The Owners - Strata Plan 50946 v Hong [2018] NSWLC 3 | Case summary

Local Court of NSW|2018-02-19

Judgment

The plaintiff commenced these proceedings on 15 February 2017 seeking to recover from the defendant, Ms Hong, the sum of $5,071.41 for unpaid levies together with interest and expenses that had been incurred as at the date of filing the claim together with the ongoing expenses of these proceedings.
Ms Hong is the owner of Lot 271 within the residential strata complex at Pyrmont. As at the date of the hearing of these proceedings the levies and interest that were claimed to be outstanding. The plaintiff maintained the proceedings to recover expenses which, as at the date of the hearing exceed the sum of $10,000. The plaintiff has abandoned the amount that exceeds the jurisdiction limit of the Small Claims Division of the Local Court. Ms Hong does not dispute her liability to pay the levies that have been raised, however, she states that the plaintiff has failed to provide an accurate record of her account or an explanation as to the interest charges that appear on the account. Ms Hong disputes that she should be liable for expenses that have been incurred by the plaintiff.

Background

There has been a significant history of legal disputes between the plaintiff and the defendant over payment of levies. It is necessary to outline in some detail the history between the parties prior to these proceedings.
This is sixth statement of claim issued on behalf of the plaintiff against Ms Hong since 2011 for outstanding levies, interest and expenses. The genesis of the legal history commenced in 2010 when Ms Hong, suffering from health issues, fell behind in making payment of quarterly levies. This triggered debt recovery action by the Owners Corporation. Legal action led to additional costs which, together with the outstanding levies, were paid by Ms Hong at the expense of current levies, which then fell behind. This in turn started a cycle of debt and subsequent legal action.
In the first, third and fourth proceedings the plaintiff obtained a judgment in its favour. In the second proceedings commenced on 15 June 2012 a defence was filed and the proceedings were discontinued. In August 2013 the plaintiff initiated proceedings in the Federal Circuit Court in relation to one of the Local Court judgments. The first, third and fourth judgments have been paid in full by Ms Hong. The last judgment being paid on 28 October 2013.
The fifth Local Court proceedings were commenced by the plaintiff in 2015. By the time of the final hearing in September 2015 levies and interest had been paid in in respect to expenses sought to be recovered the Court made orders that the plaintiff bear its own costs.
One significant matter arises from the 2015 proceedings. Prior to and during those proceedings the plaintiff, through its managing agent, Whelan Property Group, adopted the practice of recording on the Current Owner Account of Ms Hong legal costs and expenses as they were incurred by the plaintiff, notwithstanding the fact that Ms Hong had not been found to be liable for those costs.
This practice is contrary to what is permitted by the Strata Schemes Management Act 2015 (NSW). The Act makes a distinction between levies and interest which are an immediate debt due and owing to the owners corporation, and expenses, which may be recoverable as a debt by the owners corporation in a court of competent jurisdiction. The distinction was explained by this Court in the decision of The Owners -Strata Plan No 52098 v Khalil [2014] NSWLC 2 at paragraphs [49] to [58] in the context of section 80 of the Strata Schemes Management Act 1996 (NSW). The distinction is even more plain in the Strata Schemes Management Act 2015 whereby section 86(2A) provides that an owners corporation may recover: "a contribution not paid at the end of 1 month after it becomes due and payable, together with any interest payable on that unpaid contribution and the reasonable expenses of the owners corporation incurred in recovering those amounts" (emphasis added).
