May 2020

Can we get our money back? Recovering costs of a property sale when the property has been sold to recover long overdue rates

The economic downturn caused by the COVID-19 pandemic will no doubt continue to be felt for some time to come and we may see an increase in defaults on the payment of rates and charges on properties. Other than in cases of genuine hardship, and where all other avenues to reach agreement have been exhausted, councils will need to take steps to recover aged debts to assist in addressing significant losses of revenue to ensure that as the community enters the recovery phase of the pandemic, funds are available to direct to public projects and to inject into the local economy.

If a council is left with no option other than to sell a ratepayer’s property to recover grossly overdue rates and charges, it can recover the expenses incurred in connection with the sale if there are enough funds remaining after payment of the outstanding rates and charges. These expenses may include real estate agent fees as well as legal costs.

This may be a lengthy process, and the legal costs of recovering possession will only be reimbursable if the contract for sale is conditional on the purchaser receiving vacant possession on completion.

In the case discussed in this article, it is worth noting that the process might have been shortened if default judgment had been sought when the defences were initially struck out, and if an application for a fixed sum for legal costs (a “lump sum cost order”) had been made at that time.

The case

A recent Supreme Court decision, Armidale Regional Council v Vorhauer, has confirmed that the costs of obtaining possession of a property are payable from the proceeds of sale. However, it is important to always assess the most commercially sensible course of action as selling a ratepayer’s property with the aim of recovering overdue rates and charges, and being reimbursed for the costs involved, can be problematic.

Background

During the period July 2012 to July 2018, Mrs Vorhauer failed to pay the rates and water charges levied on her property which she occupied with her two daughters.

As the charges had by that time been unpaid for at least 5 years, in April 2018 the Council passed a resolution to sell the property under section 713(2)(a) of the Local Government Act 1993 (Act).

After complying with all the relevant advertising and notice requirements, the property was put up for public auction. The property didn’t sell at auction and was subsequently listed for sale by private treaty, as allowed by the Act.

In November 2018, the Council entered into a contract for sale of the property with the property to be sold with vacant possession.

Accordingly, Council served a notice to vacate on Mrs Vorhauer and her daughters, requiring the property to be vacated by 10 December 2018. Mrs Vorhauer and her daughters failed to comply with the notice to vacate and on 13 December 2018 Council commenced proceedings for an order for possession of the property, to enable settlement of the sale to take place.

The details

The defendants, Mrs Vorhauer and her daughters, filed defences, but because they had no arguable basis for resisting the Council’s claim they were struck out.

Prior to the final hearing in February 2020, at which the defendants did not appear, Council filed affidavits which satisfied the Court that:

  • Council had resolved to sell the property by public auction

  • The total amount owing by Mrs Vorhauer to the Council as at 6 November 2018 was $70,645.11

  • The amount that was outstanding for a period greater than five years at that date was $50,033.01

  • The outstanding rates and charges had been properly certified by the chief executive officer of the Council

  • The notices required to be given were properly given and

  • The Council had entered into a contract of sale on 6 November 2018, and that on settlement of the contract vacant possession of the property had to be given by the Council.

The Court determined that the Council was entitled to possession of the property, and that a writ of execution should be issued and executed immediately.

Recovering the costs

As the property’s sale price exceeded the amount outstanding for rates and charges, the Council also sought an order that any surplus from the sale proceeds after the unpaid rates had been paid be used to pay the costs of the proceedings. The Court agreed that the costs were expenses that the Council had incurred in connection with the sale and that they would be recoverable.

However it was unlikely that the legal costs would be calculated at the time of settlement of the sale, because in accordance with the usual court processes, they would have to be determined either by agreement, assessment or by a lump sum cost order, all of which could take some time to finalise.

The surplus of the purchase price remaining after the overdue rates, legal costs and other expenses of sale had been deducted would therefore not be known at the time of completion of the sale.

The Court observed that although under the Act, the balance is required to be held in trust for those having an estate or interest in the land immediately before the sale (the ratepayer), a council is not required to pay the balance within any stipulated time, and may pay it in parts.

Council was therefore entitled to retain part or all of the balance of the purchase price after payment of the outstanding rates and charges to pay its legal costs when they were finally ascertained, and only then account for any remaining surplus.

Authors: David Creais & Jack Williams

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