Hybrid Strata Loans in Australia: Legal Risks, Compliance and Alternatives

On 19 May 2026, Gerard Doyle, Partner at Bugden Allen Group Legal and Fellow of the Australasian College of Strata Lawyers, published a detailed legal analysis concluding that hybrid strata loans, as currently structured, are incompatible with strata legislation in both New South Wales and Victoria. The analysis identifies specific provisions of the Strata Schemes Management Act 2015 (NSW) and the Owners Corporations Act 2006 VIC) that hybrid strata loan structures do not satisfy, and outlines the legal consequences for owners corporations, owners and lenders.

At Lannock Strata Finance, we made the deliberate decision to not offer a hybrid strata loan product.

This page explains what hybrid strata loans are, why we concluded they do not work for strata communities and what the Bugden Allen legal analysis now confirms.

If you are a strata committee member, lot owner, strata manager or legal adviser evaluating strata finance options, this page is written for you. This is vital because the duty of committee members to act in the interests of the owners corporation (OC) extends to thoroughly understanding the legal structures of what they are approving or putting forward to owners at a general meeting. 

What is a hybrid strata loan?

A hybrid strata loan is a financing structure where an owners corporation (OC) borrows simultaneously from an external commercial lender and individual lot owners (Lending Owners) via unsecured loans.

Lending Owners make an unsecured loan through a Trust to the owners corporation (the corporation of which they are also a member).

The Liability Risk: Lending Owners may mistakenly believe their unsecured loan to the owners corporation exempts them from the obligations of the owners corporation's external loan arrangement. It does not. All lot owners share unlimited joint and several liability for their owners corporation’s obligations – which include all borrowings, such as the external commercial debt.

The hybrid strata loan structure creates a financial paradox where the Lending Owner is an unsecured creditor of the owners corporation, yet is still liable for its debts:

If the owners corporation defaults on its external loan, then, as with all owners, the Lending Owner is liable (via levies) to contribute to repaying that external debt, even though the owners corporation already owes them money from their initial unsecured loan.

A hybrid strata loan creates two tiers of members (owners) within the owners corporation. However, it does not create two tiers of liability.

While hybrid loan products may present an initial marketing appeal by appearing to break committee or general meeting political deadlocks, their underlying mechanisms introduce severe structural, legal and compliance risks to any owners corporation that adopts them.

For more details, visit here: https://lannockstratafinance.com/lp/hybrid-strata-loan 

Are hybrid strata loans compatible with strata legislation in NSW and Victoria?

No, not in their current form.

Owners corporations are statutory bodies, 'creatures of statute' created and governed by specific state legislation. Understanding this is essential. Unlike ordinary companies, which can do mostly anything not prohibited by law, an owners corporation starts from the opposite position: It can only do what its enabling legislation specifically empowers it to do. If the legislation is silent, it cannot do it.

The Bugden Allen Group Legal analysis, published 19 May 2026, concludes that the levy credit mechanism is ultra vires, meaning it is beyond the legal powers granted to owners corporations under both the NSW Strata Schemes Management Act 2015 and the Victorian Owners Corporations Act 2006. No general meeting resolution can authorise something the legislation does not expressly permit.

Section 100 of the Strata Schemes Management Act 2015 (NSW) grants an owners corporation the power to borrow money. Section 25 of the Owners Corporations Act 2006 (VIC) does the same. But neither Act grants an owners corporation the power to credit a levy obligation against a debt owed by the owners corporation. Strata legislation in both states is prescriptive about how funds are raised and spent. There is no prescribed power that authorises a strata scheme to grant a 'credit' to a lot owner in lieu of levy payment.

This is not a technical drafting oversight. It cannot be resolved by contract or by a resolution passed at a general meeting. An act that is ultra vires is not compatible with legislation, and the consequences flow through the entire structure of the loan agreements.

