When acting for a Purchaser of a strata property, it is generally assumed that outstanding strata levies will be paid by the Vendor from sale proceeds at settlement. However, accepting this general position without further investigation, may be somewhat careless.
Standard condition 23.6.1 deals with strata contributions that are not regular periodic contributions (such as a special levy), not disclosed in the Contract. Special levies are generally raised when there aren’t enough funds in either the administrative or sinking fund to pay for an essential expense. Standard Condition 23.6.1 reads:
- 23.6 If a contribution is not a regular periodic contribution and is not disclosed in this contract-
- 23.6.1 the vendor is liable for it if it was levied before the contract date (unless it relates to work not started by that date), even if it is payable by instalments;
Significantly, the words in brackets are often overlooked, causing an unaware Purchaser to become liable for more than they bargained for. The critical wording in brackets, “(unless it relates to work not started by that date)”, provide that where a special levy (ie – not a periodic contribution) is levied prior to the contract date, but where work has not commenced at the date of contract, the Vendor will not be responsible for payment of this levy. In other words, the Purchaser will “inherit” the levy on settlement.
Special levies can often be quite hefty so it is important that a Purchaser is fully informed as to whether they will become responsible for any such levies on settlement. Investigation must therefore be made either prior to exchange of contracts or after exchange where the contract is conditional on the Purchaser obtaining a satisfactory body corporate report.
To ensure a Purchaser is fully informed, not just as to potential levies they will become liable for but also as to the nature of the body corporate into which they are buying , a comprehensive body corporate report should certainly be ordered.
Should the report detail the existence of a special levy, further enquiries must be made with the body corporate manager to make clear whether the work, the subject of the levy, has commenced.
It is also worth pointing out the specific wording used in Standard Condition 23.6.1. The said Standard Condition refers to work being “commenced” rather than “completed”.
As time and cost are involved in obtaining a body corporate report, the time at which to order the report is also relevant. Until a contract is exchanged it is not binding on the Parties and therefore a Purchaser should be cautious when expending money on searches that may become irrelevant in the event that the Vendor enters into a contract with another Purchaser. The Vendor is not obliged to compensate a potential purchaser for any money expended on searches in this case.
Therefore, a Purchaser should enter into a Contract made subject to asatisfactory body corporate report, prior to ordering the body corporate search. This will allow them to rescind the Contract in the event that the report is not satisfactory. Similarly, the Purchaser’s solicitor should ensure that the “subject to” clause is not restrictive in nature and allows the Purchaser to rescind the Contract in the event that the report details levies for which the Purchaser will become responsible for if the Contract proceeds to settlement.
Should the report reveal that special levies are not payable by the Vendor on settlement, the Purchaser has several options (where the correct special condition is inserted into the Contract as detailed above). The best option is to negotiate an adjustment to the purchase price for the value of the levy. If the Vendor refuses to negotiate, the Purchaser then has the choice to rescind the contract or proceed with the Contract on the understanding that they will be responsible for the outstanding levy.
Although the Purchaser may ultimately find they will be responsible for the special levy, they will be fully informed proceeding with an unconditional contract and can plan and make provision for the cost of the special levy.
If you require any further information and/or advice in relation to buying or selling your property please do not hesitate to contact our property and commercial department manager Michelle Hall on 02 6670 1001 or firstname.lastname@example.org.