2 Year Limitations on Lot Owner Claims Confirmed

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In a result that is beneficial to owners corporations, the Court of Appeal has overturned the decisions of the NSW Civil and Administrative Tribunal Appeals Panel in Tezel v The Owners – Strata Plan No 74232 relating to the application of the 2 year limitations period for damages claims arising from a breach of the obligation to maintain the common property under Section 106(1) of the Strata Schemes Management Act 2015 (NSW).

The NCAT Appeal Panel had overturned a decision of a Tribunal Member finding that a lot owner is required to commence proceedings within 2 years of becoming aware of a particular type of damage (in that case loss of rent). This is even if the damage continues to accrue over time such that some of the damage is within 2 years. The substance of the Appeal Panel’s decision was that where there was a continuing breach of Section 106(1), the 2 year clock “resets” with every day until the common property is rectified.

In overturning the Appeal Panel decision, the Court found that section 106(6) is a statutory limitation which requires a lot owner to commence proceedings two years after they become aware of a loss. The Court also found that if there is a continuing breach of s106(1) it does not follow that “the loss” occurs on a rolling basis so as to reset the point of first awareness. As such, if the lot owner becomes aware of a loss of rent claim on 1 November 2017, the lot owner has until 1 November 2019 to commence proceedings, contrary to the previous train of thought in the Tribunal, which allowed a lot owner to file the application and then backdate their loss two years from the date of filing. In reaching its conclusion, the Court of Appeal did consider the impact on other lot owners in a strata scheme of a lot owner delaying taking any legal action and potentially running up the value of their claim unnecessarily.

The Court also advised that s 106(4) operates as a qualification on the owners corporation’s obligation to comply with the duty in s 106(1), meaning that if an owners corporation has taken action against an owner or other person in respect of damage to the common property, it may defer compliance with subsection (1) or (2) in relation to the damage to the property until the completion of the action if the failure to comply will not affect the safety of any building, structure or common property in the strata scheme. However, the fact that an owners corporation defers compliance under s 106(4) would not impact upon a lot owner’s entitlement to bring an action under s 106(5).

Overall, the Court of Appeal provided a well-reasoned decision, which has clarified what the relevant “loss” was under s106(5) and also that the lot owner’s clock starts ticking the moment they become aware of the loss.

There will no doubt be future battles over whether the 2-year limitations period can be extended and what is meant by “becoming aware of a loss”. However, overall we consider the Court of Appeal decision to be a welcome rebalancing of the scales in these types of claims against owners corporations.

In light of the Court of Appeal decision, we would recommend the owners corporation does the following to protect its position:

  • As soon as a lot owner makes a demand or it becomes aware of potential lot property damage, obtain from the lot owner or make a record of the damage to the lot property and financial loss claimed, including any allegation the lot is not habitable;
  • In appropriate cases, engage a building consultant to record the lot property damage and send a copy to the lot owner;
  • Seek appropriate legal and expert advice on the owners corporation’s obligations.

Should you wish to discuss this decision further or obtain advice, please do not hesitate to contact Peter Ton from our Sydney office.

Should a body corporate be able to expel a nuisance occupier?

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In a case decided by the Supreme Court of Western Australia, a seller of a strata lot was ordered to pay hundreds of thousands of dollars in compensation to someone who purchased their unit.  The seller failed to disclose to the buyer something that would materially affect their use and enjoyment of the property they purchased.

It wasn’t about undisclosed building defects, the existence of expensive court litigation, or the unit heating up by the rising sun each morning.

For two decades, a neighbour was guilty of assault and disorderly behaviour, used extremely foul language, banged a hammer in response to even the slightest noise, and screamed out of his window at his neighbours.

The seller failed to disclose that they would be selling a unit next to a neighbour from hell.  The litigation has seemingly ruined the lives of all involved.  But the abusive neighbour wasn’t involved – he is doing just fine.

Read on if you want to learn more about this sad saga in strata, and my perspective on why one of my most radical and “crazy” ideas about how to improve strata living could be justifiable.