The qualification of "reasonableness" in the right of recovery of expenses means that owners corporations cannot unilaterally appropriate payments made by lot owners for payment of levies towards expenses incurred without those expenses being either assessed as reasonable by a court or tribunal or otherwise agreed upon between the Owners corporation and the lot owner.
The managing agent for the Owners Corporation failed to appreciate this distinction when it recorded whatever expenses are incurred as an immediate debt due by Ms Hong on her Current Owner Account. These amounts should not appear on an owner's account until such time as an order, judgment or settlement has been reached in respect to the lot owner's liability for those expenses.
As a consequence of the order made by the Court in the fifth proceedings that the plaintiff bears its own costs, the plaintiff has been required to amend Ms Hong's Current Owner Account by removing entries already entered for legal costs of those proceedings. For reasons not entirely clear the plaintiff elected to cancel payments made Ms Hong from 12 October 2012 to 9 September 2015, being thirty payments totalling $61,299.75, and reapplied those payments on 30 September 2015.
The removal of expenses and the reallocation of payments made between 2012 and 2015 to 30 September 2015 carried with it a potential impact upon the calculation of interest. If payments appear on the account as being made at a later time then the concern is raised by Ms Hong that additional interest would accrue as levies would appear to be unpaid for a longer period of time. In addition, the appropriation of payments towards expenses subsequently disallowed may also impact upon the calculation of interest.
As a consequence of the orders made by the Court in respect of the fifth proceedings the plaintiff's legal representative wrote to Ms Hong on 16 September 2015 advising that the plaintiff would carry out a review of Ms Hong's Current Owners Account and provide an amended Owner Ledger. The letter relevantly states: "Whelan Property Group is undertaking a review in conjunction with my firm of your Owner Ledger in light of Assessor Olischlager's decision. Upon completion of this review, hopefully by next week, I will provide you with your amended Owner Ledger and we can then attempt to resolve any further issues you may have. I will also endeavour to provide you with a reasonable explanation as why any amendments have been made to your Owner Ledger."
No amended Owner Ledger was forwarded to Ms Hong in accordance with this letter. Ms Hong followed up this letter with an email dated 11 March 2016 requesting a copy of her Owner Ledger. The legal representative responded by stating that he did hold any instructions in respect to the matter.
The next contact that was made on behalf of the Owners Corporation was through a debt collection agency in August 2016. Mr Ecob contacted Ms Hong regarding the outstanding account. Ms Hong states that a meeting was then arranged on 2 September 2016. At that meeting she states that she pointed out discrepancies in relation to the calculation of her Current Owner Ledger. She states that Mr Ecob undertook to discuss these discrepancies with the plaintiff.
The next communication from the plaintiff was a statutory notice issued to Ms Hong dated 13 December 2016 demanding payment of $8,238.97 comprising levies in the sum of $7,090.41 and interest in the sum of $1,005.56. The notice attaches a schedule of levies and payment from 1 July 2015. It does not address the adjustments from the previous 2015 proceedings. The demand indicates that recovery action will commence if the amount is not paid within 21 days.
Ms Hong emailed Mr Ecob on both 22 December 2016 and 6 January 2017 seeking advice why the notice had been issued instead of a response to the issues raised at the meeting of 2 September 2016. Mr Ecob did not respond to those emails.
Throughout the period of 16 February 2016 to 7 December 2016 Ms Hong made weekly payments to the plaintiff of either $300 or $250, despite her uncertainty regarding the balance of the Current Owners Account.
These proceedings then commenced on 15 February 2017.

