Body Corporate Budgets and Levies – what you need to know

Stephens LAlan Henwood-002awyers Director Alan Henwood has wide experience of the Unit Titles Act 2010 and in this article outlines what you need to know about setting Body Corporate budgets and levies.
A recent series of High Court cases has accentuated the need for care in preparing budgets and raising levies.

There are four designated funds that the Unit Titles Act 2010 contemplates that levies can be raised for:

  1. the operating account,
  2. the long-term maintenance fund,
  3. contingency funds, and
  4. capital improvements.

These recent court cases have clarified that those four funds are the only ‘funds’ for which levies can be raised.  They have also determined that the operating account can only be used for annually recurring expenses and the long-term maintenance fund can only be used for costs identified in the long-term maintenance plan. And while you can operate the various funds through a single bank account, it is not sufficient to have just separately coded or identified the funds: the funds or categories must have been individually established by resolution.

So, what happens if you have a major one–off repair project such as seismic strengthening or recladding?  According to the High Court, you cannot use the operating account (its purpose is annually recurring expenditure), nor can you use the long-term maintenance fund or funds in the long-term maintenance fund.  You also cannot use a capital improvement fund as there is a long-established distinction in law between repair and improvement.  You must establish a contingency fund for the works, inapt as that sounds.

Many body corporates prepare a single annual budget which includes operating expenses, long-term maintenance fund contributions and project expenses, and raise a composite levy.  It seems that this is permissible but when it comes to receipt of levies and actual expenditure, the necessary funds must exist to which transactions are credited/debited.  Where there is a major project our recommendation is that, for transparency, there is a separate budget and separate levies.

Many body corporates also allow for operating contingencies as a budget item. However, the proportion of levies raised for contingencies still needs to be credited to a contingency fund, not the operating account. And if there is no contingency fund the law is anyway that an unbudgeted expense must not make the body corporate insolvent or exceed 10% of the operating account budget.

Associated with challenges to levies, there have also been challenges to process. The courts are requiring clear evidence that due process has been followed.  Minutes that simply state that a resolution has been passed (or the word of the chairperson) are not being accepted. Evidence in minutes of eligible voters, proxies, postal votes, a quorum and votes for and against resolutions are becoming the evidential standard.

This is not making administration of body corporates any easier.  But there is good news.  Provided that a body corporate is acting within its powers, the courts are making it clear that where there is majority support for a proposal, they will not subject it to pedantic analysis.  Challenges to individual expenses and claims that there were better (read ‘cheaper’) ways to carry out a project are being routinely rejected.  A point of judicial exasperation appears to have been reached, with some judges going so far as to suggest that owners who want to challenge everything should possibly think about whether community living is for them.

The message is actually quite simple.  Get your processes right and the courts will support you.  Who knows, the disaffected minority (and there is a saying that “every body corporate has one”) may even come to realise that there is no point in challenging majority decisions.  Then again, pigs may fly……..

Alan Henwood, Stephens Lawyers
DDI:     04 915 9589
M:        029 924 3402
E:         alan.henwood@slaw.co.nz