Critical Information for Strata Owners
Strata owners tend to think of the Owners Corporation as if it is something quite separate from them. “I don’t have to worry about that. The Owners Corporation has to pay for it.”
That is an illusion. There is no-one else.
There is only the group of owners. And as a member of that group you share in the total, unlimited liability for whatever costs are incurred by the Owners Corporation.
There are two key layers of defence that the Owners Corporation is legally obliged in most states and territories to put in place to protect the individual owners – strata insurance and a reserve fund (often called a sinking fund). However, if those defences are not in place or are inadequate then any gap in the cost to maintain, repair or even rebuild the property falls on the individual owners.
The law generally requires a damaged or destroyed strata property to be repaired, rebuilt or replaced. For this reason, it insists that the building be insured for its full replacement value. But if that “cheap” insurance policy does not respond or is only partly effective, then the gap will need to be met by way of a special levy.
Each member has a joint and several liability to the entity, and unlike a limited liability structure, the exposure can be far higher than the amount invested.
Owners instinctively think about damage to the property, but the Owners Corporation also has legal exposures. Consider a small development with 6 apartments spread over 3 storeys with a replacement cost of $6 million. The judgment awarded by a court to a young person who falls and is left a quadriplegic because a railing wasn’t secure might well be $16 million. If your “cheap” insurance policy has a liability limit of $10 million, then that other $6 million will be imposed on the owners by way of a special levy. Assuming the unit entitlement is equal, could you afford your $1 million share of that unfunded $6m plus legal costs?
- There is no limit on how much your personal liability might be.
- It may be more than the value of your unit/lot/apartment.
- It can be enough to bankrupt some of the owners.
- If some of the owners are bankrupt, or cannot be located, the cost is simply re-allocated among the remaining owners.
The breadth and limit of policy coverage can vary between insurers. In the event of a major loss, that “cheap” insurance policy will prove to have been a very false economy.