Will your body corporate be footing the legal bill for debt recovery against lot owners?

Will your body corporate be footing the legal bill for debt recovery against lot owners?

An article by Nicole Wilde, Special Counsel in our Queensland office.

Why Body Corporate Debt Recovery Is Necessary

It is “unsatisfactory and unfair to other lot owners”[1] when other lot owners do not stay up to date with their body corporate contributions. The Court of Appeal in Queensland has noted:

“…The recovery of contributions owed to the body corporate by lot owners is a significant issue for some bodies corporate, to the extent that in some instances, contributions can be in arrears for a number of years. The problem of arrears can be such that it can cause severe financial hardship for the body corporate.”[2]

Your Body Corporate’s Duty to Sue

A body corporate has the right to recover unpaid contributions, penalties and recovery costs from lot owners.[3]

In fact, a body corporate has a statutory duty to start legal debt recovery proceedings against lot owners where a contribution has been outstanding for 2 years. The body corporate has a duty to sue a lot owner in arrears within 2 months after the 2 year period where the contribution has been outstanding.[4] The body corporate can start debt recovery proceedings earlier, but by the time the contribution has been outstanding for 2 years and 2 months, if the body corporate has not commenced legal debt recovery proceedings against the lot owner, the body corporate itself will likely be in breach of its duty to sue.

What do we believe about body corporate debt recovery costs?

To have the best prospects of ensuring that your body corporate can recover most, if not all, of its legal recovery costs from lot owners in arrears, you must ensure that your body corporate’s actual legal costs are:

1. Reasonably incurred (in other words, no unnecessary steps should be taken);
2. Reasonable in amount (in other words, at a reasonable rate for a solicitor dealing with the matter having regard to the complexity of the matter); and
3. Proportionate to the amount of the lot owner’s debt.

Failure to ensure that your body corporate engages a solicitor that lives by the above values may mean that your actual legal costs are not accepted by the Court as ‘reasonable’ recovery costs, meaning they would not be recoverable from the lot owner. That means that your body corporate (and all the lot owners who pay on time) is left footing the bill for any legal or debt recovery costs that are not ‘reasonable’.

What Can Be Included in Your Body Corporate’s Debt Recovery Claim

A body corporate’s debt recovery claim against a lot owner is allowed to relate to contributions, penalties and recovery costs that became overdue in the period dating back 6 years from when the legal debt recovery proceeding is commenced.[5] Before 2018 there was some confusion in the industry about whether debt recovery could relate to the lot owner’s previous 6 years’ arrears, or only the last 2 years’ arrears, was clarified by the Queensland Supreme Court (Court of Appeal).[6] A body corporate’s debt recovery claim against a lot owner can include debts dating back 6 years prior to the debt recovery claim being commenced.

Will the Body Corporate be able to recover all of its legal costs from the lot owner?

The short answer is maybe. The long answer is that there have now been two Queensland District Court decisions where the ‘reasonableness’ of a body corporate’s actual legal debt recovery costs were scrutinised:

1. The Thompson decision

In the Thompson decision in 2017, the body corporate plaintiff engaged Grace Lawyers as its solicitors to act in legal proceedings to recover unpaid contributions, penalties and recovery costs from a lot owner. The body corporate applied for summary judgment. A Magistrate granted the body corporate’s summary judgment application and ordered the lot owner to pay unpaid contributions in the sum of $16,049.02, $817.49 in interest and $32,171.21 in recovery costs. To obtain this summary judgment the body corporate relied on an affidavit from its solicitor giving evidence to the effect that its legal costs incurred were ‘reasonable’. The lot owner successfully appealed against the summary judgment. In finding that the Magistrate made errors, the District Court relevantly said:[7]

“…[38]  I am not persuaded that these assertions of opinion as to the reasonableness of the [legal] charges, when regard is had to all the information before the court, are sufficient to satisfy the Court that the defendant has no real prospect of successfully challenging the costs sought.

[39] Firstly, the evidence of Mr Carlson as to his opinion can only be admissible on the basis of special expertise. The conditions for admissibility of expert opinion as stated in Cross on Evidence are helpfully set out in the judgment of Applegarth J in Thiess Pty Ltd v Arup Pty Ltd.32 It is doubtful whether the claim of expertise briefly made in the affidavit is sufficient to justify admissibility of this evidence as expert opinion. Ultimately it will be necessary for the respondent to prove the primary facts founding the opinion and to establish those facts are a proper foundation for the opinion reached. It is enough to observe that costs agreed between solicitor and client, although considered reasonable as between those parties, will not necessarily be reasonably incurred within the meaning of s 145(1)(c) of the Standard Module. The criteria upon which Mr Carlson reached his opinions as to reasonableness is not clearly articulated….]”