The case

In 2015, a contract for the sale of a strata unit in Western Australia was enter into.  A general condition of the contract was that:

“…the Seller does not know of anything which will materially affect the Buyer’s use or enjoyment of the Strata Lot or of the common property comprised in the Strata Scheme”

The seller didn’t disclose the existence of a neighbour who frequently engaged in antisocial behaviour.

In Thillagaratnam v Doan [2022] WASC 185, the Court found:

  • “Mr Pratt has a long history of breached of violence restraining orders, common assault and disorderly behaviour relating to other occupiers of the strata complex and in particular Lot 6, dating from at least 2001”;
  • The owners of Lot 6 had complained about “repeated banging on their ceiling, apparently caused by hammer blow” and “extremely foul language and loud cursing”;
  • “He (a previous tenant) said that Mr Pratt made their lives misery because they could not make any noise above a whisper including by turning on the hot water for fear of triggering an ‘angry backlash’ from him”;
  • “Mr Pratt was an obnoxious occupier who overreacted to any noise from Lot 6 by banging on his floor, playing his television and stereo at an excessive noise level and swearing at the other occupiers of the complex…”;
  • “His behaviour was completely irrational and unacceptable.”

Judge Curthoys further reasoned:

  • “A ‘normal’ person does not react so adversely to noise, they do not hammer on the floor, they do not abuse their neighbours by swearing and insulting them.”
  • “A ‘normal’ person does not scare children with their conduct. A ‘normal’ person does not react to cars and people coming in and out of the complex in the manner Mr Pratt did.”
  • “Mr Pratt’s conduct is a matter which falls squarely within ‘anything which will materially affect the Buyer’s use or enjoyment of the Strata Lot’.”

For failing to disclose the neighbour’s behaviour to the buyer, the seller was liable for breach of contract and fraudulent misrepresentation.  The buyer was claiming more than $500,000 in loss and damage.

Parallels to Queensland?

This is a case based on a contract of sale drawn in Western Australia.  Standard contracts of sale in Queensland and the implied warranties found in section 223 of the Body Corporate and Community Management Act 1997 (Qld) (BCCM Act) do not contain the same condition.

The closest warranty would be that there are no circumstances (other than what is disclosed in the contract) in relation to the affairs of the body corporate likely to materially prejudice the buyer – section 223(3) of the BCCM Act.  An example of such a circumstance is if an administrator has been appointed over the body corporate under chapter 6 of the BCCM Act.  That usually only occurs if the body corporate’s affairs are in complete disarray.

I am unaware of any similar circumstance (a nuisance neighbour) being held, or argued, to amount to a breach of this warranty in Queensland.  However, a similar condition to that considered in this Western Australian case could be specially inserted into a contract.

If you are reading this article and thinking that you wouldn’t have gone through with an ill-fated purchase of a lot in a strata scheme had you been told about this or that, then you should take advice on your circumstances.

Change is needed

This Western Australian case provides a salient lesson on the impact one person can have on the peace and enjoyment of a strata community.

Over May to June 2022, I participated in the Smart Strata Community Education Seminars to provide viewpoints, and debate, on how to create harmonious strata communities.

I began by explaining that there are only two places in the world where you can’t choose who you associate (or live) with: strata communities and prisons. Not everyone is suited to living with others, and the only barrier to entry into a strata community is the ability to purchase or rent a lot.  I argued that this should change, and a body corporate should have the power to expel occupiers to deal with extreme, disruptive behaviours.

You can watch that from 9.15 at this link.

Some might have thought I was jesting with this suggestion to provide some entertainment.  I wasn’t.  Others might have thought it was counter-intuitive to creating harmonious strata communities.  After years of seeing strata communities held hostage to, and crippled by, the extreme, disruptive behaviours of one resident, I don’t think it is.

In my view, Queensland’s strata legislation does not properly equip a body corporate to effectively deal with extreme, disruptive behaviours.

