The Owners - Strata Plan No 52098 v Khalil

(i) Service of Levy Notices between 1 February 2012 and 1 May 2012 9Ms Khalil states that she did not receive levy notices from the plaintiff during the period of 1 February 2012 and 1 May 2012. She states that the plaintiff, through its managing agent, BCS Strata Management Pty Ltd (BCS), had been directed to send levy notices to her address in Eaton Street Neutral Bay in late 2011. 10Ms Khalil states that this is evidenced by the plaintiff issuing a notice to her dated 8 November 2011 to the address in Eaton Street Neutral Bay. A copy of that document is marked "Document A" of Ms Khalil's evidence. She states that notwithstanding this notice of change of address the managing agent then reverted to sending notices to her former property manager McGrath Property Management. On 12 January 2012 Ms Magbuhos of McGrath Property Management emailed Brad Louise of BCS stating that they no longer managed the property and all future correspondence should be forwarded to the property. 11On 10 April 2012 Ms Khalil's account was referred to a debt recovery service, Kemps Peterson Pty Ltd. Ms Khalil provides evidence of an exchange of emails between herself and Mr Tom Greenaway, account manager at Kemps Petersons. On 23 April 2012 Mr Greenaway refers to an earlier discussion and requests Ms Khalil's new postal address. He states "once received I can have my client update their records so you will receive levy notices in future." Ms Khalil responded the same day indicating her address in Eaton Street Neutral Bay. 12On behalf of the plaintiff, Ms Olson, an administration assistant employed by BCS, gives evidence regarding the usual practice of BCS to send levy notices. Ms Olson attaches a copy of the special levy generated 6 December 2011 addressed to Ms Khalil c/- McGrath Property Management. Further levy notices were issued to Ms Khalil on 6 March 2012 and 5 June 2012. 13Mr Smythe, the strata manager employed by BCS, states that the address nominated for service of notices on Ms Khalil between 18 November 2010 and 17 January 2012 was McGrath Property Management's address in Young Street Neutral Bay. In the period between 17 January 2012 and 20 July 2012 the address for service was a unit at the address in Alfred Street, North Neutral Bay. In the period from 20 July 212 the address for service was changed to the Eaton Street Neutral Bay address based on an email sent by Ms Khalil to Smith Partners Lawyers on 20 July 2012. 14In relation to the levy reminder notice dated 8 November 2011 sent to Ms Khalil at the Eaton Street Neutral Bay address, Mr Attwood, a debt collections officer employed by BCS, states at paragraph 11 that he caused the reminder notice to be sent to the Eaton Street address on the basis that "different attempts are made to reach the Defendant to avoid the need to commence debt recovery proceedings." 15In relation to the question whether Ms Khalil did inform the plaintiff's managing agent of a change of address to Eaton Street Neutral Bay in late 2011, I am satisfied that she did so for the following reasons. 16Firstly, the evidence shows that the record keeping processes maintained by BCS were not infallible. The Court has before it an email from Ms Khalil dated 23 April 2012 advising Mr Greenaway of the change of address. Mr Greenaway, who was acting on behalf of the plaintiff, undertook to ensure that the plaintiff's records were updated yet that email was never acted upon. It was not until a further email was provided by Ms Khalil in July 2012 that the address was changed. There is no explanation why her notice of change of address dated 23 April 2012 was not acted upon. 17Secondly, while Mr Atwood states that BCS sent reminder notices to alternative addresses to ensure that they came to the attention of Ms Khalil there is no evidence of other copies of the reminder notice dated 8 November 2011 being sent to either McGrath Property Manager or the property address to cover all possible options to contact Ms Khalil. There is no evidence that Mr Atwood or BCS adopted this same practice of sending notices to different addresses in early 2012 when Ms Khalil again fell into arrears and a reminder notice was required to be sent. Mr Atwood gives no evidence as to how he came to be aware of Eaton Street Neutral Bay address in November 2011. His evidence is not persuasive. 18Finally, the history of Ms Khalil's account shows that she generally did make arrangements to pay levies within a reasonable timeframe. At the end of 2011 she made a substantial payment to reduce her balance to $1.91. Her failure to make any payments during the first five months of 2012 was uncharacteristic. The payment record is consistent with her assertion that she did not receive notices during this period. 