Key legal references: 
Strata Schemes Management Act 2015 (NSW) ss.73, 74, 78, 79, 81, 83, 86, 95, 98, 100, 270

Owners Corporations Act 2006 (VIC) ss.23, 25, 26, 27, 28, 33, 34, 35, 202

Bugden Allen Group Legal analysis by Gerard Doyle, Partner and Fellow of the Australasian College of Strata Lawyers (19 May 2026) · ATO Product Ruling PR 2024/2

What are the legal consequences for owners corporations and lot owners?

1. Lending Owners become unfinancial – and lose their right to vote

In both NSW and Victoria, lot owners who fail to pay their levies become 'unfinancial'. This status strips them of the right to vote at general meetings. Because the levy credit is ultra vires, it will be void and so the Lending Owner's levy remains formally outstanding, regardless of what the loan documentation says about the offset arrangement. A Lending Owner is therefore technically in default of their levy obligations from the moment each levy falls due.

The practical consequence is severe: the lot owners who agreed to lend their own money to the owners corporation prior to the commencement of work find themselves classified as non-paying owners, unable to participate in the governance of their own scheme.

2. Record keeping and audit obligations cannot be met

Strata legislation in both NSW and Victoria requires owners corporations to keep accurate financial records and reconcile them with bank statements. The NSW SSMA specifically requires the owners corporation to record every transaction of money received or disbursed, and each year to reconcile those transactions against its banking records.

The levy credit mechanism creates an insurmountable problem: because no money actually moves when the credit is applied, nothing appears on the owners corporation’s bank statement. An auditor cannot reconcile what isn't there. In Victoria, the OCA requires accounts to provide a 'true and fair view' of the owners corporation's financial position – something that cannot be achieved because offset arrangements are not reflected in the bank records.

Ask your auditor directly: Can our treasurer complete the accounts when this product is being used? If the answer is unclear, that is a significant red flag for the committee's legal obligations.

3. The loan agreements themselves may be void

Section 202 of the VIC OCA and section 270 of the NSW SSMA both void any contractual term that purports to exclude, modify or restrict the operation of the Act. Because the credit mechanism is a fundamental term of these contracts, for them to be void may lead to frustration of the contract, rendering the whole arrangement void ab initio (from inception) and leaving it without any contractual foundation.

Monies advanced by both the commercial lender and the Lending Owner may no longer be subject to any enforceable repayment obligation. This could prompt lenders to commence urgent legal proceedings to recover funds advanced.

This raises urgent questions: What happens to money already lent? To repayments? To money already used by the owners corporation?

Read more about this legal consequence here.

4. Lending Owners carry increased exposure, they’re still on the hook

The hybrid strata loan structure may create two tiers of owners, but it does not create two tiers of liability. A Lending Owner who lends to the owners corporation does not remove themselves from the external borrowing arrangement. Arrears, defaults, budget blowouts, cost overruns, shortfalls, fees and penalties – joint and several liability for the full obligations of the owners corporation remains intact for every owner in the scheme.

What has also changed is the Lending Owner's position. Their loan to the owners corporation is unsecured project finance. They now carry the borrower's risk and the lender's risk simultaneously. If the owners corporation cannot repay them, they are an unsecured creditor of a corporation of which they are also a member and for whose debts they remain personally liable.

They have not reduced their exposure. They have added to it.

What does the ATO say about hybrid strata loan interest?

In ATO Product Ruling PR 2024/2, the Australian Tax Office determined that interest received by a Lending Owner is assessable income in the year the credit is applied, even if it is received by way of a levy credit rather than as an actual cash payment.

This means Lending Owners who enter hybrid strata loan arrangements must declare the interest component of any levy credit as income in their annual tax returns, even though no cash has entered their bank account. These tax implications are not necessarily disclosed clearly in most hybrid strata loan marketing materials.

