Liberty [2008] QBCCMCmr 229 (30 June 2008)

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

I hereby order that the Body Corporate for Liberty is not entitled to recover the amounts of $998.84 and $257.40 charged to Alotier Pty Ltd, the Owner of Lot 2985, on 17 September and 12 October 2007 for legal fees, unless and until those costs are determined by a court of competent jurisdiction to be recovery costs reasonably incurred.

I further order that, within seven (7) days of this order, the Body Corporate for Liberty issue a account statement to Alotier Pty Ltd, the Owner of Lot 2985, showing a reversal of those legal fees, as well as a reversal of any further amounts (including any lost discounts, interest penalties or other recovery costs) accruing since 17 September 2007 because of the purported imposition of those legal fees.

I further order that, within seven (7) days of this order, the Body Corporate for Liberty shall provide a copy of this order and statement of reasons to all lot owners in this scheme.

The above order was appealed to the Commercial and Consumer Tribunal. The appeal no is KA009-08.

Liberty community titles scheme 27241 (Liberty) consists of some 191 lots and common property. The community management statement (CMS) for Liberty indicates that the Body Corporate and Community Management (Standard Module) Regulation 1997 (Standard Module) applies to the scheme. Department of Natural Resources and Water records show the scheme is registered as Survey Plans 120551 and 126147.

Pursuant to the Body Corporate and Community Management Act 1997 (Act), this application was made by Alotier Pty Ltd, Owner of Lot 2085 (applicant), represented by Otto Paschkewitschus, on 8 February 2008. The applicant sought the following order against the Body Corporate for Liberty Place (respondent):

To remove the legal fees totally, fees of 1,256.24 as highlighted in the attached levy notice.

In initially the applicant lodged a conciliation application. I understand that the Commissioner’s Office conducted a conciliation session on 22 January 2008 but this was not successful in resolving the dispute.

Under section 243 of the Act, a copy of the application was provided to the Body Corporate, with an invitation to the Committee and all owners to respond to the matters raised by the application. A submission was made by the body corporate manager (BCM) for the scheme, Stewart Silver King and Burns (SSKB), on behalf of the Committee Secretary. The applicant inspected the submissions received and made a written reply.[1]

A dispute resolution recommendation was made referring the dispute to departmental adjudication.

The application relates to legal fees charged to the applicant by the Body Corporate as a result of debt recovery action taken to pursue the applicant’s late payment of contributions.

On 3 July 2007 the applicant wrote to SSKB, proposing to pay its arrears in nine weekly instalments with the full amount of nearly $4,400 to be paid by 31 August 2007. The BCM forwarded this request to the Chairperson, Geoffrey Chapman, on 9 July and on 10 July he responded that “The general consensus is that he should pay up ASAP.” and told the BCM to “...take whatever action is necessary, to get the money in asap, in the most economical way possible.”

By email on 11 July 2007 the BCM advised that the Committee rejected the plan and would take legal action if all outstanding amounts were not paid in full immediately. However the applicant says there are no records of the Committee considering the proposal in any Committee meeting. On 4 October 2007 SSKB advised the applicant that the payment plan was “...declined by email to be ratified at the committee meeting to be held on the 15th October 2007.” The minutes of the Committee meeting on that date show no such consideration of the applicant’s proposal, although an arrears payment plan proposed by other owners was unanimously approved at that meeting.

The applicant proceeded to make the proposed payments and cleared the debt by 31 August. By email on 18 July 2007 SSKB acknowledged one of the payments but said the Body Corporate did not accept it as part of an accepted payment plan and that if full payment was not made immediately the Body Corporate reserved the right to take legal action to recover the balance.

The applicant then received a notice of contributions on 16 October 2007 which included two items described as ‘Legal Fees Hwl’. One dated 17 September 2007 was for $998.84 and the other dated 12 October 2007 was for $257.40, both after the levies had been paid. The applicant says they received no correspondence from the Body Corporate’s solicitors, Home Wilkinson Lowry (HWL), or from the Body Corporate in regard to these charges. It later emerged that a letter of demand from HWL was apparently sent to an incorrect address.

