The benefit principle explained

The benefit principle explained

The benefit principle is simple in premise; when levying for “extraordinary items of expenditure” that do not benefit all owners equally, the owner that benefits more, should pay more.

In application, things aren’t quite so simple.

What is the “benefit principle”?

The benefit principle first appears in Section 24, subsection 2(A) of the Owners’ Corporations Act 2006, which states:

“Fees and charges for extraordinary items of expenditure relating to repairs, maintenance or other works that are carried out 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.”

Similar wording also appears in Section 49: “Cost of repairs, maintenance or other works”, and Section 53: “Upgrading of common property”, so it is a well-established principle within owners’ corporation regulations.

Where things get tricky is that the Act does not set out criteria for determining which lots benefit, how to quantify that benefit, nor how to apportion the cost accordingly.

The Grundl Assessment

In 2017 case Owners’ Corporation PS407621Y v Grundl, VCAT Senior Member A. Vassie gave a detailed assessment, when dismissing a fee recovery proceeding, which provides a useful set of steps to follow when determining whether to apply the benefit principle.

In short, the Grundl Assessment outlines that if an owners’ corporation (OC) considers the question of who substantially benefits from the works, and, acting in good faith and exercising due care and diligence, finds that all lots substantially benefit, then a tribunal will not interfere with its decision to set fees in accordance with lot liability.

If, however, an OC fails to consider the question, sets fees in accordance with lot liability and an aggrieved lot owner challenges the decision, the OC has made a legal error. If all lots do not equally benefit from the works, the OC runs the risk of the resolution being ruled invalid.

In this case, an owner, Mr Grundl, was found to not be liable for paying a levy of $26,400 because the benefit principle should have been applied and was not. Mr Grundl did stand to benefit from the works in question, but substantially less than other owners.

Making the right decision

When trying to determine if some lots benefit more than others from proposed works, there are a range of factors to consider.

For example, the layout of the property and location of the works, the improvement which results from the works, and if that improvement enhances the value of the whole property. Whether the works improve the safety of the building or reduce the risk of personal injury should also be considered.

One lot may benefit more directly from the works, but all other lots may indirectly benefit, either from improved value, or reducing the risk of legal action against the OC. These considerations must all be weighed up.

If it is decided to use the benefit principle, the responsibility falls to the OC to decide the extent to which the various lots benefit and apportion fees accordingly.

An OC can rest easy in its decision, though, so long as it acts in good faith and with due care and diligence. Where this is demonstrated, a tribunal will not interfere with its decision, unless “the decision was outside the range of reasonableness so that it was one which no members of an OC, acting honestly and reasonably, could have made, or unless there has been some other legal error.”

Ultimately, the key factor is to consider the question of who substantially benefits from the works. An OC may wish to get legal advice to illustrate their consideration, and protect their decision from being overturned, should it be challenged by an owner at VCAT.

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