19I am satisfied that the strata manager did not serve levy notices on behalf of the plaintiff between January and May 2012. 20Although BCS failed to serve notices on Ms Khalil on behalf of the plaintiff during this period the real question to be answered is; what is the consequence of that failure? 21During the period of 1 January 2012 to the end of May 2012 a special levy for paintwork was payable. On 1 January 2012 a special levy amount of $580.25 was payable. On 1 April 2012 a further special levy amount of $580.25 was payable. Regular quarterly levies fell due on 1 February 2012 and 1 May 2012. 22In relation to quarterly levies which are regular periodic contributions section 78(6) provides: "(6) Regular periodic contributions to the administrative fund and sinking fund of an owners corporation are taken to have been duly levied on an owner of a lot even though notice levying the contributions was not served on the owner." 23In Strata Plan 48892 v Robert Gilbert Coshott [2004] NSWLC 6 Magistrate Lulham referred to the intention of the legislative scheme at [14]: "The Act clearly then casts the responsibility on the owner to pay the contributions as levied, even if notice levying the contributions was not served on the owner. The obligation is on the owner to ascertain the amount of, and the date for payment, of the levies and to pay them." 24The decision of the learned Magistrate was affirmed on appeal to the Supreme Court in Coshott v The Owners of Strata Plan No 48892 [2006] NSWSC 308. 25In respect to regular periodic levies the service of notices does not affect the obligation on the lot owner to pay. 26In respect to special levies section 78(6) has no application. A lot owner is liable to pay a special levy where the owners corporation serves notice on the lot owner (section 78(1)). 27The failure to serve the two special levy notices on Ms Khalil means that she was not under an obligation to pay those two levies. However, on 23 April 2012 Ms Khalil was in contact with Mr Greenaway of Kemps Petersons. Mr Greenaway forwarded by email a copy of the most recent levy notice, presumably the 1 April 2012 special levy, together with a statement of account. The forwarding of the most recent levy and the statement to Ms Khalil gave notice of the special levies from 1 January and 1 April 2012 and rectified the original failure to serve those levies. From that time Ms Khalil was on notice of her obligation to pay these special levies.

(ii) Agreement between Ms Khalil and Mr Greenaway in April 2012 28Ms Khalil states that she received a telephone call from Mr Greenaway of Kemps Petersons in April 2012 regarding outstanding levies. On 23 April 2012 Mr Greenaway forwarded by email a copy of the latest levy and a copy of the account. 29Ms Khalil states that after receiving the email a further conversation took place between herself and Mr Greenaway where she complained that notices were being sent to the wrong address. She states that Mr Greenaway said words to the effect: "Since statements were sent to the wrong address without your notification to change the address on file, we will waive the recovery costs and interest. Just subtract those additional costs and divide the remaining amount for levies by three and pay over three months." 30Ms Khalil states that she agreed to this arrangement. 31There is no direct evidence from Mr Greenaway regarding his recollection of the conversation with Ms Khalil. Attempts have been made by both parties to contact Mr Greenaway and it appears that no formal statement has been obtained as Mr Greenaway has no specific recollection of these events. 32Ms Carol Byrne, the debt recovery manager at Kemps Petersons, has provided a statement that there is no record of an agreement being entered into between Ms Khalil and the plaintiff. She states that it is unlikely that any agreement to waive fees or to pay by instalments would have been entered into verbally and without approval from the Executive Committee for the plaintiff. 33Having regard to the totality of the evidence I am satisfied that a conversation took place in which Mr Greenaway agreed to Ms Khalil making payments over three months to make up arrears in contributions and that Mr Greenaway indicated that expenses and interest that accumulated due to the failure to send notices to the correct address would be waived. 34In forming this view I note that Ms Khalil has acted in a manner wholly consistent with an agreement to pay by instalments being reached with Mr Greenaway. She made three payments each in the sum of $1,165 on 7 May, 8 June and 12 July 2012. This was clearly a concerted effort on her part to pay a special levy and two quarterly levies. 