As the general public’s awareness of strata continues to increase, buyers will be more cautious.  Searches of body corporate records should become the norm in a person’s decision to complete one of the most significant purchases in their life.

If these extra precautions are not taken by buyers, or Queensland’s strata legislation is not improved to empower bodies corporate to deal with extreme, disruptive behaviours more effectively, then purchasing a lot in a strata community will in many respects continue to be like a box of chocolates: you never know what you’re going to get.

This information is intended to provide a general summary only and should not be relied on as a substitute for legal advice.

AUSTRALIA’S BUILDING DEFECTS CRISIS: PRACTICAL TIPS FOR DEALING WITH DEFECTS

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Alarming statistics published in November 2019 lay bare true of extent of Australia’s building defects crisis.

 

In a study involving 212 buildings, Deakin University’s Nicole Johnston and Griffith University’s Sacha Reid found that 85% of new buildings in the multi-residential sector have at least one defect.

 

Of the states surveyed, the worst performer was New South Wales, where that average ballooned to 97%. 50% to 60% of defects are also said to be attributable to design issues, or would have been preventable with better design.

 

Based on these statistics, Australians buying into new buildings can reasonably assume it will have defects. The unanswered question however – one which has the potential to impact owners even further – is how many of those defects are exacerbated by owners corporations (OC) and bodies corporate (BC) as a result of poor issue-management?

 

In our experience, the answer is many: from limitation periods expiring to relying on the wrong experts. However, there are simple steps that can be taken to tackle the problem early.

 

1. Building Health Check

 

Everyone knows you need to see your dentist at least once a year. Waiting until a cavity emerges leads to panic, pain and, often, lots of unforeseen expenditure.

 

A building is no different. Problems can snowball, and by the time you have tenants complaining about leaky balconies, the cost to rectify the issue AND the resultant damage can be huge. Not to mention the defects the average lay person can’t see.

 

Paying a good, qualified and experienced consultant should be thought of as expenditure in mitigation. Identifying the problem early can help you plan, budget accordingly, and save you money in the long run.

 

Treat your building like your teeth. Get a building health check done today as early identification and intervention is key.

 

2. Know your rights…and your options

 

There is no one size fits all approach to building defects. “Sue the builder” is often the last resort.

 

How many defects does the OC or BC have? What are they worth/how much will it cost to rectify? Will the builder negotiate or ignore the OC / BC? Should the OC / BC do the repairs and claim the repair costs later? Can owners sue the OC / BC to do the repairs / maintain common property? Is the OC / BC taking steps to mitigate its loss? What jurisdictions are available to seek rectification? Are there any time limitations which the OC / BC should be aware of? If the OC / BC does not do the repairs now, what will your insurer say?

 

All valid questions that should be answered as early as possible. Don’t just ask your lawyer about whether you can sue. Think broader, think strategy and think exposure.

 

Leaving it late can also be a killer. Sure, you have a little time to go before that limitation period expires. But did you know that the builder went into liquidation a year ago and its now too late to lodge a proof of debt? A simple ASIC search would have picked up that up, had you done it earlier.

 

Choosing a lawyer is also a big deal. All lawyers can tell you when limitation periods expire. But it’s not just about expertise in the law. It’s about industry experience, strategies and thinking broader.

 

For example, lawyers experienced in building defects may be able to tell you how a particular builder will respond to your request that they return to site to carry out repairs, based on past experience. Many builders have sparkling reputations and will fix the issues without much resistance. However, similarly some are shell companies created for the sole purpose of the particular development. Once the development is complete the company is deregistered. Can an OC / BC bring an action against a deregistered company? Experienced lawyers don’t just say ‘no’ but look to developing a strategy which looks broader than the ASIC search.

 

That kind of knowledge can save the OC / BC much time and money.

 

3. Think ahead

 

For committees and strata managers, defects raise new questions each and every day. Many of them unique to the particular strata scheme.

 

Can the developer block motions to raise levies? Does the OC / BC need to obtain proxy support ahead of the meeting? How much money should be raised? Can the OC / BC assume everyone will pay that special levy on time? How can the OC / BC reduce the premiums?

