Who must pay the Body Corporate loan when a sectional title unit is Sold?

One of the questions frequently asked by Sellers, Purchasers and Estate Agents is:

“The Body Corporate took out a loan over 120 months. If an owner sells their unit before the loan has been repaid, who remains liable for the outstanding loan - the Seller or the Purchaser?”

The answer is not as straightforward as many believe.

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There is no automatic legal rule

A common misconception is that the Seller must automatically settle the balance of the Body Corporate loan before transfer. Equally incorrect is the assumption that the Purchaser automatically assumes liability for the remaining loan repayments.

In law, neither proposition is necessarily correct!

Each matter must be considered on its own facts.

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The Body Corporate is the Borrower?

A Body Corporate is a separate juristic person. When it raises finance to fund maintenance, improvements or capital projects, the loan is concluded by the Body Corporate, not by the individual owners.

The Body Corporate then services the loan from funds collected from owners, whether through ordinary levies, special levies or another approved funding mechanism.

The real question therefore is how the members agreed that the loan would be repaid.

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The Body Corporate’s resolutions are critical

The starting point is always the resolutions adopted by the members when the loan was approved.

These resolutions will often determine whether repayments form part of the ordinary monthly levies; whether a special levy was raised; whether liability follows ownership of the unit; or whether a Seller is required to settle an allocated portion of the loan before transfer.

Without considering these resolutions, it is impossible to provide a definitive legal answer.

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If repayments form part of future levies

Where the Body Corporate services the loan through monthly levies, the general position is that liability follows ownership.

This means:

1. the Seller remains liable for all levies due up to the date of registration of transfer;
2. the Purchaser becomes liable for levies falling due after transfer; and
3. the outstanding loan does not automatically become payable simply because the property has been sold.

This is the position most commonly encountered in practice.

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Can the Seller be required to pay the outstanding balance?

Yes, but only if there is a proper legal basis.

If the Body Corporate validly resolved that owners who owned units when the loan was approved remain responsible for their allocated share, or that the outstanding balance must be settled before transfer, that resolution may be enforceable.

Similarly, the agreement of sale between the Seller and Purchaser may allocate responsibility differently between the parties.

For this reason, every transaction should be considered individually.

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What about the levy clearance certificate?

This is often where disputes arise.

Before transfer can be registered, the Body Corporate must issue a levy clearance certificate confirming that all amounts due by the Seller have been paid.

Some Managing Agents require the Seller to settle the outstanding balance of the Body Corporate loan before issuing the clearance figures.

However, that requirement is not automatically enforceable simply because it is the Managing Agent’s practice.

The Body Corporate should be able to identify the legal basis for that demand, whether it is contained in:

• the resolutions approving the loan;
• the management or conduct rules;
• the loan agreement itself; or
• another legally enforceable obligation.

Absent such authority, there may be grounds to challenge the requirement.

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Practical advice before signing or transferring of the unit

Before signing an offer, the Seller and/or Purchaser should obtain and review the special or annual general meeting minutes approving the loan; the resolution authorising the borrowing; the loan agreement concluded by the Body Corporate; the current levy schedule; the management and conduct rules; and the levy clearance figures issued by the Managing Agent.

These documents usually determine where the liability lies.

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Final Thoughts

There is no universal rule that the Seller must repay the outstanding balance of a Body Corporate loan when selling a sectional title unit.

Likewise, the Purchaser does not automatically become liable simply because transfer has taken place.

The correct answer depends on the legal framework governing the particular scheme, most importantly, the resolutions adopted by the Body Corporate and the manner in which the loan repayments were structured.

As Conveyancers, we should avoid assumptions. Careful examination of the Body Corporate’s documentation before transfer can prevent unnecessary disputes, delays and unexpected financial liability.

Have you encountered a situation where a Managing Agent insisted that the Seller settle the full outstanding Body Corporate loan before issuing a levy clearance certificate? I’d be interested to hear how it was resolved, alternatively if you need assistance to resolve contact us.