Merrimac Heights [2006] QBCCMCmr 609 (21 November 2006)

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

I hereby order that the application for an order that the sinking fund balance be maintained to an adequate level and that only funds collected for the painting of the buildings be allocated for that purpose is dismissed.

I further order that monies in the sinking fund which have been collected to cover the cost of painting individual lot buildings should be refunded to the lot owners in the same proportion in which they were collected.

I further order that the body corporate for Merrimac Heights must not repaint owners’ lots until a written agreement is made between the lot owner and the Body Corporate pursuant to section 118 of the Body Corporate and Community Management (Accommodation Module) Regulation 1997; and

I further order any agreement purporting to be pursuant to Section 118 of the Body Corporate and Community Management (Accommodation Module) Regulation 1997 between the Body Corporate and the lot owner, for that lot owner’s unit to be painted, is of no effect unless the agreement includes the identification of the costs attributable to the lot for the preparation, repairs and painting service.

STATEMENT OF ADJUDICATOR’S REASONS FOR DECISION - REF 0754-2006

"Merrimac Heights" CTS 19563

Application

Frances and Neil Simpson, the Owners of lot 10 (the applicants) have sought orders that the sinking fund balance be maintained to an adequate level and that only funds collected for the painting of the buildings be allocated for that purpose.

Jurisdiction

Merrimac Heights CTS 19563 is a 150 lot scheme registered under the Body Corporate and Community Management Act 1997 and is operating under the Body Corporate and Community Management (Accommodation Module) Regulation 1997. Typically, this module is intended for residential arrangements.

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

(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)).

Grounds

The applicant states:

The applicant has also provided copies of the minutes of a budget committee meeting held on 16 August 2006. On the issue of painting, the committee resolved to recommend to the Body Corporate that it accepts one of two quotes received. The recommended quote is from SMB Painting and Design and is for $189,000 plus GST ($207,900).

The minutes of the committee meeting also include the following discussion in relation to the sinking fund:

Submissions

A total of 8 submissions were received, including 2 from committee members and 1 from the body corporate manager. One submission was unclear in its intentions and one expressed views as to the appropriateness of proposed levies. Of the 8 submissions received, 6 expressed the view that the painting should proceed, with all monies to come from the sinking fund.

A significant amount of historical material has been provided with the submissions, along with some submissions in relation to appropriate levies.

Legislation

Section of Module	Text
92(3)	The sinking fund budget must-- (a) allow for raising a reasonable capital amount both to provide for necessary and reasonable spending from the sinking fund37 for the financial year, and also to reserve an appropriate proportional share of amounts necessary to be accumulated to meet anticipated major expenditure over at least the next 9 years after the financial year, having regard to-- (i) anticipated expenditure of a capital or non-recurrent nature; and (ii) the periodic replacement of items of a major capital nature; and (iii) other expenditure that should reasonably be met from capital; and (b) fix the amount to be raised by way of contribution to cover the capital amount mentioned in paragraph (a). Example-- Painting of the common property is anticipated to be necessary in 3 years time at a cost currently estimated at $3000. The contribution amount for the sinking fund in the budget for the financial year must therefore include the annual proportional share for painting of $1000. Next year, the estimated cost has increased to $3400 and so the second year levy will be $1200. The estimated cost in the third year is $3500, so with the $2200 accumulated, a levy of $1300 is necessary to meet the cost. In larger schemes, the sinking fund will have several projects being funded for various future times.
92(7)	To remove any doubt, it is declared that the inclusion of an item of expenditure in a budget adopted by the body corporate is not, of itself, authority for the expenditure.
92A	(1) The amount of an administrative or sinking fund budget adopted by a body corporate at an annual general meeting may be more or less than the proposed budget amount by an amount equivalent to not more than 10% of the proposed budget amount. Example-- A proposed administrative fund budget is $5000. The administrative fund budget adopted by the body corporate at the annual general meeting may be between $4500 and $5500. (2) However, the amount of a proposed budget may be adjusted only to provide for spending, or remove amounts included in the proposed budget for spending, from the fund for the financial year if-- (a) the motion to approve the spending is stated in the agenda for the meeting; and (b) either-- (i) the spending is approved by the body corporate but is not adequately provided for in the proposed budget; or (ii) the spending is provided for in the proposed budget but the body corporate does not approve the spending at the meeting. (3) The adjustment must be approved by a majority of voters present and entitled to vote on the adjustment. (4) If the amount of a proposed budget is adjusted in accordance with this section-- (a) the proposed contributions to be paid by lot owners for the financial year are proportionately adjusted; and (b) it is not necessary to amend the motion stated in a voting paper for the fixing of contributions to incorporate the adjustment; and (c) a copy of the adopted budget must be given to each lot owner with the copy of the minutes of the meeting given to the lot owner under section 57.
86.666645" colspan="1" rowspan="1" valign="top"> 98(7)	Funds must not be transferred between the administrative fund and the sinking fund.
118	Supply of services by body corporate--Act, s 158 [SM, s119] (1) The body corporate may supply, or engage another person to supply, utility services and other services for the benefit of owners and occupiers of lots, if the services consist of 1 or more of the following-- (a) maintenance services, which may include cleaning, repairing, painting, pest prevention or extermination or mowing; (b) communication services, which may include the installation and supply of telephone, intercom, computer data or television; (c) domestic services, which may include electricity, gas, water, garbage removal, airconditioning or heating. Example-- The body corporate might engage a corporation to supply PABX services for the benefit of the owners and occupiers of lots. (2) The body corporate may, by agreement with a person for whom services are supplied, charge for the services (including for the installation of, and the maintenance and other operating costs associated with, utility infrastructure for the services), but only to the extent necessary for reimbursing the body corporate for supplying the services. (3) In acting under subsections (1) and (2), the body corporate must, to the greatest practicable extent, ensure the total cost to the body corporate (other than body corporate administrative costs) for supplying a service, including the cost of a commercial service, and the cost of purchasing, operating, maintaining and replacing any equipment, is recovered from the users of the service.