 

These issues rear their heads often. The time to ask them is before the OC / BC has  to.

 

Committees should also create an action plan. Know what the OC / BC is going to do and when it needs to do it. This type of thinking mitigates stress, and leaves other owners confident that their money is being well spent.

 

In utilising this three-step approach over 2021-2, Grace Lawyers has helped lead some strata schemes and stakeholders  to achieve fantastic results:

 

  • We acted for four commercial lot owners in a landmark case before the NSW Court of Appeal that confirmed commercial lot owners could recover their share of rectifying common property defects from the developer under contract: Rialto Sports Pty Limited v Cancer Care Associates Pty Limited; CCA Estates Pty Limited; Davjul Holdings Pty Limited; Armmam Pty Limited [2022] NSWCA 146

 

  • In 2022, we advised a number of large, layered developments in Queensland consisting of hundreds of residential lots through the rectification of building defects:
    • With a circa of $5.2M contributions from the developer (given the builder was placed into administration) without having to commence court proceedings; and
    • with a circa $2.5M contribution from the builder / developer without having to commence court litigation.

 

  • We acted for a plaintiff owners corporation in a seminal case regarding the scope of the duty of the care under section 37 of the new Design and Building Practitioners Act 2020 (NSW), and whether it extended to developers: The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659

 

  • In 2021, we acted for a large residential body corporate in Queensland that was approaching the expiry of their limitation period. We urgently commenced proceedings in the Supreme Court and then promptly negotiated a settlement that involved a $1.2M contribution from the builder / developer.

 

  • In 2022, we acted for a residential body corporate in Queensland that was fast approaching the expiry of its limitation period. We urgently commenced proceedings in the Supreme Court for building defects in the circa of $4.2M.

 

So, if there is a new strata scheme in your management portfolio: (1) encourage them to do regular (annual) health checks, (2) guide them towards early intervention and to get advice on their rights and options, and (3) plan ahead to keep owners confident and comfortable with the action being taken.

 

 

A NEW DAWN FOR NON-RESIDENTIAL STRATA SCHEMES IN DEFECTS CASES

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A New Dawn: Owners in non-residential strata schemes have right to recover their share of the cost of common property defects from developers

In a landmark judgment handed down last month, the NSW Court of Appeal has confirmed that owners of lots in non-residential strata schemes can, under certain circumstances, recover from developers their share of the cost to rectify defects in the common property.

The judgment is the biggest development in building defect law since the decision of the High Court of Australia in Brookfield Multiplex Ltd v. Owners Corporation Strata Plan 61288 & Anor (Brookfield), which confirmed that Owners Corporations for non-residential strata schemes could not sue builders to recover the cost of common property defects.

Background

Up until October 2014, the ability of owners to recover the costs of common property defects was set in stone.

For residential strata schemes, an owners corporation had the benefit of statutory warranties under section 18B of the Home Building Act 1989 (NSW) (the HBA). The HBA is a unique part of the law which holds that a number of warranties are “implied” into all contracts for residential building work. Those warranties – which include, for example, a warranty that the work was conducted with due care and skill – were enforceable by owners corporations against a builder and developer.

For non-residential strata schemes, it was generally accepted that an owners corporation could sue a builder under the common law duty of negligence. The process of proving a case in negligence is a bit different to a case for breach of statutory warranties under the HBA, however the net result was the same. That is, an owners corporation could recover the cost of rectifying defects in the common property caused by bad workmanship.

That all changed on 8 October 2014, when the High Court of Australia handed down its judgment in Brookfield.

In Brookfield, the Court made two key findings which meant owners and owners corporations in non-residential strata schemes were seemingly left with no way to recover the cost of rectifying defective common property. Those findings were:

  1. That when defects exist in the common property which the Owners Corporation must rectify, it is the owners, not the Owners Corporation, who suffer a loss.
  2. That builders do not owe a common law duty of care to Owners Corporations, because Owners Corporations are not sufficiently ‘vulnerable’.