35Ms Khalil also made numerous attempts to raise issues with the plaintiff regarding expenses, her address details and the agreement that she states was reached with Mr Greenaway. A summary of email correspondence shows the efforts she went to resolve these issues. The agreement was not some recent invention. She makes reference to the agreement from the earliest time of July 2012. Her position regarding the agreement was consistent throughout. The following is a brief summary of the attempts by Ms Khalil to resolve the issues. 36On 20 July 2012 Ms Khalil forwarded an email to Ms Kavita Prasad of Smith Lawyers. In the email Ms Khalil provides a detailed account of her dealings with Mr Greenaway. She maintains the view that she had reached an agreement with Mr Greenaway to pay outstanding contributions over a three month period. In relation to expenses she states: "Can I please be sent or emailed a statement with a breakdown of costs, the reversal of all recovery costs as previously agreed with KPR and all payments made to date so that I have an accurate picture of where I stand". 37Ms Prasad responded on 9 August 2012 to the effect that the matter should be raised with the Body Corporate. On 21 August 2012 Ms Khalil sent an email to Nathan Jarvis, a Collections Officer, with Kemps Petersons again providing the history of the matter and seeking advice. In the absence of any response other than an acknowledgement Ms Khalil sent a further email to Mr Jarvis. That email states in part: "KPR had advised me to make the payments on the strata fees minus any fees and charges since invoices were sent to the wrong address." 38There was no meaningful response by Kemps Petersons to Ms Khalil's concerns. The only response received was from John Franklin who forwarded a copy of a statement. 39On 3 October 2012 forwarded an email to John Franklin seeking advice regarding her concerns. She again writes "When I was made aware that invoices were being sent to the wrong address by Tom Greenway [sic] from KPR I commenced a payment plan over 3 months (which Tom Greenway advised me to do rather than pay the resultant overdue amount in one payment)". 40On 21 November 2012 (some five months after Ms Khalil first raised her concerns) Mr Atwood responded. Mr Atwood states, "we can find no conclusive evidence that your conversation with Tom Greenaway took place". Mr Atwood states that no staff member has authority to grant time to pay or to waive fees. He further states; "The above has already been advised to you in an email from Khristine Enriquez of Kemps Petersons." 41Ms Khalil continued to raise the issue regarding the waiver of expenses. As a consequence the issue was referred to the plaintiff's executive committee. On 18 January 2013 Mr Lal of Kemps Petersons advised that the "committee has rejected your request of removing fees and interest." 42Ms Khalil sought a copy of the minutes of the executive committee's decision. On 18 February 2013 Mr Louis responded, "there were no direct minutes just direction to proceed from EC". 43Ms Khalil sought further details of the decision. On 8 March 2013 Brad Louis simply stated, "there was no physical meeting it was direction by provided [sic] by the EC". 44The email correspondence shows that Ms Khalil was proactive attempting to resolve issues regarding outstanding levies and expenses. Her conduct is consistent with a person who holds an honest belief that she had reached an agreement with the plaintiff. In contrast the communications by Kemps Petersons were slow and unresponsive. No evidence has been put forward of the Executive Committee decision. Mr Atwood's email response on 21 November 2012 is significant. Mr Atwood states that there is "no conclusive evidence" that Ms Khalil's conversation took place with Mr Greenaway. This raises doubts regarding the accuracy of the record keeping of Kemps Petersons given that a conversation certainly did take place between Mr Greenaway and Ms Khalil. Furthermore, Mr Atwood refers to an earlier email response from Ms Enriquez. Ms Khalil states that she has never heard of Ms Enriquez nor has the plaintiff provided any evidence of this email. 45In the circumstances, I accept Ms Khalil's version of events and that an agreement was reached with Mr Greenaway. Given the representation Mr Greenaway made in April 2012 that payments could be made over the next three months, the plaintiff should have withheld from proceeding with the first legal proceedings. The costs relating to those first proceedings where unreasonably incurred.

