Cladding nightmare could send apartment owners broke 

Property owners around the country could end up bankrupt if they fail to come up with the funds for urgent costly works on many apartment complexes to bring them into line with local council fire and safety regulations. 

Many owners have been asked to pay thousands or more to bring their buildings into line with regulations, with tens of thousands of apartment complexes around the country potentially affected.  

According to Construction, Forestry, Maritime, Mining and Energy Union’s figures, the cost to remediate this problem, so hideously exemplified in the destruction of London’s Grenfell Tower in 2017, is estimated to be $6.2 billion. In 2014, the Lacrosse apartments in Melbourne’s Docklands caught fire after a cigarette set cladding alight. 

Many strata buildings are asking owners to pay a special levy to cover the cost of these works. If owners don’t pay their levy on time, under strata law the outstanding money attracts interest at a rate of 10 per cent a year.

“Strata committees do have the discretion to vary this if there is a good case for leniency,” says Karen Stiles, executive officer of the Owners’ Corporation Network (OCN), which represents owners. “But the owners’ corporation also has the right to hand the matter to debt collectors. They can also start bankruptcy proceedings to recover the debt including interest if the money owed reaches $20,000.”

Until recently, the debt threshold for creditors to start bankruptcy proceedings was just $5000. A recent review of court applications by creditors to force people into bankruptcy found more than 50 people on average are bankrupted by body corporates each year. 

Many local councils’ fire orders have placed a deadline on removing cladding that does not comply with their rules. As a result, many owners’ corporations have put in place a special levy to cover the cost of the works. Another option to pay for the changes is for the owners’ corporation to take out strata finance.

Stiles notes some owners will be far better positioned to pay a special levy than others. She says first-home buyers with little equity in their properties to borrow against and retirees on fixed incomes may find it hard to come up with the requisite funds to pay any special levy. For retirees, this issue is exacerbated by low interest rates damaging their income, compounded by many companies deferring their dividend payments due to COVID-19, which has also reduced many retirees’ incomes. 

Stephen Brell, managing director of strata management firm Netstrata and a director of advocacy group Strata Community Australia, notes in a worst-case scenario where an owner cannot pay a levy, the property may be sold to cover the costs. “But in most circumstances, debt-recovery proceedings are finalised reasonably quickly.” Allowing an owner to enter into a payment plan so levies may be paid off gradually is an alternative to selling the property or bankrupting the owner. 

So far, federal and state governments have refused to provide any financial assistance to property owners who cannot pay a special levy instigated to cover the cost of new cladding, although the Victorian government has committed $600 million to replacing flammable cladding on high-risk buildings. More recently the NSW government has set up the Cladding Product Safety Panel to look into the issue.

Given the extent of the problem, Stiles says the OCN is calling on strata committees to show more compassion towards owners suffering genuine financial distress. But so far, only some have heeded this request.  

She says some strata committees with the funds to do so are are waiving interest on unpaid levies during COVID-19. Others are not in a position, or are choosing not, to do so.  

“Many owners will be in a precarious financial state and are very distressed at the moment. OCN has called on state governments to offer affected owners long-term no or low-interest loans to pay for cladding rectification.”  

OCN also says owners in buildings where work is required to bring the structure up to council standards should be able to access the $25,000 HomeBuilder grants.

“This money would be better invested in owners facing major costs due to flammable cladding,” says Stiles, adding the federal government was warned of non-compliant building products flooding the country but it did nothing to stop it.

But so far, the scheme has not been extended to cladding and it looks unlikely it will be.