The applicant says they disputed the charges with SSKB without success. He wrote to the Committee on 4 October 2007 but received no response and no mention of his letter in subsequent meeting minutes. SSKB advised the applicant that as the matter had been referred to the solicitors all correspondence must be directed to HWL. Queries to HWL were not responded to.

The applicant objects to the legal fees and considers that they are being victimised despite making a fair and reasonable payment plan request. They argue that the Committee and BCM have not acted in the best interests of the Body Corporate in issuing these charges and ignoring requests for explanations. They believe the BCM has breached the Code of conduct for body corporate conduct and caretaking service contractors[2].

The submission makes comments about the conciliation proceedings. Pursuant to section 252E(5) of the Act, evidence of anything said or done about a dispute in a departmental conciliation session is inadmissible in a proceeding, Accordingly I have disregarded that information.

During the course of investigating this dispute I requested further documentation from the Body Corporate in regard to the decisions in made in regard to the dispute, and its engagement of HWL. Documentation provided included:

I am satisfied that this is a matter which falls within the legislative dispute resolution provisions.[3]

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:

(b) the exercise of rights or powers, or the performance of duties, under the Act or the CMS; or

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

An order may require a person to act, or prohibit a person from acting, in a way stated in the order.[4] An adjudicator's order may contain ancillary and consequential provisions the adjudicator considers necessary or appropriate.[5]

The debate between the parties in this dispute has focused on the reasonableness of the charges imposed by the Body Corporate. However the determination of this application hinges on a much more fundamental issue: the authority to recover debt recovery costs.

While I appreciate the applicant’s apparent history of indebtedness in this scheme, which has not been specifically refuted by applicant, the Body Corporate must take great care when purporting to incur and charge for debt recovery costs.

Section 99 of the Standard Module, as follows, allows the Body Corporate to recover unpaid contributions, penalties and recovery costs as a debt. The legislation only allows a body corporate to recover costs ‘reasonably incurred’ in recovering outstanding contributions.

(1) If a contribution or contribution instalment is not paid by the date for payment, the body corporate may recover each of the following amounts as a debt—

(c) any costs (recovery costs) reasonably incurred by the body corporate in recovering the amount.

(2) If the amount of a contribution or contribution instalment has been outstanding for 2 years, the body corporate must, within 2 months from the end of the 2 year period, start proceedings to recover the amount.

(3) A liability to pay a body corporate debt in relation to a lot is enforceable jointly and severally against each of the following persons—

(b) a person (including a mortgagee in possession) who becomes an owner of the lot before the debt is paid.

(4) If there are 2 or more co-owners of a lot, the co-owners are jointly and severally liable to pay a body corporate debt in relation to the lot.

(5) If an owner is liable for a contribution or a contribution instalment, and a penalty, an amount paid by the owner must be paid—

(6) If the body corporate is satisfied there are special reasons for allowing a discount of a contribution, or waiving a penalty or liability for recovery costs, the body corporate may allow the discount, or waive the penalty or costs in whole or part.

A ‘body corporate debt’, as defined in the Dictionary to the Standard Module as meaning:

(b) a penalty for not paying a contribution or instalment of a contribution by the date for payment;

• an amount owing to the body corporate for lawn mowing services arranged by the body corporate on behalf of the lot owner

Pursuant to section 96, a body corporate can only include on a contribution notice the owner’s contributions, penalty interest and any amounts that an owner has agreed to pay associated with services provided to their lot[6] or related to an exclusive use by-law. Any additional amounts which a body corporate considers an owner is liable for must be pursued separately, but the non-payment of these would not affect the discounts and penalties applicable to that owner’s account.

Moreover, unless such additional amounts fall within the scope of ‘another amount associated with the ownership of a lot’ as described in the definition cited above, they would not be a ‘body corporate debt’. As such the non-payment of such amounts would not affect an owner’s voting rights[7] or become the liability of a subsequent owner of the lot. It has been accepted in previous adjudications[8] that recovery costs provided for under section 99(1)(c) do not fall within the definition of a ‘body corporate debt’, and as such they attach to the individual and not the lot.