(iii) Did the plaintiff act reasonably in commencing these proceedings? 46Ms Khalil believes that in September 2013 when these proceedings commenced her strata ledger was not in arrears and it was unreasonable for the plaintiff to commence these proceedings. She states that payments of levies are up to date and all regular contributions have been up to date since 2012 and that the plaintiff's claim involves levy recovery costs which accrued notwithstanding her agreement to pay outstanding arrears in 2012. 47The Court has been provided with a copy of Ms Khalil's Statement of Account. The statement shows all levies, interest and expenses debited against the account for the period 1 November 2002 through to 9 September 2013 being the time immediately prior to the commencement of these proceedings. The statement of account shows a debit balance of $3,313.57 as at 9 September 2013. The statement shows a debit balance extending back to the beginning of 2012 when the account was only $1.94 in arrears. 48A review of Ms Khalil's account reveals a flawed practice adopted by the Strata Manager, BCS. During period 2011 to 2013 BCS has debited Ms Khalil's account in the sum of $1,981.50 for various debt recovery expenses. There is no basis upon which the plaintiff is entitled to treat these expenses as a debt due and owing by the defendant. 49A distinction is drawn within the Strata Schemes Management Act 1996 regarding the right to recover levies and interest as opposed to expenses. The relevant provisions are as follows: Section 78 (1) An owners corporation levies a contribution required to be paid to the administrative fund or sinking fund by an owner of a lot by serving on the owner a written notice of the contribution payable. Section 79 (1) Any contribution levied by an owners corporation becomes due and payable to the owners corporation in accordance with the decision of the owners corporation to make the levy. (2) A contribution, if not paid at the end of one month after it becomes due and payable, bears until paid simple interest at an annual rate of 10 per cent or, if the regulations provide for another rate, that other rate. Section 80 (1) An owners corporation may recover as a debt a contribution not paid at the end of one month after it becomes due and payable, together with any interest payable and the expenses of the owners corporation incurred in recovering those amounts. 50The operation of section 78(1) and 79(1) creates a statutory debt in respect to levies upon the conditions of those provisions occurring. Section 79(2) has a similar effect in respect to interest accruing on those levies. There is no provision within the Strata Scheme Management Act 1996 that gives expenses the characteristic of being a debt immediately due and payable upon being incurred by an owners corporation. While section 80 refers to the right to recover expenses that provision creates a statutory cause of action. A debt recovery expense incurred by an owners corporation does not, of itself, create a debt immediately payable by the lot owner. It is necessary for the owners corporation to seek a judgment to recover those expenses. 51This distinction was noted by Hodgson JA in the Court of Appeal decision in The Owners Strata Plan 36131 v Dimitriou [2009] NSWCA 27; (2009) 74 NSWLR 370. At 381 Hodgson JA states: "that apart from s 80, an owners corporation would have a debt for contributions and interest, but not for expenses incurred in recovering them." 52While Hodgson JA goes on to say that section 80 makes the expenses themselves a debt, it is clear that Hodgson JA is referring to a right to recover expenses as part of a claim rather than as a separate discretionary costs order. The majority of the Court of Appeal held that there are a number of limitations on the recoverability of expenses. 53Firstly, expenses are only recoverable "to the extent that such costs and disbursements are reasonably incurred and reasonable in amount; and such costs and disbursements would have to prove this in order to obtain a judgement for them" (Hodgson JA at 382, Handley AJA at 130). Costs should be assessed on a party/party basis rather than on a solicitor/client basis (Hodgson JA at 384). 54Secondly, expenses "must be truly characterised as having been incurred in recovering arrears of contributions" (Hodgson JA at 384). That is, there must be a clear connection between the expense incurred and the recovery of the levy. 55Thirdly, "the words "together with" in section 80(1) do mean that the claim for expenses, including legal costs and disbursements, must be made in the same proceedings as the claim for the contribution" (Hodgson JA at 385, Handley AJA at 402). Furthermore, the right to recover expenses is ancillary to the right to recover unpaid contributions. It is not open for an owners corporation to initiate proceedings with respect to expenses only. At the commencement of legal proceedings there must be a claim for unpaid contributions. Proceedings may be maintained to recover expenses associated with recovering outstanding contributions. 56It is clear from the way BCS managed the account that it misunderstands the distinction between contributions and interest which creates an immediate debt due and owing by virtue of sections 79(1) and (2) and expenses which are a debt that must be proven before the court before they are payable by virtue of section 80(1). 