Balance due on Current Owners Ledger

The plaintiff submits that Ms Hong's Current Owners Ledger had a nil balance as at 1 July 2015 and that this represents a starting point for calculation of arrears. The plaintiff states that when proceedings commenced on 15 February 2017 Ms Hong was in arrears in relation to levies up to 1 January 2017. Ms Hong does not accept that position and believes that there are errors in interest calculations that result in her account being in credit as at 1 July 2015 and that the plaintiff has failed to provide an accurate reconciliation of her account.
At the end of 2016 Ms Hong was receiving conflicting information from Whelan Property Group, the managing agent, and Collection Corporation of Australia, the debt recovery agent, regarding the state of her indebtedness. A levy notice issued by Whelan Property demanded payment of the sum of $11,633.28 on 1 October 2016. The statutory notice issued by Collection Corporation of Australia issued in December 2016 refers to a total amount due of $8,238.97. The schedule attached to that notice indicates a cumulative debt of $9,590.41 as at 1 October 2016.
The discrepancy was evidently a source of confusion to Mr Ecob, the debt recovery agent who was acting on behalf of the Owners Corporation. In an email dated 21 June 2017 to Ms Hong, Mr Ecob notes the discrepancy between the Owners Corporation records and the Collection Corporation of Australia schedules and writes: "I believe the discrepancy of $1001.21 has occurred when all payment were reapplied on 30/9/2015 though they had been paid earlier. This matter should be settled on the basis that a Credit is given by the Owners Corporation of $1001.21 and $9625.58 is paid."
Perhaps in an effort to resolve these discrepancies the plaintiff engaged Mr Pearce a Chartered Accountant to undertake a reconciliation of Ms Hong's Current Owners Account in January 2018. Mr Pearce has examined the Current Owners Account for the period of 1 October 2013 to 17 January 2018. He concludes that the balance outstanding on the Current Owners Ledger as at 17 January 2018 is $9,924.85. Mr Pearce also notes that all payments received between 12 October 2012 and 9 September 2015 totalling $61,299.75 were rolled back in the Owner Ledger in order to enable the cancellation of the legal fees. On 30 September 2015 all receipts totalling $61,299.75 were reapplied. Mr Pearce does not expressly state whether he undertook a recalculation of the interest payable according to the original date payments were received. However, the Court is prepared to find that interest has been calculated according to the original date of receipt on the basis that the revised Current Owners Account dated 16 June 2017 does not appropriate a greater amount for interest than the earlier unrevised version of the Current Owners Account dated 3 June 2015.
Mr Pearce does not provide any advice to explain the discrepancies between the Current Owners Account and schedules maintained by Collection Corporation of Australia.
The report provides little assistance to the Court.
It appears to the Court that the explanation for the discrepancy between the Current Owners Account and the schedules maintained by Collection Corporation of Australia lies in the continuing practice of the Managing Agent for the Owners Corporation to include expenses incurred irrespective of whether those expenses have been awarded by the Court. By way of example, the Current Owners Account dated 16 June 2017 records a debit of $143.00 on 14 December 2016 being the fee for the issue of the statutory notice of demand prior to the commencement of this current claim. It is still a matter for the Court to determine whether Ms Hong is liable for this fee. It should not appear on the Current Owners Account. This amount does not appear in the schedules maintained by Collection Corporation.
A perusal of Ms Hong's Current Owners Account dated 16 June 2017 compared to an earlier version of the Current Owners Account dated 5 June 2015 leads the Court to conclude that the Account contains errors, discrepancies and assumptions that are not substantiated.
Firstly, the Current Owners Account dated 16 June 2017 commences on 21 June 2011 and carries forward a cumulative debt of $5,146.55. Ms Hong has been a Lot Owner since 2002 and no doubt the Current Owners Account commenced from that time. That is not in evidence. Instead the plaintiff purports that the Current Owners Account commencing 21 June 2011 represents an accurate starting point. There are good reasons to doubt that this is the case. In Mr Ecob's statement outlining the history of proceedings at paragraph [12] he refers to the first legal proceedings that were commenced under file number 2011/00035511. These proceedings commenced in respect to levies due for the period 1/7/2010 to 1/1/2011 inclusive. A judgment was entered on 4 April 2011 in the sum of $8,112.92. Mr Ecob refers to various payments that were made during 2012 and 2013 by Ms Hong that discharged this judgment. Those payments do not appear on the Current Owners Account dated 16 June 2017. It appears that this judgment and the payment of it was managed separately from the Current Owners Account. This would effectively render Ms Hong with a nil balance on the Current Owner Account as at 1 January 2011. However, assuming that to be the case then only one levy would be raised on 1 April 2011 prior to the balance brought forward on 21 June 2011 on the Current Owner Account giving rise to a potential debt as at 21 June 2011 of $2,273.65. The figure of $5,146.55 that appears on the Current Owners Account is unexplained.