Amounts charged by a BCM, such as statement fees and arrears notice fees, are not normally services that an individual owner has agreed to. Although a BCM may be entitled to charge these amounts under the terms of their engagement, the agreement is between the BCM and the body corporate. As such the charges are the responsibility of the body corporate to pay unless and until they are deemed to be ‘recovery costs’ which can be charged to the individual owner.[9] The same principle applies to charges incurred by a body corporate’s engagement of a solicitor or a debt collection agency.
The key question, then, is what ‘recovery costs’ are. Costs incurred by a body corporate in relation to the failure of an owner to pay their levies do not become ‘recovery costs’ simply by virtue of them being incurred by the body corporate. A body corporate does not have an automatic right to recover costs incurred when they hand a debt over to a debt collection agency or lawyer, even if that lot owner has withheld contributions deliberately or for a long time. It has been well established in previous adjudications[10] that it is not for a body corporate to determine what costs are reasonable or not.

Section 99 provides that recovery costs must be pursued as a ‘debt’. There is a particular significance to this term. It means the costs allegedly incurred must be pursued in a court of competent jurisdiction. The costs do not become payable by the owner until the body corporate has obtained a judgment order as to the costs. Therefore, the body corporate must be able to satisfy the court that the costs were reasonably incurred and can only charge an owner for recovery costs that the court has determined are reasonable.

If this were not the case there would be no check on the amounts that a body corporate could seek to pass on to owners. There is no authority, under the body corporate legislation or in law generally, for an aggrieved party to unilaterally impose its legal costs to a party with whom it is in dispute. To do so would be attempting to usurp the power of a Magistrate or District Court judge to award costs. Moreover, although the description of ‘costs reasonably incurred’ may be a broader basis of recovery than the standard court scale of costs, it should not be assumed that all costs actually incurred will be fully recoverable. That will be a matter for the discretion of the judge.

The requirement that recovery costs may only be charged to an owner through a court order (unless they charged by agreement of the owner) means that a body corporate is must act very carefully when it engages professional assistance to pursue debts. It cannot assume that the costs of professional assistance will, as of right, be passed on to a lot owner.

If a body corporate wishes to commence debt recovery proceedings or engage a solicitor or other agent to pursue a debt, authority for those actions must be given by the Committee at a minuted committee meeting. Even if it is within the terms of the BCM’s engagement to pursue outstanding debtors, or engage agents for that purpose, a BCM cannot make these decisions. Although the Committee can resolve to bring a proceeding to recover a liquidated debt[11], if the costs likely to be incurred are more than the committee spending limit then authorisation for the expenditure will need to be considered at a general meeting.[12]

In this case there was a very general Committee resolution authorising the BCM to take all necessary action to recover any outstanding levies. The resolution did not relate specifically to the applicant. I do not consider that this was adequate. The Committee cannot delegate to the BCM the decision to take commence legal proceedings or to expend funds on the engagement of a solicitor. The Committee should be specifically considering (and minuting) in each case whether the costs (including those charged by the BCM as well as the solicitor) and time taken to pursue formal action is the most effective means of recovering the debt in the circumstances. While the BCM later received direction from the Chairperson in regard to this specific case, it should be noted that the Chairperson has no unilateral decision-making capacity.

It is clear in this case that the Body Corporate has not obtained a court judgement in relation to the disputed legal fees. In the absence of any judgement authorising any recovery costs, the Body Corporate is clearly not entitled to charge any recovery costs.

This does not prevent the Body Corporate from now taking proceedings to seek a court order for payment of all recovery costs incurred by it, including these legal fees, if it can establish to the court’s satisfaction that those costs are reasonable. It would be for the court to determine if the charges actually incurred are reasonable. I certainly do not propose to comment on the quantum of the fees charged by the Body Corporate’s solicitors. However I will make some observations on the Body Corporate’s actions in this regard.