Since then, the industry position on this has been bleak, with nearly all non-residential strata schemes choosing to swallow the cost of rectifying defects in the common property.

Until now.

The case in Rialto Sports Pty Limited v Cancer Care Associates Pty Limited; CCA Estates Pty Limited; Davjul Holdings Pty Limited; Armmam Pty Limited [2022] NSWCA 146

In 2018, four lot owners in a commercial strata scheme sued the developer for their share of the cost of rectifying defects in the common property. The cases were the first of their kind in Australia.

Grace Lawyers acted for each lot owner from day one.

The facts of each case were very similar:

  1. Two of the four plaintiffs had bought their lots “off the plan”. Another plaintiff was the assignee of a cause of action to sue (the original suit having been brought by another “off the plan” buyer).eme had been registered. The last plaintiff had bought its lot after the strata scheme had been registered.
  2. The terms of the development consent for the strata scheme included a condition that the development must be carried out in accordance with the provisions of the Building Code of Australia;
  3. Three of the four contracts contained clauses requiring the developer to “cause the construction and completion of the Building in a proper and workmanlike manner in accordance with the Development Consent.” The remaining contract provided for ten specific items of work to carried out by Rialto and its builder prior to completion of the contract.
  4. Various defects existed in the common property which the Owners Corporation was required to rectify. The defects had been valued at several million. However, the Owners Corporation had only raised one special levy – of $660,000.00 – to cover the cost of replacing combustible cladding;
  5. Each owner sued to recover the amount of their contributions toward the entire cost of the defects (not merely the cladding). Those contributions were based on each owner’s respective unit entitlements.

It was common ground that the word “Building” meant the entire building, not merely the lots.

The developer opposed the claims, arguing (among other things) that:

  • the lot owners had no standing to sue the developer, because the owners corporation was the proper plaintiff to bring any claim for damage to common property. This is what is known as the “proper plaintiff rule” in litigation.
  • the claims circumvented the scheme of the Strata Schemes Management Act 2015 (NSW) (the Act), in particular section 106, which confers responsibility upon the owners corporation to maintain and repair the common property, thereby giving a statutory cause of action to lot owners against the owners corporation to compel it to adhere to that duty;
  • the lot owners’ share of the cost to rectify the common property, reflected in statutory levies imposed by the owners corporation under the Act, is not a form of “damages” recoverable by the lot owners. That was because the remedial works had not been done, and the lot owners could never do the works themselves.
  • lot owners may not recover a “reflected” form of loss, being their proportionate share of the loss suffered by the owners corporation for damage to common property, nor is a statutory levy a form of damages recoverable by lot owners.

The lot owners were wholly successful at first instance. The developer appealed to the NSW Court of Appeal.

The NSW Court of Appeal’s Decision

Although the appeal was allowed in part (due to the District Court failing to give sufficient reasons for its decision, the Court of Appeal rejected each of the arguments above, finding as follows:

  • Because the lot owners claim was for breach of contract, the “proper plaintiff’ rule did not apply. Furthermore, because of the High Court’s decision in Brookfield, it could not be suggested that the owners corporation also had a claim against the developer in negligence;
  • It does not matter that the Act confers responsibility on the owners corporation to maintain and repair common property, and gives lot owners the right to compel the owners corporation to adhere to that duty. These things do not negate any personal rights a lot owner may have against a third party for breach of contract, even if that breach involves damage to the common property;
  • Damage to the common property is an infringement of the owner’s proprietary interest in the common property as an equitable tenant in common with other lot owners. The consequence of any such damage is a diminution in the value of the lot owner’s interest in the common property;
  • The lot owners had standing to claim damage for their share of the cost of rectifying damage to common property, because they were ultimately the ones who suffered the loss. That is consistent with what the High Court said in Brookfield;
  • Provided that the remedial work is necessary and reasonable, it does not matter that the owners corporation may never do the works (for the amount claimed by the lot owners or otherwise).

The question is whether a loss is suffered by reason of the breach of contract by the developer.

