted funds.

In particular, concerns have been raised about whether the body corporate has proposed to spend money from the sinking fund for purposes other than expenditure of a capital/non-recurrent nature and whether the body corporate is properly forecasting likely capital expenditure over a ten year period. I would encourage all owners to consider whether a new sinking fund budget should be adopted to reserve appropriate amounts for future capital/non-recurrent expenditure.

For these reasons, I make the order above.

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^[1] Refer Bayview Shores, Application 0370-2003, CG Young, 28 November 2003.

^[2] Explanatory Notes for SL 2003 No. 263, page 125.

^[3] Explanatory Notes for SL 2003 No. 263, page 127.
^[4] Refer Lamag Holdings Pty Ltd v Reylan Pty Ltd, Court of Appeal NSW, Handley JA, Sheller JA & Hope AJA, BC9201473, 19 November 1992.