57In Dimitriou's case Handley AJA [at 402] described a claim by an owners corporation for expenses to be "in the nature of a quantum meruit" claim that must be proven at a trial to be reasonable in amount and reasonably incurred. 58None of the "expenses" which appear on Ms Khalil's account statement prior to the commencement of these proceedings had been proved as a debt before a Court of competent jurisdiction. The expenses that appear in 2012 appear to be related to the earlier legal proceedings. As the plaintiff obtained no judgment in those proceedings they could not be treated as a debts for which Ms Khalil is liable. 59It is not open for the plaintiff to seek to recover these expenses in these proceedings as that offends the third limitation that requires expenses to be recovered in the same proceedings as the contribution to which it relates. Furthermore, in light of the agreement that was reached between Ms Khalil and Mr Greenaway in April 2012 the accrual of these expenses was unreasonable. 60The expenses appearing on Ms Khalil's account in 2013 may, at least in part, relate to recovery of contributions that are the subject of these proceedings. However, it is pre-emptive on the part of BCS to include these costs as a debit on Ms Khalil's account prior to the court giving judgement in respect to those expenses. Expenses should not appear on a lot owner's account unless they have been subject to assessment either by a Court or a costs assessor under the Legal Profession Act 2004. 61The erroneous inclusion of these expenses on the statement of account has also had an effect on the calculations of interest pursuant to section 79(2). Interest pursuant to section 79(2) is calculated only on outstanding contributions. By including expenses in the account and appropriating payments to those payments resulted in interest calculations being greater than what they should be. 62When the expenses appearing on Ms Khalil's account are removed the correct balance of Ms Khalil's account at the time of commencement of these proceedings (disregarding the discrepancy in interest calculations) was $1,332.50. This figure is less than one quarterly levy amount. 63Returning to the original question of whether as to whether the plaintiff acted reasonably in commencing these proceedings and incurring expenses the answer, in my view, is that there was a significant element of unreasonableness. 64The decision to commence legal proceedings was based on false assumptions regarding the extent of Ms Khalil's immediate liability. Had the plaintiff made a demand for the correct amount and not appropriated payments to expenses for which Ms Khalil was not liable it is at least likely that these proceedings might either not have commenced or not taken the protracted and expensive course that it has. 65The levy notices that were issued in 2013 were unclear and misleading. For example, the levy notice generated on 30 July 2013 referred to a balance due of $4,981.14. Ms Khalil's account statement, however, refers to a balance as at that date of $3,301.09. There is no explanation for this difference. The levy notice issued contains demands for payment of various matters that lack any transparency such as amounts for levy recovery costs and briefing/instructions. The strata manager applied GST to levies raised. Levies raised against lot owners for the purpose of making contributions into the administrative and sinking are not taxable supplies. 66The levy notices made it difficult to determine the nature of the amounts being claimed by the plaintiff. 67During the period of 2002 to 2011 Ms Khalil had a very good record in paying her contributions on time. 68The failure on the part of the plaintiff to correctly serve special levy notices in the first six months of 2012 was a trigger that placed Ms Khalil into arrears. The inappropriate inclusion of expenses on the account exacerbated Ms Khalil's predicament. 69The circumstances of this case are not far removed from the example referred to by Handley AJA (at 402) where he states that a owners corporation may not be entitled to recover the expenses of proceedings commenced the day after the contribution became due against the lot owner with a reasonable payment record who promptly pays the contribution. 70In the present case the substantial expenses incurred by the plaintiff are not the fault of Ms Khalil. The costs have arisen as a result of the plaintiff's strata manager failing to keep proper records of account and to correctly update the address for service of notices, as well as the failure of the debt recovery agent to withhold from accruing further expenses in view of the representation made by Mr Greenaway in April 2012 allowing further time to pay. Ms Khalil should not be held responsible for the cost of those failings. 71Ms Khalil paid the outstanding contribution that was due 4 November 2013. The proceedings have been maintained only for the purpose of recovering section 80 expenses. Those expenses were not reasonably incurred. 72The Court will enter a verdict in favour of the defendant. S Olischlager Local Court Assessor

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: 20 March 2014