(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