Furthermore, we’ve been shown our competitor’s loan documentation and Lannock is the only strata lender we are aware of to publish a comparison rate that includes every fee and cost, ensuring you see the true cost of funds without hidden complexities.

What happens if a Lending Owner wants to sell their property?

A Lending Owner's loan agreement is a contract between that individual and the owners corporation (and the commercial strata lender). An incoming purchaser is not a party to that agreement and so cannot simply step into the Lending Owner's position.

Arranging an assignment of the loan will require a deed of assignment executed by four parties: the Lending Owner (seller), the incoming purchaser, the owners corporation and the commercial strata lender. The owners corporation must also convene a general meeting to pass the necessary resolution. Coordinating four parties (including a strata lender and a body corporate manager) within a standard property settlement window creates a significant practical burden that the current hybrid strata loan products do not adequately address.

A lot owner who entered a hybrid strata loan arrangement expecting a straightforward path to sell may find themselves facing delays, additional legal fees and a purchaser who is unwilling to accept the complexity.

What are the other practical risks of hybrid strata loans?

Beyond the legal problems identified by Bugden Allen, strata communities evaluating hybrid strata loan products should consider:

Complex administration for the whole scheme

Hybrid strata loans require the owners corporation to manage multiple lenders simultaneously, maintain separate accounts for Lending Owner contributions, calculate pro-rata levy splits and prepare Individual Annual Investment Income Returns for submission to the ATO. This complexity drives up administration fees for every owner in the scheme – not just those who participated as Lending Owners.

Thin contracts for a complex product

The Lending Owner contracts used in hybrid strata loan products are an ‘easy read’ - deceptively so. Given that the levy credit mechanism – the core of the product – is legally void, it follows that the contracts cannot properly document or protect the arrangement. Fewer contractual safeguards mean fewer options when something goes wrong.

Classification as a Managed Investment Scheme (MIS) and ASIC Design Obligations

As noted by Bugden Allen, hybrid strata loan products bear hallmarks of an unregistered Managed Investment Scheme (MIS) under the Corporations Act 2001. If ASIC treats them as MIS, the compliance burden on promoters increases significantly – and any penalties for non-compliance would flow back through the scheme.

Beyond the Corporations Act, strata funders who offer these products face accountability under ASIC’s Design and Distribution Obligations (see RG 274). These products do not appear to meet aspects of ASIC’s guidelines, such as 'choice architecture' which amongst other things, is concerned that products do not exploit environmental factors such as decision fatigue among owners. If a funder ignores these regulatory accountabilities, their failure becomes your problem if it brings about the early demise of the funder.

The Alternative: Proper, Proven Standard Strata Finance

A standard strata loan from an established, specialist lender like Lannock Strata Finance provides capital works funding without the structural legal problems of a hybrid model.

With a conventional strata loan:

• The owners corporation borrows from a single lender under a single loan agreement

• All lot owners contribute to repayment through their regular levies

• Levy payments to service the loan made through the admin fund are tax-deductible for investors

• The loan structure is straightforward to disclose to purchasers and valuers

• Audit and reconciliation can be completed cleanly – no phantom credits, no missing bank entries

• There is no risk of Lending Owners becoming unfinancial or losing governance rights

Explore a standard strata loan here.

Lannock Strata Finance has been leading the way in strata and providing funding for strata communities across Australia for more than 20 years. Hybrid strata loans, in their current form, do not meet the compliance standards of strata. The Bugden Allen legal analysis confirms the basis for that position.

If your strata community is evaluating a hybrid strata loan product, we strongly encourage you to seek independent legal and financial advice. When it comes to strata, the gold standard for legal advice is from members of the Australasian College of Strata Lawyers. The instructions given to your advisers should clearly focus on statutory interpretation and require them to respond to the points raised in the Bugden Allen advice.

Ask them directly: Is this loan structure compliant with strata legislation in our state? Can my corporation authorise something that the legislation does not explicitly permit?

Speak to our team: Call 1300 851 585