Secondly, the plaintiff's calculation of interest includes interest at the rate of 10% on expenses charged that have been debited to the Current Owners Account. Nothing within the Strata Schemes Management Act 2015 permits 10% interest to be applied to expenses. Section 79(2) of the repealed Strata Schemes Management Act 1996 provides: "A contribution, if not paid at the end of one month after it become due and payable, bears until paid simple interest at an annual rate of 10 per cent or, if the regulation provide for another rate, that other rate".
The provision is reproduced in almost identical terms in section 85(1) of the Strata Schemes Management Act 2015. The charge of 10% interest applies only to unpaid levies, not expenses.
The only way in which interest should be charged on expenses is if a claim for interest was awarded by the court pursuant to section 100 or 101 of the Civil Procedure Act 2005 (NSW). Interest rates under these provisions are lower than 10%. There is no evidence to suggest that interest on expenses has been either claimed or awarded by the Court pursuant to the Civil Procedure Act 2005 in any of the previous proceedings. Indeed it would be unusual for the Court to award pre-judgment interest on costs. It would appear that there is no basis for the Managing Agent for the Owners Corporation to charge interest on expenses.
The Managing Agent's error in calculating interest on expenses is illustrated by a comparison of the Owners Account dated 3 June 2015 and the revised Owners Account dated 16 June 2017. Both Current Owner Accounts show a payment was made by Ms Hong in the sum of $16,000 on 12 October 2012. In a copy of the Owner Account dated 3 June 2015 an amount of $1,571.33 was deducted from this payment as payment towards interest. In the revised account following the 2015 proceedings the Owners Account dated 16 May 2017 shows that an amount of $1,353.96 was instead appropriated towards interest. The lower calculation of interest is due to the omission of three items of expenses in the Owners Account of June 2015 from June 2017. This shows that interest at the rate of 10% is effectively being charged on expenses contrary to the Act. As the Managing Agent records these expenses at the time that they are incurred rather than at the time that they are awarded further means that additional interest is being charged on expenses prior to the liability of the lot owner being determined.
The error on the part of the Managing Agent in the calculation of interest is compounded by recording expenses on the Current Owners Account as at the date they are incurred by the Owners Corporation rather than as at the date that those expenses are awarded by a court or tribunal.
Thirdly, there are discrepancies between the Current Owners Account dated 3 June 2015 and the Current Owners Account dated 16 June 2017 that are unexplained and unrelated to the decision of the Court in the 2015 proceedings. Ms Hong points out the following discrepancies: 1. On the Current Owners Account dated 3 June 2015 two debit entries appear dated 28 June 2012 in the sums of $119 and $1,003. These debit entries do not appear on the Current Owners Account dated 16 June 2017. 2. The entry on the 3 June 2015 version of the Current Owners Account contains an entry dated 1 July 2007 for a summons (Local Court) for $1003.92. This entry is deleted from the 16 June 2017 version of the Current Owners Account and appears to be substituted with an entry dated 22 October 2012 of $1040.64 for a summons (Local Court). 3. On the Current Owners Account dated 16 June 2017 there are two debit entries of $66 dated 27 May 2013 which do not appear on the earlier Current Owners Account dated 3 June 2015. 4. On the 16 June 2017 version of the Current Owners Account there is an entry of a debit of $752.76 on 27 May 2013. On the earlier 2015 version of the Current Owners Account it appears that this amount is altered to $771.76 and dated 18 April 2013. 5. The 3 June 2015 version of the Current Owners Account contains an entry dated 4 July 2013 for a Bankruptcy Notice in the sum of $855. On the Current Owners Account version dated 16 June 2017 this item appears as an entry dated 15 August 2013 and increased by $3 to $858.00. 6. On the 16 June 2017 version of the Current Owners Account the entry dated 28 October 2013 being the cost of a summons is increased by $67 from $775.76 to $842.76. 7. The 16 June 2017 version of the Current Owner Account omits entries of 23 August 2013 of bankruptcy petition cost of $5.060 and bankruptcy hearing costs of $385 that appear on the earlier version of the Current Owners Account. 8. The 16 June 2017 version of the Current Owners Account omits an entry that appears on the earlier Current Owners Account being legal negotiations costs of $88 dated 25 October 2013.
These issues render it impossible for the Court to be satisfied that there is any amount owing by Ms Hong and if so, what that amount might be. It is the view of the Court that the appropriate course on the part of the Managing Agent for the Owners Corporation is to undertake a proper reconciliation of the Current Owners Account that removes expenses from the Current Owners Account to avoid interest charges being applied and to separately record expenses awarded by the Court or otherwise agreed upon with the lot owner. The practice of recording fees and expenses on an individual lot owner's account immediately when they are incurred is one that has no basis in law.
A further reconciliation of Ms Hong's account is necessary to show the correct balance. That reconciliation should ensure that expenses do not attract interest pursuant to the Strata Schemes Management Act 2015. The reconciliation of Ms Hong's account would best be achieved by recording and recovering expenses separately from the Current Owners Account.
As a consequence of these errors the Court is not satisfied that the plaintiff has established that there was any amount owing by Ms Hong in respect to unpaid levies when these proceedings commenced. It follows from this that the Owners Corporation cannot recover expenses.

