The “Benefit Rule”: To apply or not to apply?

It is well understood by Owners Corporation Managers that the Plan of Subdivision of a property sets out the lot entitlement and liability of each of the Owners Corporation members. These are usually expressed as a percentage or fraction of a total value.

Lot entitlement is the proportionate share of ownership of Owners Corporation assets, including common property, and determines each Lot Owners voting rights at a meeting of the Owners Corporation. Lot liability is the proportion of Owners Corporation expenses which each Lot Owner is obliged to pay.

What is not as widely understood is that in Victoria, lot entitlement and liability do not represent the same proportionate value. Lot entitlement is calculated based on the value of the Lot and the proportion that that value bears to the total value of the lots affected by the Owners Corporation. Lot liability, on the other hand, is calculated based on the amount that is just and equitable for the Owner of the Lot to contribute towards the administrative and general expenses of the Owners Corporation. Therefore, as a general rule, a Lot Owner is not liable to pay or contribute towards the funds of the Owners Corporation a proportion of any amount exceeding the Lot Owner’s lot liability.

Payment or contribution based on lot liability applies to annual fees and levies and maintenance of a regular and/or budgeted nature. It does not, however, apply to an amount payable to an Owners Corporation for repairs, maintenance or other such works that are undertaken by the Owners Corporation on common property or a lot which are wholly or substantially for the benefit of some or one, but not all, of the lots affected by the Owners Corporation. Reflecting more a ‘user pays’ system, fees for extraordinary items of expenditure relating to such repairs, maintenance or other works must be levied on the basis that the Lot Owner of the lot that benefits more pays more.

Commonly referred to as the ‘benefit rule’, this principle acts more as an exception than a rule, and only applies where there are extraordinary items of expenditure relating to repairs, maintenance or other works undertaken wholly or substantially for the benefit of some or one, but not all, of the lots. While it is clear that whether or not the exception applies will turn on the facts, an Owners Corporation that fails to turn its collective mind to the question of whether the benefit rule should apply commits a legal error.

It is therefore incumbent on Owners Corporation Managers to ensure that, when the circumstances arise, the Owners Corporation is directed to consider whether to apply or not apply the benefit rule. 

For further information, please enquire at property@nevile.com.au