What this means going forward

For owners of lots in non-residential strata schemes, the decision is a massive boost for consumer protection, finally plugging the gap left by the Brookfield decision in 2014.

For lot owners (particularly “off the plan” buyers) seeking to make similar claims, set out below are a number of vital considerations:

1. What do the contracts say?

This is the starting point in any claim for breach of contract. If the contract for sale does not promise that the common property will be defect free (or something similar), then there can be no claim. That is because the cost of rectifying the defective common property (i.e. the damages) must be characterisable as a breach of the contract.
Other considerations include:

  • Do the contracts say the clauses requiring the delivery of a defect free building merge on completion?
  • Do the contracts have a mandatory dispute resolution clause?
  • Do the contracts limit the vendor’s liability?

2. How do I ensure commerciality?

Speak with your fellow lot owners and band together. Engaging one lawyer to act for all lot owners will be much less expensive.

Consolidating the legal proceedings will also ensure there are not multiple sets of legal proceedings happening at one time.

3. Are their other claims available, other than breach of contract?

Potentially.

It is arguable that the NSW Court of Appeal’s findings could be extrapolated to a claim for misleading and deceptive conduct under the Australian Consumer Law.

Unfortunately the same cannot be said for claims made under the Design and Building Practitioners Act 2020 (NSW), because this act is solely concerned with places where people live (such as serviced apartments).

However, this has yet to be tested.

Grace Lawyers acted for the owners corporation in Brookfield and the successful lot owners in Rialto Sports and are the leaders in strata building & construction disputes.

If you require advice about your particular circumstances or claim, please contact any of our building and construction team Jessica Bates, Daniel Radman or Paul Berrill .

Can an Owners Corporation include legal costs on an owner ledger? Yes!

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A common question we are asked on the topic of strata levy recovery is whether legal costs for chasing unpaid arrears are payable by owner before the Owners Corporation has obtained a court judgment for them. This question is often followed by another, more practical question, which is “can legal costs be included on an owner ledger?”

In a recent case – in which Grace Lawyers acted for the successful Owners Corporation – the NSW Civil and Administrative Tribunal has vindicated our long-held view that, yes they are, and yes you can!

The decision bucks conventional industry wisdom and has the potential to save Owners Corporation’s thousands of dollars in legal costs by avoiding the long, drawn out Court process.

Background

Almost all Owners Corporations will experience debt recovery litigation at some point. An owner stops paying their levies, interest accrues, and the Owners Corporation has to take action to recover the money it is owed.

Oftentimes these matters end quickly. After a few strident letters, the owner coughs up the money, blaming a change of address or a lazy property agent for the delay.

All good, right? Well, no. Not for the Owners Corporation which has expended the time and costs of chasing the owner for the levies. Costs which the industry will tell you the Owners Corporation must now shoulder. Multiply that by the five or so owners who fall into arrears each quarter, and you have the potential for the Owners Corporation to be wasting hundreds, if not thousands of dollars in legal costs in chasing down levies.

But does an Owners Corporation really have to swallow these costs? The industry position on this has been overwhelming negative. Most take the view that that costs can only be recovered from an owner – or included on an owner ledger – after the Owners Corporation has obtained a court judgment for them.

The reason for this is that section 86(2A) of the Strata Schemes Management Act 2015 (NSW) states that Owners Corporation can only recover a contribution not paid at the end of 1 month after it becomes due and payable, “together with any interest payable on that unpaid contribution and the reasonable expenses (i.e. costs) of the owners corporation incurred in recovering those amounts.”

Because Courts are the only ones capable of determining if expenses are in fact reasonable, conventional wisdom has been that an Owners Corporation must commence legal proceedings to recover costs. Otherwise, a Court could never certify the costs are reasonable and an owner would never become liable to pay them!

This was the view adopted by the Local Court of NSW in The Owners – Strata Plan No 52098 v Khalil [2014] NSWLC 2. This decision is parroted by a number of big industry bodies and pressure is put on strata managers to follow its lead.

