Strata transmitted debt - far easier to catch than any other STD

The South Australia strata law says it best: ‘If a strata corporation defaults in payment of a pecuniary liability, the liability is enforceable against the unit holders jointly and severally.’ (s 21 Strata Titles Act 1981). It’s the same around the country of course; it’s just that the South Aussies spell it out.

This is the truth of strata about which we dare not speak. When we share floors, walls, and ceilings, we become much more intimate with our co-owners than we perhaps are aware. We assume their share of the liabilities if they can’t pay. It’s much like a marriage, without benefits.

Next time you decide to not go to a strata meeting ask yourself, ‘Would I trust my neighbour with my enduring power of attorney? Would I give then my little red book of internet passwords? Would I give them my bank account numbers and login details?’ Because, as I explained recently in this interview, this is what you are doing when you absent yourself from the decision-making process for your home or investment.

When you buy an apartment, the strata of which you become a member  has the power to borrow money. It may do so by an ordinary resolution – that  is, a simple majority of those that decide to show up and vote. Think about that for a moment- it could be as little as two owners among many that bother to go to the meeting while you stay home with Netflix and chill.  

The difference between you and your strata is that your strata can’t mortgage the common property as security for the loan. Herein lies the secret of strata finance. Without mortgage security, a high rate of interest is acceptable - currently, that’s circa 9 % per annum. Even in times of rising home loan rates, that’s a lot.

So, you stay home, a couple of your neighbours meet, and voila, you are the proud owner of new debt for a Colourbond roof when a quick fix of few loose tiles would’ve done. And it gets worse... if indeed there is anything worse than a Colourbond roof.  When your fellow apartment owners can’t afford to pay their share of the repayments, an administrator can levy those of you who can until the debt is paid.

The genius of strata finance is that the real security is the statutory obligation of the strata to continue striking levies against the members until the strata debts are paid in full. Looking again at the South Australian language, the use of ‘joint and several’ is financier speak for ‘we can go for anyone who’s got the dough’.  

Strata finance is not all bad. It’s a useful product for big repairs when not everyone in the strata can pay a special levy. Those that can pay a special levy up front from their own resources end up paying more in interest than they might want, but at least everyone gets to enjoy the repairs and satisfy their legal obligation as property owners. It helps that the obligation to repay principal and interest can be spread over long periods, up to 10 years. If you want to sell in that time, it’s a simple adjustment to the purchase price. It’s surprising how many miss this in due diligence.

The downside is that it’s a ‘one in all in’ product, because a strata must strike levies in accordance with unit entitlements to discharge the liabilities of the strata.Some have tried to make more flexible loans to strata that allow owners a choice to pay up front or incur interest on your portion. It’s a nice idea but ultimately it doesn’t work because there’s just one debt and its transmittable.