2. The Jorgensen decision

In the Jorgensen[8] decision in 2020, the body corporate plaintiff engaged Grace Lawyers as its solicitors to act in legal proceedings to recover unpaid contributions, penalties and recovery costs from a penthouse lot owner. In almost identical circumstances to the Thompson decision, the body corporate applied for summary judgment against the lot owner and a Magistrate made an order requiring the lot owner to pay the body corporate’s claim for unpaid contributions in the amount of $29,033.76, interest of $3,841.25 plus $40,280.61 in legal costs and debt recovery costs by a debt recovery agency used by the body corporate’s strata manager. In support of the summary judgment application, the body corporate had relied on an affidavit of its own solicitor giving evidence that the body corporate’s legal fees were ‘reasonable’. The lot owner successfully appealed against the summary judgment order. In finding that the Magistrate made errors in giving summary judgment against the lot owner, the District Court relevantly said:

“…First, Mr Carlson as a Partner of Grace Lawyers exhibited the tax invoices rendered to the respondent in accordance with the various Costs Disclosure Agreements. And in relation to each of these invoices he swore that the work was reasonable and necessary essentially because it was done. This method of proof is self-serving and of little if any probative value in my view. Further, there was no submission or evidence put before me to demonstrate that Mr Carlson possesses any relevant expertise in costs assessment such as would enable him to provide an admissible opinion as to the reasonableness of the costs sought.

[103] Secondly, even if Mr Carlson established he had the necessary qualifications to give this opinion evidence, the reasonableness of the recovery costs both in terms of whether they were reasonably incurred and reasonable in amount do not bear the simplest of scrutiny. Mr Carlson’s evidence is replete with deficiencies, irrelevancies and unexplained conclusions…”

Scale Legal Fees

To provide some context, in body corporate debt recovery claims for amounts less than $50,000, if a lot owner does not defend the claim and the body corporate applies for default judgment, the registrar of the Court is required to fix the legal costs amount (exclusive of service disbursements and necessary searches) as follows:[9]

It is not mandatory for solicitors to charge their body corporate clients the above scale legal fees for obtaining default judgment against a lot owner. However, a body corporate who engages a debt recovery agency or a solicitor that charges significantly in excess to obtain default judgment may be at risk of not being able to recover all of its legal costs as ‘recovery fees’ if they are not reasonably incurred, reasonable in amount and proportionate to the lot owner’s debt.

How to start a debt recovery proceeding

A body corporate can authorise the start of a debt recovery proceeding against a lot owner by Committee resolution. You are allowed to choose which solicitor you want to act for your body corporate.

The Committee can vote, either at a Committee Meeting or by a Vote Outside of Committee meeting (VOC) to pass an authorising motion, for example:

The Committee resolves to:

• authorise the commencement of debt recovery proceedings against the owner of lot [#] for the purpose of recovering unpaid contributions, penalties and recovery costs;
• engage Bugden Allen Lawyers (BAL) to act for the body corporate in the proceeding subject to the provision of a cost agreement from BAL that is acceptable to the Committee;
• direct its body corporate manager to supply to BAL from the body corporate’s records all documents and information necessary for the debt recovery proceeding; and
• authorise the body corporate manager and the committee members to swear or affirm any affidavits on behalf of the body corporate for the purpose of the proceeding.

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[1] Jorgensen v Body Corporate for Cairns Central Plaza Apartments [2020] QDC 300, Muir DCJ, para 110.

[2] Explanatory Notes for SL 2003 No. 263 referred to in Body Corporate for Mount Saint John Industrial Park v Superior Stairs & Joinery Pty Ltd [2018] QCA 173 (31 July 2018).

[3] Body Corporate and Community Management (Standard Module) Regulation 2020, reg 166(1).

[4] Ibid, reg 166(2).

[5] Limitation of Actions Act 1974 (Qld), s.10.

[6] Body Corporate for Mount Saint John Industrial Park v Superior Stairs & Joinery Pty Ltd [2018] QCA 173 (31 July 2018).

[7] Thompson v Body Corporate for Arila Lodge [2017] QDC 134, paras 38 to 40.

[8] Above n. 1.

[9] Uniform Civil Procedure Rules 1999 (Qld), reg 694 & Schedule 2, Part 2.