I would suggest that, while the Body Corporate clearly accepted payment plans from other owners, it would not necessarily be unreasonable to refuse a payment plan from an owner who has a long history of indebtedness, particularly in the absence of any indication that the owner was experiencing any specific financial hardship. However I am concerned that the Committee did not properly consider the payment plan. It is clear that there was no Committee meeting, or even a resolution passed outside a Committee meeting[13]. But the Committee cannot make a decision without such a resolution. Moreover, the Committee should really have considered the full potential cost to the Body Corporate of pursuing formal debt recovery proceedings, the likely costs which could be recovered in court, and the possible time which such legal proceedings might take.

The Body Corporate has not provided documentation indicating when HWL was actually engaged to pursue the debt in regard to the applicant, what instructions were given or whether any quote for was provided. Clearly there was no Committee resolution specifically approving this engagement or the expenditure. I am also concerned that the Body Corporate does not (from the documentation provided) appear to have promptly informed HWL of the amounts received by 31 August 2007, which may have resulted in some costs being unnecessarily incurred after that date.

It would seem from the material provided that charging owners for including recovery costs on contribution notices and charging recovery costs without a court order is part of SSKB’s standard accounting procedures in the financial administration they undertake for their client bodies corporate. While the Body Corporate and its Committee retains responsibility for actions of the BCM engaged by it, they may well have relied on the expertise of SSKB in this regard.

I am aware that the practice employed by SSKB in this case has been widespread in the body corporate management industry, with more than a dozen different body corporate management firms involved in disputes where recovery costs have been inappropriately charged. However, from my reckoning there have been at least 20 previous adjudicator’s decisions where a body corporate has been ordered to remove recovery costs from an owners account until they were the subject of a court order.[14] Many more have set out the applicable principles which I have discussed above. SSKB is a large and established firm that has been involved in the management of community titles schemes in Queensland for many years. As such it is to be expected that they would be familiar with the legislative requirements in this regard, not least because it is part of their responsibilities under the Code of conduct for body corporate managers and caretaking service contractors[15] which forms part of their terms of engagement.

Moreover, beyond the general expectation that SSKB, along with all BCMs, should be familiar with body corporate legislation, including well-established interpretations of the legislation, it is clear that SSKB has been directly put on notice as to the correct interpretation of the legislative provisions on at least two occasions. In one dispute resolution application determined in 2006[16], in which the Adjudicator’s statement of reasons clearly stated that recovery costs could not be included on an account until a court had determined that they were reasonable, SSKB was engaged as the BCM for the respondent body corporate.

These concepts were also commented on in a previous dispute resolution application involving the Body Corporate for Liberty, while SSKB was engaged as the BCM. The decision on that matter in 2004[17] invalidated a by-law which purported to provide for the recovery of body corporate costs in recovering arrears and undertaking legal proceedings, on the basis that the by-law sought to impose a monetary liability contrary to section 180(6) of the Act and also contradicted the provisions of the Act in regard to the recovery of contributions. In his statement of reasons the Adjudicator commented that the purported by-law contradicted the applicable legislative provisions in that it sought to make costs payable on demand rather than as a debt and to enable costs to be simply entered against the lot’s levy account rather than the legislative requirement to take a proceeding to recover the debt.

I am very concerned that SSKB has not corrected its apparently standard accounting procedures to ensure that it complies with the legislative provisions regarding recovery costs, as interpreted by numerous previous adjudications, and particularly those in which it was involved.

I appreciate that Committee members and individual SSKB staff may not have been personally aware of previous decisions. However seems from the material on both files that one of the founders of SSKB, Howard Stewart, was directly involved in Liberty at the time of the 2004 decision and remains involved at the current time. If so I am at a loss to understand why he has apparently failed to read, understand or apply the 2004 decision to his company’s practices.

Regardless of the individuals involved, I am of the view that SSKB should have changed its company’s accounting practices in all the schemes that it managed immediately on receipt of the 2004 decision. And if it was not immediately clear at that time, it certainly should have been when the 2006 decision was made.

SSKB can be in no doubt now. The principals of SSKB should address this situation immediately by notifying all staff of the applicable law and ensuring all necessary adjustments are made to its procedures so that the firm does not continue to purport to collect debt recovery costs on behalf of the bodies corporate that it represents without a court judgement. It should similarly ensure that only those amounts specified in section 96 of the Standard Module are included on contribution notices.