Observation

The applicant states that only $121,000 of the sinking fund was earmarked for the painting of the units, though they have not provided me with the basis of this understanding. It appears that this understanding may be based on the projections made in September of 2003 (provided by body corporate manager), that $121,275 might be spent on painting in the 2006 financial year.

Given that the cheapest quote secured for the job in 2006 (for 2007 financial year) was $189,000, it would certainly appear that the projections had not foreseen the extent of price rises attaching to the provision of painting services. Therefore, it is arguable that the levies collected in anticipation of painting have been inadequate.

However, in my mind this means any number of items may have required substantial adjustment either up or down since the time of the 2003 projections and the greater issue is for the Body Corporate to consider the adequacy of its sinking fund balance as a whole, rather than just referring to the isolated issue of painting. For example, other large expense items such as bitumen maintenance may now be under or over provided for. However, no-one has given me any information on this issue. Further, it is not really the role of this office to undertake budget exercises on behalf of bodies corporate.

I will leave remedial action in that regard, in the hands of the Body Corporate. However the Body Corporate should note that "the sinking fund must allow a reasonable capital amount both to provide for necessary and reasonable spending from the sinking fund for the financial year, and also to preserve an appropriate proportional share of amounts necessary to be accumulated to meet anticipated major expenditure over at least the next 9 years........".

In particular I refer the Body Corporate to the example provided under Section 92(3) of the Module and ask them to consider whether or not they have recast the levy each year in order to accommodate anticipated increases in cost.

Determination

Regretfully, all parties to this dispute appear to be unaware of the significance of the failure to comply with the requirements of Section 118 of the Body Corporate and Community Management (Accommodation Module) Regulation 1997.

Under sections 108 and 119 of the Module, where a community title scheme is created under a standard format plan (formerly known as a group title plan), maintenance of lot buildings, including painting, is the responsibility of each lot owner while the body corporate is responsible for the common property areas.

Therefore unless the body corporate is able to establish that a lot owner is in breach of their obligations under section 119(2) to maintain the lot in good condition, the body corporate is unable to insist that a lot be painted.

When painting is due, owners have a duty under this provision to paint their lot buildings when repainting is necessary. They may do the work themselves by engaging a tradesperson painter or, alternatively, under section 118 of the Standard Module owners may arrange for the body corporate to engage a painter to paint their buildings to take advantage of cost savings and for uniformity. However such an arrangement it is not obligatory for owners and each owner may choose whether they wish to participate in the arrangement or not. Those who do participate must share the full cost of the painting with no cost falling on the body corporate or those owners who refuse the painting service.

In respect of an arrangement pursuant to section 118 of the Standard Module Regulation, I wish to make it clear that painting of individual lots cannot be paid for out of the sinking fund. That is, the Body Corporate cannot disregard the provisions of Section 118 and elect to collect monies in the sinking fund for that purpose.

Realistically, a Body Corporate cannot resolve to override the right of an owner (within a standard format plan), to engage in their own maintenance regime. This is because persons purchasing under a standard format plan at any time down the track, cannot be denied the right to self maintenance, as they may have elected to purchase into a standard format plan partly because of that freedom of choice.

Therefore, the question arises as to how the body corporate should deal with moneys paid over the years into the sinking fund for the purposes of funding future painting. Clearly the sinking fund forecast should not have included a component for the cost of painting individual lots and the body corporate should ensure that any such cost component is removed from future forecasts.

While the Act and regulation modules do not specifically deal with repayment of monies erroneously levied against owners, the legislation gives an adjudicator a wide jurisdiction to make orders that are "just and equitable in the circumstances to resolve a dispute". This includes the making of any ancillary and consequential provisions an adjudicator considers necessary. In this matter it appears just and equitable for me to order that the monies in the sinking fund which have been allocated for the painting of individual lot buildings should be refunded to the lot owners in the same proportion in which they were collected. As all owners will receive a refund, I consider that no owner will be disadvantaged. Even if an owner has only recently purchased a lot, that owner should receive a refund since the contributions of a previous owner are effectively a portion of the equity of the body corporate funds acquired by the new owner as part of the purchase.

Therefore, before the painting proceeds the Body Corporate will need to arrange for the refund of sinking fund monies and the entering of individual agreements with lot owners regarding the painting. These agreements should be in writing and identify the cost attributable to preparation/repairs and the painting service.

I will order accordingly.

Number of Scheme:	19563
Name of Scheme:	Merrimac Heights
Address of Scheme:	10 Bourton Road MERRIMAC QLD 4226

•	Painting costs in the upcoming year had been allowed for at $215,600 whereas quotes had been received for $189,000 plus GST;
•	Installation of driveway gates had been allowed at $21,500 but $13,000 had been met from the 2005/2006 budget;
•	Repairs to the tennis court fence had been allowed for the year 2010 at $54,819 however the committee realised that repairs would be needed before then;
•	Painting had been budgeted for in another 8 years time, even though the warranty was for 10 to 12 years;
•	The estimated sinking fund balance at 31 July 2007 was $4,003.87, with contributions of $50,903.60 required in the following year;
•	If no significant emergency works came up, the estimated sinking fund balance was expected to be higher, assuming approval of proposed increased to levies;
•	Additional works or improvements cannot be carried out without again increasing levies.

Queensland Body Corporate and Community Management Commissioner - Adjudicators Orders

Merrimac Heights [2006] QBCCMCmr 609 (21 November 2006)