What should each apartment pay?
Property developers taking on their first apartment block will be confronted with the question: What should each apartment contribute to the overall strata budget?
An apartment building may be made up of 10 apartments of varying shapes and sizes. Overall, the strata might need $50,000 each year to pay for the expenses like insurance, lifts, cleaning, maintenance, electricity and capital replacement. So, how should the $50,000 of expense be shared?
One view is that since all apartments are in the same building, all the owners should contribute equally. This would mean each apartment owner would put forward $5000 per year. In theory, it sounds nice and simple but in reality, it is not this easy. Not all apartments cause the same amount of expense. For instance, a penthouse owner travels further in the lift each day causing more lift expense. The penthouse apartment is bigger and requires more paint and so on.
Another view may be that bigger apartments cost more to maintain so they should pay more, based on the size of each apartment. Should a 120m² apartment pay twice the amount of a 60m² apartment? Again, this approach seems simple and fair. However, the size of each apartment does not have a relationship to the amount of gardening costs. The garden is the same size and costs the same amount, no matter how big the apartment. All owners benefit equally from having manicured gardens and lawns.
Or should it be that the more expensive apartments pay more than the affordable apartments? Is it fair that people who buy $1 million apartments pay twice the strata levies of people who buy $500,000 apartments? Keeping in mind, ability to pay is not the same as being the cause of the expense.
These decisions about what each owner should contribute are not easy but making these decisions is part of the process of going to market with a development. It can be a contentious decision and failing to apply the guiding principles correctly can cause problems later on. This is why it is encouraged that developers seek out the advice of strata managers.
The guiding principles a strata manager will use, do vary from state to state and the terminology changes in each state, with some of the principles over-lapping. It would be ideal if one day, state governments could get together and make some uniform land laws for all strata schemes but, in the meantime, we need to battle on with each state going its own way.
The best analogy for what each apartment owner should pay to the overall strata budget is to consider the strata scheme to be like a company, with each apartment owner being like a shareholder in the company. Each share (or apartment) is given a weighting, which determines the proportional amount each owner will need to pay towards the common funds, held by the strata scheme. The weighting given to each apartment may be called the contribution entitlement, the interest entitlement, the lot liability, or the units of entitlement – it all depends upon the state. The weighting will not only determine how much of the total an apartment owner pays, but also the weight, which a vote will carry, when the common decisions are made at a general meeting of the owners. The weighting will be calculated by balancing all the competing principles.
Here is a simplified example:
| Budget | Apartment | Weighting/Entitlements (%) | Annual Strata Levy |
| Electricity $5000 | No 1 – Studio, no car park | 10 (6%) | $3,030 |
| Lift $8,000 | No 2 – Studio, no car park | 10 (6%) | $3,030 |
Cleaning $5,000 | No 3 – 1 bedroom, no car park | 13 (8%) | $3,939 |
| Gardens $7,000 | No 4 – 1 bedroom, 1 car park | 15 (9%) | $4,545 |
| Insurance $20,000 | No 5 – 1 bedroom, 1 car park | 15 (9%) | $4,545 |
| Sinking Fund $ 5,000 | No 6 – 2 bedroom, 1 car park | 17 (10%) | $5,152 |
| No 7 – 2 bedroom, 2 car parks | 19 (12%) | $5,758 | |
| Total $50,000 | No 8 – 2 bedroom, 2 car parks | 19 (12%) | $5,758 |
| No 9 – 3 bedroom, 2 car parks | 22 (13%) | $6,667 | |
| No 10 – 3 bedroom on 2 levels, 2 car parks | 25 (15%) | $7,576 |
Here is a snapshot of the law as it stands in Queensland.
In accordance with The Body Corporate Community Management Act 1997, when a body corporate scheme is established, the original owner, on the advice of the strata manager, initially sets lot entitlements. There are two types of entitlements. One is the interest entitlement, which is based on market value. The second is the contribution entitlement. There are two principles that the strata manager will generally use to determine the contribution entitlements – either the equality principle or the relativity principle. These principles are explained in the Body Corporate and Community Management Act 1997.
Lot entitlements continue to be a controversial strata issue. Guiding legislation has changed numerous times recently, and it looks as though it may change once more. The Queensland Property Law Review is looking at how entitlements should be calculated (whether the just and equitable principle really works), and whether owners should have the opportunity to have the entitlements changed. It will be a wait and see as to how contributions will be calculated in the near future.
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