Grace Lawyers have never agreed with this view.

The case of Oliveira v The Owners – Strata Plan No 74698

In the case of Oliveira v The Owners – Strata Plan No 74698, an applicant owner sought an order from the Tribunal to remove thousands of dollars in legal costs from an owner ledger. That was said to be on the basis that – you guessed it – the Court had not yet found the costs were reasonable, and so the owner was not yet liable to pay them.

The background to the matter was that the Owners Corporation had obtained a number of default judgments in the Local Court against the owner. Those judgments had recently been set aside. The costs on the owner ledger were therefore no longer “secured” by a court judgment, and had to be removed.

The Owners Corporation opposed the order, arguing the following:

  1. That section 86(2A) of the Act, properly understood, meant that a debt recovery expense is immediately payable by the lot owner at the time it is incurred by the owners corporation, not when the Court enters judgment.

    The costs would not otherwise be a “debt” and the Owners Corporation would not have a cause of action to recover them.

  2. An interpretation of section 86(2A) whereby an Owners Corporation was required to sue an owner just to have Courts rubber-stamp even if the smallest amount of costs, would lead to complete disproportionality of costs and a revolving door of litigation. 

  3. The decision in Khalil was clearly wrong, and was consistent with the heavily criticised position of the Queensland Civil and Administrative Tribunal’s in Body Corporate for Liberty CTS: 27241 v Alotier Pty Ltd, Steward Silver King and Burns [2009] QCCTBCCM 3 (11 February 2009).

    The Liberty decision followed the same logic as Khalil, and had been rejected by numerous courts (and QCAT itself, at a later date) since it was handed down in 2009.

  4. The owner ledger was nothing more than a transaction summary. It was not binding on an owner. If an owner disagreed with its contents, he/she/it could choose not to pay it.

The Tribunal agreed with all of these points. In dismissing the lot owner’s application, the Tribunal expressly declined to follow Khalil and stated that:

It cannot be said that recovery expenses incurred pursuant to s 86 of the SSMA are not owed by a lot owner until they are assessed by a court. Subsection 86(2A) means what it says – recovery action is available to an owners corporation if a levy contribution is not paid at the end of 1 month after it becomes due and payable.

The Tribunal found that any amendment of the owner ledger should occur after the Local Court proceedings had concluded. If the Court found any of the costs included on the ledger were unreasonable, those costs would need to be removed.

What does this mean for Owners Corporations?

The decision is a welcome reprieve for Owners Corporation and strata managers who have stuck to their guns and maintained this position in the face of staunch criticism (including from industry bodies).

Moving forward, strata managers delegated the function of debt recovery should ensure the following practices are implemented:

1. Costs, including lawyer’s invoices and charges pursuant to agency agreements, should be included on the owner ledger.

However, Owners Corporations should remain diligent to ensure payments by owners are not mistakenly applied to costs. Payments must always be allocated in the following matter:

(a) In accordance with the owner’s instructions at the time of payment;

(b) If no instructions are provided, what the Owners Corporation can reasonably infer the payment is for based on the amount and timing of the payment.

For example, if a $1,200.00 payment is received on the date the $1,200.00 March quarterly levies fall due, one can reasonable assume the payment was for this purpose;

(c) If the Owners Corporation cannot infer what the payment is for, based on the Owners Corporation’s policy regarding how payments are to be applied;

(d) If no such policy exists, to the oldest debts first.


2. Costs should always be included in letters of demand. This is extremely important.

If a lot owner pays the outstanding levies and interest only before the issue of a claim to recover levies, interest and costs, the Owners Corporation may lose the ability recover costs.


3. Ledgers should be adjusted following court judgments.

For example, if $1,000.00 in costs is included on an owner ledger but the Court only awards $500.00, the additional $500.00 must be removed.

Strata managers should ensure the ledger is always an accurate reflection of what is owing.

For further information please contact Daniel Radman on 1300 144 436.

