Interest on overdue strata levies makes no sense [or cents]

All over Australia interest applies to overdue strata levies and usually at rates that are much higher than mortgage rates, but lower than credit cards.

It’s also conventional wisdom and pretty uncontroversial that strata owners should pay interest on late strata levy payments.

But interest on strata levies makes no logical, economic or practical sense when you consider the justifications that are made for it as follows. And, I don’t think it should apply universally when strata levies are overdue.

So, why is conventional thinking about interest on overdue strata levies wrong?

First, money has time value. Money today is worth more than the same amount in the future. So, interest compensates creditors for the opportunity cost of not having access to that money during the overdue period. But, it’s not as though strata buildings are investing that money for higher returns [in fact most strata money is kept in zero interest trust accounts] or that it could be used to make a profit [as it can’t]. And, usually strata buildings have money in existing reserve funds that can be used to cover their normal expenses whilst waiting for overdue strata levies, so they aren’t inconvenienced and don’t have to borrow the money and incur interest. So, the concept of money time value doesn’t really apply.

Second, in businesses, maintaining cash flow is crucial for operational continuity, growth and profit. That’s especially so, since most businesses will incur interest charges from their creditors if delayed cashflow means they pay expenses late, or pay interest on business loans or overdrafts to cover cashflow shortages, or have to use capital for the expenses.  But, strata buildings aren’t profit making entities, they don’t operate with cashflow loans or overdrafts, and don’t have capital like a business does.  Plus, strata buildings almost never incur interest on late payments for their operating expenses.  So, there’s no economic cost from late strata levy payments.

Third, overdue payments create a creditor risk. There is an increased risk for creditors when debts are paid late as debtors typically have decreasing ability to pay and/or disappear over time. Charging interest helps with this risk by providing additional money to offset or compensate for the uncertainties and potential financial losses associated with late payments.  But, strata owners can’t disappear, they have at least one real estate asset, and overdue strata levies are recoverable from existing and future strata lot owner. So, there’s no real creditor risk.

Fourth, incurring interest motivates strata owners to pay levies on time. It acts as a financial incentive [or penalty] for timely payment, helping to maintain healthy strata cashflows. But, in most situations late strata levies are not the result of a conscious choice by strata owners but the result of their personal financial circumstances.  So, interest on strata levies can’t really motivate  a strata owner who can’t pay.

Fifth, in commercial situations interest helps offset the cost of administrative efforts by the creditor, such as sending reminders, making follow-up calls, and legal proceedings to recover overdue amounts. So, business time spent on non income producing activities is covered. But all Australian strata buildings can pass those costs onto strata owners when recovering strata levies. So, there’s no internally absorbed recovery costs to cover.

Sixth, charging interest is often seen as a fair and equitable way to compensate people who pay on time and, conversely, burden people who don’t.  It sounds like rough justice but it isn’t if strata owners who pay strata levies on time don’t suffer any actual burden or disadvantage. Plus, strata owners are always subsidising each other for something: like ground floor owners paying for a lift they don’t use, infirm owners paying for gyms, non-car owners paying for carparks, etc, since strata operational costs are pooled without tracing to or from owners use, benefit or disadvantage. So, there’s no need [or benefit] to using interest to be fair.

So, apart from the very marginal impact interest on strata levies has on timely payments by strata owners, there’s no justifiable reasons to charge it universally on all late strata levies or in almost all cases no actual financial impact on strata buildings that needs addressing with interest.

In my opinion, a strata building shouldn’t be able to charge interest on overdue strata levies unless it incurs an actual cost because that delayed payment [like interest on a creditor payment it can’t pay from reserves], and then only, be able to charge the proportion of that delay cost attributable to that strata owner’s share of that cost.

So, interest on strata levies makes no sense [or cents] to me.

Just strata sayin …

March 22, 2024

Francesco ...