Owner’s corporations and the benefit principle


Owner’s corporations and the benefit principle

The benefit principle states that individual lot owners who benefit more from owner’s corporation decisions should pay more. If the benefit principle is not applied, matters can end up in VCAT.

The Owners Corporations Act 2006 states:

  1. Section 24: owners corporations can levy special fees and charges on individual lot owners to cover extraordinary expenditure items such as repairs, maintenance or other works undertaken wholly or substantially to benefit some or one (but not all) of the lots.
  2. Section 49: owners corporations can recover as debts from individual lot owners the cost of repairs, maintenance or other works undertaken wholly or substantially for the benefit of one or some (but not all) of the lots.

How is the benefit principle applied?

Owner’s corporations must correctly calculate and apply the benefit principle whenever setting special fees, charges and debts to cover extraordinary expenditure items.

Prior to December 2021, the owner’s corporation could only use the benefit principle to set annual fees based on lot liabilities. Since 1 December 2021, however, owner’s corporations must calculate and apply the benefit principle whenever adding special levies or debts onto annual fees of individual lot owners.

The “detriment principle” – protecting the owner’s corporation and compliant residents

In what can be called “the detriment principle”, residents need to be aware that owner’s corporations can now recover reasonable pre-litigation costs from defaulting owners and impose payment plans for hardship cases to reduce inequities for non-defaulting residents.

Such costs and plans could include the ability to:

  1. levy additional annual fees on residents because their actions have created additional costs;
  2. levy annual fees on lots other than in accordance with lot liability because of additional costs caused by the particular use of that lot;
  3. levy annual fees on lots where the lot liability does not adequately take into account the amount of these additional costs; and
  4. recover premiums from individual residents to pay for the costs of reinstatement and replacement insurance claims or any insurance excess amounts such as:
  • excess amounts or increased premiums caused by insurance claims because of the culpable or wilful acts or gross negligence of residents, their tenants or guests;
  • damage to common property caused by residents, their tenants or guests where the policy excludes the damage, or the costs of repairing the damage will be less than the excess amount payable;
  • claims as a result of damage through Airbnb parties that increase insurance premiums and the cost of the increase can be passed onto the Airbnb hosts; and
  • passing on the costs for an owner’s corporation to pay for additional security for Airbnb properties.

Legal advice when applying the benefit principle can reduce the potential of a challenge

Owner’s corporations may wish to obtain legal advice to make sure that VCAT will not dismiss their levies or debt recovery actions if their decisions made under the benefit principle are challenged.

Legal advice would be based upon what is known as “the Grundl Assessment” in Owners Corporation PS407621Y v Grundl (Owners Corporations) [2017] VCAT 1550.

This sets out the steps an owner’s corporation must follow whenever calculating and applying the benefit principle.

  1. It must turn its collective mind to the question of whether all lots will benefit substantially from the expenditure or whether some lots will benefit more substantially than others.
  2. It must then act in good faith and exercise due care and diligence (as required by s 5 of the Owners Corporations Act 2006) to decide the extent to which the various lots will benefit and then apportion the fees honestly and reasonably.
  3. If it decides that all lots will substantially benefit, then it must set fees according to lot liability.
  4. However, if some lots will benefit substantially more than others, then it must set fees according to the benefit principle and not according to lot liability. This will ensure that owners of lots that benefit more will pay more.
  5. If the owner’s corporation does all this, it will not commit a legal error in making its decision.
  6. However, if it does not do this, it will have committed a legal error in making its decision.
  7. An owner who does not agree with the decision can challenge it in VCAT.
  8. If no legal errors can be found in the original decision, VCAT will uphold the owner’s corporation decision and dismiss the lot owner’s challenge.
  9. VCAT can also set aside the owner’s corporation decision if the owner can prove that the decision falls outside the range of reasonableness and that no members of the owner’s corporation could have made the decision if they had been acting honestly and reasonably.
  10. VCAT can also set aside the decision if the individual owner can prove that there was another legal error that would invalidate it.
  11. If an extraordinary expenditure is urgent, an owner’s corporation must pass a special resolution to levy that extraordinary expenditure if it will be more than twice the amount of the current annual fees.

Get help from a property lawyer

At David Davis, we have significant expertise and experience with owner’s corporation (previously body corporate) disputes and with VCAT hearings.

We can provide advice and assistance to an owner’s corporation that has applied the benefit principle when calculating special fees and charges and that decision has been challenged by a resident. We can also assist residents who are challenging an owner’s corporation decision.

Contact David Davis Lawyers

Phone: 03 9014 1299

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