Rectifying combustible cladding can be a costly exercise which owners might be tempted to delay in order to defer large financial outlays. However, often the cost of delaying the work will outweigh the cost of addressing the issue in a timely manner.
Deciding to fund
An owners corporation that believes a third party is responsible for the combustible cladding may also wish to fund legal proceedings.
Considerations to take into account when funding cladding rectification include the extent and cost of the work, the nature of the property (e.g. residential, commercial, leisure accommodation, etc.), the financial and tax position of each of the owners, the cash flow and taxation impacts of each funding option and the Owners’ economic objectives.
Funding options in strata
The three funding options available are:
- Capital Works or Maintenance Fund (often known as a sinking fund)
- Re-mortgaging (in order to fund a special levy)
- Strata Finance
Capital Works / Maintenance funds
This fund is allocated to anticipated major capital works and is in most cases collected over a long period of time.
An owners corporation may wish to use existing funds in the capital works fund but this will be unlikely to cover the full amount of costs associated with cladding rectification and as a result may delay rectification.
Re-mortgaging for a Special Levy
Special levies tend to be a once-off levy, particularly when funds are required urgently, but may be raised in instalments.
Special levies often cause delays in commencing works as many people believe an owners corporation should not engage in a contract until it has the funds to make payment. If a significant portion of owners are late in paying the levy then the works may be delayed.
Special levies often impose a significant financial burden on owners, particularly for those that are cash poor. Owners that are unable to meet the payments required for a special levy may be forced to sell or to re-mortgage which is becoming increasingly difficult in a tighter regulatory market.
Strata finance enables an owners corporation to access funds immediately. Lannock makes an unsecured loan directly to the owners corporation. There are no mortgages, liens, charges caveats or any registration of interest on the title of the body corporate or on the title of any individual unit. Owners are not required to provide personal information or a personal guarantee.
This allows an owners corporation to complete work right away rather than wait for funds to accumulate and owners get the benefits of peace of mind and enhanced capital and rental returns.
The financial distress caused by raising a large special levy is minimised and there’s a guarantee that the funds will be available rather than hoping that all owners pay the special levy on time.
Lannock has made a very public commitment to fund 100% of the rectification costs of all strata properties.