Expenses Unreasonably Incurred

While it is not strictly necessary for the Court to consider the reasonableness of the expenses given the conclusion that the plaintiff has failed to establish a debt for unpaid levies, it is appropriate for the Court to address the issue of whether the Owners Corporation acted reasonably by incurring expenses that exceed $10,000 in prosecuting this claim.
For the reasons that follow, the Court is of the view that the conduct of the Owners Corporation was wholly unreasonable. The Court would, in any event, exercise its discretion and not allow the expenses claimed.
The question of whether costs are reasonably incurred brings into consideration the ordinary principles relating to awarding costs. Of course, where a plaintiff establishes a debt due by a defendant there is a reasonable expectation that the plaintiff will also be entitled to costs. In Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11 at [69] McHugh J identified factors that might disentitle a successful party to costs. They include whether the successful party effectively invited the litigation, whether the party unnecessarily protracted the litigation, whether the successful party prosecuted the matter solely for the purpose of increasing the costs recoverable, and whether the successful party had obtained relief which the unsuccessful party had already offered in settlement of the dispute. Disentitling conduct may include any conduct which is calculated to incur unnecessary expense: see Lollis v Loulatzis (No 2) [2008] VSC 35 at [29].
In the present case there are a number of factors which would disentitle the plaintiff to an award of costs.
Firstly, the plaintiff undertook to revise the Current Owners Account and inform Ms Hong of any changes that occurred as a result. The plaintiff failed to meet this undertaking. Instead it elected to issue a notice demanding payment and then commenced these legal proceedings.
Secondly, the plaintiff was unresponsive to requests by Ms Hong for clarification of issues regarding the calculation of the balance on her Current Owners Account. The concerns raised were legitimate. The plaintiff effectively invited this litigation by providing inconsistent information regarding the extent of the alleged debt and by failing to respond to requests by Ms Hong to resolve these issues.
Thirdly, throughout the period prior to the commencement of these proceedings Ms Hong was making regular weekly payments. During the period of 16 February 2016 to 7 December 2016 Ms Hong made weekly payments to the plaintiff of either $300 or $250. These payments were sufficient to meet current levy amounts that were being raised each quarter. This was a sensible course to take while making inquiries regarding the balance on her account. It is clear that Ms Hong was not a recalcitrant debtor. At no stage did she indicate an unwillingness to meet her obligation to pay her levy contributions. Yet rather than engaging with Ms Hong the plaintiff has taken a very litigious approach and initiated multiple claims where the expenses have outweighed the initial amounts of unpaid contributions.
Fourthly, the amount of the expenses claimed is excessive. The fees include those of a managing agent, accounting fees, a collection agent and a legal firm. Those expenses are said to exceed $10,000. This is in respect to a claim where the plaintiff's case, at its highest, was that Ms Hong owed less than this amount. It is a relatively simple, statutory claim. The expenses have been incurred with no regard to the principle of maintaining proportionality between the amount in dispute and the costs of proceedings. A number of charges are exorbitant. By way of example, the managing agent has charged the sum of $143 for issuing a statutory notice which is, in effect, a pro forma letter of demand. It is an amount which does not appear to be justifiable in terms of the degree of work done or effort involved.
This is a claim where the plaintiff is afforded the benefit of section 86(2A) of the Strata Schemes Management Act 2015 which permits an owners corporation to recover, as part of its claim, expenses. It is a provision that allows the plaintiff to recover expenses in excess of what would ordinarily be allowed in proceedings in the Small Claims Division of the Local Court where costs are capped. The plaintiff takes advantage of this provision. Section 86(2A) encourages owners corporations to commence litigation and incur costs with the view to recovering those costs against a lot owner instead of considering alternatives to litigation such as mediation or negotiation. There is a strong inference raised that the plaintiff brings these proceedings for the purpose of incurring more costs at the expense of Ms Hong.
Even if the plaintiff had satisfied the Court that there was an amount due in respect to levies and interest, which it has not, the Court would not allow the expenses claimed.
The Court will enter a verdict in favour of the Defendant. Assessor Olischlager Local Court of New South Wales

Amendments 29 May 2018 - Updated catchwords DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 29 May 2018

Strata Schemes Management Act 1996(NSW)

Civil Procedure Act 2005(NSW)ss 100, 101

The Owners - Strata Plan 50946 v Hong

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