An update on the Benefit Principle
The benefit principle basically means that those who benefit more, pay more.
In relation to building works, should specific works benefit one or some of the lots, but not all lots, it is up to the Owners Corporation to determine the benefit received by the works and set higher levies accordingly, due to higher lot liabilities, to the affected owner/s.
The usual method of apportioning the annual budget and most special levies is lot liability specified in the plan of subdivision.
As set out in previous publications, the Act was amended in 2013 to require that in striking special levies intended to meet extraordinary items of expenditure for repairs, maintenance or other works, an Owners Corporation must consider the application of the benefit principle in apportioning the fees. This principle allows deviation from the lot liability method. Section 24 of the Act sets out the benefit principle as follows:
(2A) Fees for extraordinary items of expenditure relating to repairs, maintenance or other works that are undertaken wholly or substantially for the benefit of some or one, but not all, of the lots affected by the Owners Corporation must be levied on the basis that the lot owner of the lot that benefits more pays more.
The Tribunal has further addressed the application of the benefit principle in a recent decision. A review of this is provided to assist members in understanding its role in the raising of levies.
Understanding the Benefit Principle
If a special levy is intended for the purpose of repairs, maintenance or other works for the benefit of a subset of lots, those lots are required to meet the cost with the apportionment based upon an assessment of the benefit received. The Act does not set out criteria to assess:
- the basis of determining a subset of lots which benefit;
- the benefit received;
- the apportionment of the cost.
These matters are left to the Owners Corporation to resolve.
Some Factors to Consider
As the Act does not set out the basis on which benefit is assessed, it is a matter for the Owners Corporation to determine. Based on the Grundl, and other decisions of VCAT, it appears in assessing whether the principle applies the Owners Corporation needs to consider all objectively relevant factors which may include the following:
Physical layout of the property
Properties which have a more complex layout or distinct precincts may find the principle will be applicable to some works, particularly if it can be demonstrated that similar works would not be required to other parts of the complex. For example, if there is a mix of high-rise and low-rise residential properties in one development (which does not have separate Owners Corporations) and a lift refurbishment is required, it may be appropriate only the high-rise lot owners meet the cost of the works.
Improvements resulting from the works
If the proposed works, particularly those visible from the street, are considered to improve the property overall, it is less likely the benefit principle will apply. An example would be the street frontage fences which may be argued largely benefit the lots at the front of the property. The alternative view is that the principle would not apply as the fences can be seen by passers-by and provide a wider benefit than just an amenity to the lots facing the fence.
Enhancement of the value of all lots
Works which have the effect of benefiting all lots mitigates against the application of the principle. An example would be landscaping of the common property which may be argued directly benefits the ground or lower floor lots. However, a well-maintained garden can have the effect of enhancing the value of property generally.
Improvements to the general safety of the building
All members derive a benefit from a safe building and the principle is difficult to apply where safety is concerned. An example is the maintenance of fire hoses. One view is that in the event of a fire only those lots in proximity to the firehose would receive a benefit. However, all lots at the property receive a benefit from properly maintained fire services irrespective of the location and the benefit principle would not be appropriate to such expenditure.
Elimination or reduction of risk of personal injury
If there is a risk of a personal injury claim being made arising from common property, it will be against the Owners Corporation. An example is common property stair balustrades, where there are multiple stairways. On a narrow view it may be considered that only those lots having entry from a particular stairway benefit from maintenance, including the balustrades. However, if a balustrade was unsafe and there may be a risk of a person or object falling from the stairs leading to injury, it is in the interests of all members to have a safe, well-maintained property irrespective of the number of lots directly served. The cost should be met by all members.
Assessing the Benefit Received
The assessment of lots benefiting is fraught with difficulty. For example, it may be contended that in replacing the roof of a multi-storey building that only the lots on the upper level benefit from the roof and thus should be required to meet the cost. The alternative view, which the Tribunal expressed in a decision prior to Grundl (Owners Corporation PS 331362S v Boothey (Owners Corporations)  VCAT 174), was a roof was for the protection of the whole building and not just the particular lots situated below it.
If the Tribunal considers the principle applicable, it is unlikely to determine the amount applicable to each lot but to return the apportionment the Owners Corporation.
An Owners Corporation, in considering a levy for extraordinary items of expenditure, will need to turn its mind to whether the principle applies. This does not require it consider narrow or unlikely arguments. If it can show there has been consideration of the principle but has elected not to apply it, this may be sufficient to satisfy the Tribunal if a member brings an application to dispute this decision of the Owners Corporation. However, it is always open to the Tribunal to make a decision as it sees fit.
In the Grundl decision, the Senior Member noted that the decision to proceed on lot liability or application of the principle should not be “outside the range of reasonableness so that it was one which no members of an Owners Corporation, acting honestly and reasonably, could have made”. For qualifying expenditure it is necessary the Owners Corporation formulates its approach based upon consideration of relevant factors such as those set out above.
If the proposed levy is within the authority of the committee, less than twice the annual budget, it may make the decision. In order to ensure that the collective mind of the Owners Corporation is turned to the principle, the committee may consider it appropriate the decision is made at a general meeting or a ballot of members even where the committee has the authority to approve the levy. In this way if a member disputes that the principle should be applied when the Owners Corporation have resolved not to, evidence of the collective mind of the Owners Corporation may be significant in the determination the matter by the Tribunal.
If an Owners Corporation undertakes an upgrade of common property in accordance with section 53 of the Act, this also requires consideration of the benefit principle and the same issues as a levy for extraordinary items of expenditure.
An Owners Corporation may consider it appropriate to seek legal advice if there is any doubt as to whether the benefit principle should be applied to a particular circumstance. Whilst legal advice is not necessarily determinative, as the Tribunal may take a contrary view, it may demonstrate to the Tribunal the Owners Corporation has turned its mind to whether the principle should be applied.