The return of Penalty Interest is good news for Bodies Corporate
The return of Penalty Interest is good news for Bodies Corporate
In response to the COVID-19 pandemic, State governments across Australia introduced legislation to help limit the financial impact. In Queensland, that legislation meant that Bodies Corporate could not charge penalty interest on unpaid levies for the period from 25 May 2020 and 30 April 2022. At the time, the emergency response was heralded as a good thing for Bodies Corporate. But was it really? Having seen its effects over the last 2 years, we believe that the return of penalty interest is good news for Bodies Corporate.
Emergency response legislation
On 25 May 2020, new legislation was rushed through Queensland Parliament in response to the COVID-19 pandemic. At the time, the changes were due to expire on 31 December 2020. Instead, many of them remained in place until 30 April 2022, so almost 2 years. One of the main changes was in relation to penalty interest.
Charging Penalty Interest
Bodies Corporate in Queensland may charge penalty interest on unpaid levies of no more than 2.5% per month, or 30% per annum, provided this is first approved at a general meeting. The purpose of penalty interest is to ensure (amongst other things) that lot owners are incentivised to pay their levies on time and in full.
From 25 May 2020 to 30 April 2022, however, Bodies Corporate could not charge penalty interest on unpaid levies, even if they had previously approved doing so.
Even before penalty interest was suspended, Bodies Corporate could waive it on a case by case basis. This meant that if Committees considered that lot owners had special reasons for not paying their levies on time or in full, they could decide to waive it.
With the emergency response legislation, however, Committees lost this discretion and penalty interest could not be charged, regardless of whether lot owners had special reasons or were otherwise adversely affected by COVID-19.
Bad debtors became worse
For many years, our firm has assisted Bodies Corporate to recover unpaid levies. This means we are well placed to compare what it was like before and during the period that the emergency response legislation was in effect.
We found that lot owners who failed to pay their levies on time before 25 May 2020 became significantly worse over the last 2 years. It may simply be that their financial circumstances worsened as a result of the pandemic, it’s hard to tell. But it may also be that those lot owners who had routinely been bad debtors before 25 May 2020 felt entitled to pay late or not at all, because they knew that penalty interest could not be charged.
This meant that Bodies Corporate themselves suffered and that lot owners who could pay on time and in full were often left to pick up the cheque.
The benefit of penalty interest
Levies are critical to the survival of Bodies Corporate. Judge McGill SC once said “levies are the lifeblood of bodies corporate“.[1] If levies are not paid, particularly for newer or smaller schemes, Bodies Corporate risk being placed into external administration, much like an insolvent company. As such, anything that makes it harder to recover levies is not a good thing for Bodies Corporate.
In our view, the reinstatement of penalty interest is good news for Bodies Corporate because it should:
- incentivise lot owners to pay their levies on time and in full; and
- make it easier for Bodies Corporate to recover levies.
Remember, lot owners can still ask that penalty interest be waived for special reasons. In every case where we have acted for Committees, and a proper special reasons request has been made, penalty interest has either been waived or at (at the very least) discounted. Giving this power and discretion back Bodies Corporate and Committees is a good thing, because it means that lot owners who can pay, but chose not to, are properly penalised.
If your Body Corporate is experiencing issues with penalty interest or unpaid levies, please contact Mario Esera.
[1] See Body Corporate for Sunseeker Apartments CTS 618 v Jasen [2012] QDC 51 at [26]
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What was often done, and not only by body corporates but councils, was to increase the levies and then offer a “discount” if paid on time.
With respect to the author there needs to be a distinction made between Queensland bodies corporate that have a discount in place for payment on time and those that don’t. Those that do (anything up to 20% discount), derive a significant windfall (up to 25% penalty) from late payment that they otherwise wouldn’t! This is something that the government overlooked at the time.