Lot Entitlement Debacle

Date Added: 04/07/2012 by John Mahoney - Mahoney Lawyers

Many resident managers have been involved in the process of your Body Corporate going through an adjustment of its lot entitlements. 

Some time ago I wrote a number of articles about proposed changes to the Body Corporate and Community Management Act which, if enacted, would have quite unbelievable consequences for those complexes which since 1997 have gone through adjustments to lot entitlements. 

Those changes are now law as of April 2011. 

To give some background information:-

Until 1997, there was only one form of lot entitlements, not the two types referred to below. The developer would set the lot entitlements of the units in a development.  They were loosely based on the value of in individual units. As such, larger units or those on the higher floors would typically have much higher entitlements with the penthouses having the highest.  It was not uncommon for a penthouse to have four or five times the lot entitlements of smaller units on the lower levels.  So these owners traditionally paid much higher Body Corporate levies.  

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The 1997 Act introduced 2 different types of lot entitlements:-

  • Contribution lot entitlements—these determine an owner’s voting rights and share of body corporate levies (except insurances).  The Act requires contribution lot entitlements to be equal unless it is just and equitable that they be different.  The Court of Appeal has determined that this starting point of equality is only departed from if necessary to properly reflect an owner’s share of body corporate expenditure.
  • Interest lot entitlements—these determine an owners “interest” in the scheme and an owner’s share of insurance levies.  The lot entitlements should reflect the unimproved value of owner’s units. 

For buildings in existence in 1997, their existing lot entitlements became both their contribution lot entitlements and their interest lot entitlements.

Lot entitlements could before the 2011 legislation only be changed by:-

  • A resolution without dissent of the body corporate at general meeting—so all owners voting have to vote in favour; or
  • Order of the Body Corporate Commissioner’s Office or of the District Court.

We were involved in a number of applications to adjust lot entitlements—indeed what was probably the first such application ever determined.  Despite protestations from “average” unit owners that their levies should not be same as “penthouse” owners, the basic rule remains - the starting point was that all units have the same contribution lot entitlements.

In making an adjustment of lot entitlements, a report or reports is prepared by a suitably qualified expert to calculate the extent to which the different lots contributed to all of the costs of running the complex. 

Invariably the reports determined that all units share fairly equally in these expenses.  Take for example the remuneration paid to the onsite manager (usually between one third to one half of the total of the Body Corporate levies).  Larger units do not place a greater demand on the resident manager than any other unit and therefore should not have to contribute more than other units to that expense.  On the other hand, larger units might place a greater burden on painting the external part of the building as there is a higher proportion of external areas (common property) around the penthouse. 

The reports would identify all of these and other expenses of the complex and allocate the proportionate part thereof to the various lots in order to determine the appropriate contribution lot entitlements. 

These same calculations were used to determine the contribution lot entitlements for new developments.  It is hard to argue that the calculations produce anything other than a fair outcome.  
In many buildings, owners of the larger units instigated lot entitlement adjustments and succeeded in having their entitlements reduced, often through litigation. The outcome did lead to an increase in levies payable by the owners of the smaller units but generally speaking the increases they faced were (because there were many more of those types of units) less than the decreases faced by the smaller number of higher level units.  

Following well publicised protestations by disgruntled owners, including an alleged drive-by shooting on the Gold Coast, the State Government some time ago announced it was reviewing the legislation and would make changes to it.  These are the  2011 changes just enacted. 

The new legislation allows any present owner in any building (who was also an owner at the time of the adjustment) where there has been since 1997 an adjustment to its lot entitlements, to have the adjustment revoked and the building revert to the lot entitlements in place before the adjustment was made.  To do that any owner need only propose a motion for a general meeting of the Body Corporate.  The mere proposing of the motion, without ever being considered by the Body Corporate, requires the Body Corporate to readjust the lot entitlements to what they used to be.    The other owners cannot challenge the readjustment. 

It is difficult to expect that there will be any buildings that will not revert to their original lot entitlements.  There will undoubtedly be at least one owner in these buildings that will take the very easy step of having the entitlements changed back to what they were.  

Whilst the Government proposed this legislation on the basis that it provides certainty for owners and overcomes the harsh consequences faced by some owners in smaller units, it seems to me that these arguments are fanciful.  What the Government seems to ignore is that over the past 13 years or so, dozens, if not hundreds, of buildings have changed their lot entitlements under what the Government considered then, and seems to still consider, given that the principals to be adopted for new buildings have barely changed, a fairer methodology.  

Take for example an owner who bought in 2006 a large unit in a building which a couple of years before had changed its lot entitlements to reduce the lot entitlements, and therefore the levies, for that particular unit.  That owner would have seen the lot entitlements and the levies for the unit at the time of purchase and probably relied on them when purchasing.  Yet now, these lot entitlements are likely to be changed so that the owner’s levies will increase by a huge proportion, there being nothing that the owner can do about it.  

It also seems grossly unfair that an owner who makes little if any greater use of a Body Corporate facility and hence contributes little if any more to the Body Corporate expenses than any other owner, should pay substantially more levies just because the unit has a greater value.  So whilst the new bill purports to offer certainty for one group of owners (who were paying a disproportionately lower level of levies than they should have been in the first place) it provides uncertainty and unfairness for other owners who whilst now paying a fair share of levies will be forced to pay much higher levies than they should.

Unfortunately, despite widespread objection by various industry and legal bodies, the State Government listened to the noise of disgruntled owners who claimed that the legislative changes were in the interests of housing affordability.

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