If SSKB does not take this action, I would consider that (like any other BCM who does likewise) it risks breaching the Code of conduct in respect of each of the bodies corporate that it represents. Moreover, all those schemes which SSKB acts for risk having each and every one of the inappropriate charges challenged by the affected owners.

I do not wish to suggest from these comments that SSKB bears the sole responsibility for the inappropriate charges imposed in this case. As always, the Body Corporate retains responsibility for directing and overseeing the actions of the BCM that it engages. However, as SSKB apparently provides management services for some 440 bodies corporate[18], my comments are made in the hope that the errors which have occurred in this case do not continue to be repeated in all those schemes.

A body corporate is not entitled to charge an owner for its debt recovery costs without the determination of a court that those charges are reasonably incurred. Given that the Body Corporate has not pursued the disputed legal fees of $1,256.24 in court, it follows that the Body Corporate is not entitled to transfer those costs to the applicant.

I have made a declaration to the effect that the applicant is not liable for these legal fees unless and until they are the subject of a court order. Accordingly I have ordered that the Body Corporate remove the amount from the applicant’s account. It may be that the inclusion of this amount on the applicant’s account has contributed to interest penalties imposed on the applicant, other charges, and possibly even the loss of discounts. The legal fees charged must be reversed from the date that they were first imposed, such that they were never and so any consequential costs in the account must also be removed.

I note that the documentation provided indicates that other fees relating to legal and debt collection activities may have been charged to the applicant before and after the two amounts disputed in this application. These amounts were not part of the order sought and so I have not investigated it or made any order in regard to them. However if there are other debt recovery amounts which have been charged which are not subject to a court order, it follows from my reasoning above that they should also be removed from the applicant’s account unless and until judgement is obtained.

As indicated above, I am concerned that the Body Corporate has continued to charge recovery costs inappropriately, despite being alerted to the legislative requirements in this regard in November 2004. Accordingly I consider it necessary to require that a copy of this order and my statement of reasons be distributed to all current owners in the scheme. This will put each owner on notice of the correct requirements and enable them to take appropriate action if recovery costs and any other unauthorised charges are incorrectly included on their contribution notices.

[1] See sections 246 and 244 of the Act respectively
[2] Schedule 2 of the Act
[3] See sections 227, 228, 276 and Schedule 5 of the Act
[4] Section 276(2) of the Act
[5] Section 284(1) of the Act

[6] For example, pursuant to an agreement under section 119 of the Standard Module

[9] Section 99(5) of the Standard Module sets out the order in which amounts paid by an owner can be applied to penalties, outstanding contributions, and recovery costs.

[10] The issue has been discussed in some 30 previous adjudications. For example: RA Meek in Belle Maison Reference 0458-1997 (5 May 1998), Unreported; J Underdown in Tropic Gardens [2005] QBCCMCmr 720 (20 December 2005); D Toohey in Anchorage [2006] QBCCMCmr 610 (22 November 2006); and MA Schmidt in Boca Raton East [2007] QBCCMCmr 526 (3 September 2007)

[11] Pursuant to section 312 of the Act and section 26(1)(e)(i) of the Standard Module, such actions are an exemption to the general requirement that a body corporate must have a special resolution to authorise the commencement of proceedings.
[12] Section 103 of the Standard Module
[13] Section 35 of the Standard Module

[14] See for example: Meek R in Belle Maison, Reference 0458-1997 (Unreported, 5 May 1998); Underdown J in Tropic Gardens [2005] QBCCMCmr 720 (20 December 2005) Toohey D in Anchorage [2006] QBCCMCmr 610 (22 November 2006); and Schmidt MA in Boca Raton East [2007] QBCCMCmr 526 (3 September 2007)

Number of Scheme:	27241
Name of Scheme:	Liberty
Address of Scheme:	1 Lennie Avenue MAIN BEACH QLD 4217

Queensland Body Corporate and Community Management Commissioner - Adjudicators Orders

Liberty [2008] QBCCMCmr 229 (30 June 2008)