DEBT RECOVERY | QUEENSLAND CASE STUDY

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The Body Corporate for the Anchorage One v Huang [2022] QDC 119

Committees are commonly faced with many challenges when it comes to recovering outstanding Body Corporate debts from Owners. There are times when the debtor argues that they should not need to pay their levies due to a fault of the Body Corporate. On 26 May 2022, the District Court confirmed in The Body Corporate for the Anchorage One v Huang [2022] QDC 119, that this argument will not be successful when disputing Body Corporate levy debt.

In the case of The Body Corporate for the Anchorage One v Huang the Body Corporate filed a claim and statement of claim against the Defendant for the outstanding levy and recovery costs amounting to just under $23,000. However, the Defendant filed a counterclaim stating that the Body Corporate built an office structure and paved pathway that they had failed to maintain which forced water runoff into her Lot subsequently causing damage. The counterclaim pleads a number of causes of action which include negligence, nuisance and breach of duties under the Body Corporate and Community Management Act and Accommodation Module. The Defendant was claiming $459,000 for damage to the Lot and loss of income as the Lot was used for commercial purposes and was tenanted.

The main concern for the Judge was whether the initial claim and statement of claim and the counterclaim are related disputes. The Judge held that, ‘It is clear, in my view, that the subject matter of the counterclaim (being the damage to the Lot) … is not related in any way to the Plaintiff’s claim for recovery of the contributions’ and should instead be referred to dispute resolution under Chapter 6 of the Act.

To summarise, if a Defendant is to seek a set-off amount for an alleged failure by the Body Corporate, the competing claims would not arise out of the same facts and there would be no sufficient connection between them to permit any set-off. This is great news for Bodies Corporate as it affirms that all outstanding levies and recovery costs will need to be paid to the Body Corporate despite an alleged failure of the Body Corporate to maintain.

For further information please contact Grace Lawyers on 1300 144 436

WHEN DOES THE CLOCK START TO RUN FOR OWNERS TO CLAIM DAMAGES AGAINST AN OWNERS CORPORATION DUE TO COMMON PROPERTY DEFECTS?

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By Colin Grace, Grace Lawyers

Exploring the NSW Civil and Administrative decision of Tezel v The Owners – Strata Plan No. 74232 [2021] NSWCATCD 132.

In a recent decision, the NSW Civil and Administrative Tribunal confirmed that the two year limitation period for an owner to recover loss from an owners corporation because of a failure to maintain and repair the common property starts when the owner becomes aware of the loss being suffered.

The decision is important for owners, owners corporations and public liability insurers alike when considering how to deal with claims for things such as lost rent and repair costs.

Background

It has been the case in NSW for decades that an owners corporation has a strict duty to maintain, renew, replace and repair the common property. That duty was previously enshrined under section 62 of the old Strata Schemes Management Act 1996 (NSW) (the 1996 Act). It now has its home under section 106 of the Strata Schemes Management Act 2015 (NSW) (the 2015 Act).

However, when the 2015 Act was enacted in 2016, it brought with it a new section allowing owners to recover from an owners corporation any “reasonably foreseeable loss” they might have suffered as a result of that owners corporation failing to comply with section 106. That section is section 106(5).

Section 106(5) was introduced in response to the NSW Court of Appeal’s decision in The Owners Strata Plan 50276 v Thoo [2013] NSWCA 270, in which the Court found that owners were not entitled to recover loss from an owners corporation due to a breach of section 62 of the 1996 Act without what is known as enabling legislation.

“Enabling legislation” is basically what section 106(5) is: a piece of legislation that gives owners a right to recover loss or compensation from an owners corporation when the owners corporation breaches a statutory duty. 

So what’s the catch? Well, the right of owners to recover loss from an owners corporation for a breach of section 106 is limited by section 106(6), which states that an owner may not bring an action for breach of section 106 by an owners corporation “more than 2 years after the owner first becomes aware of the loss.”

Whilst they might sound simple, these words are anything but clear. Important questions include:

  1. Does the word “loss” refer to a type of loss – such as loss of rent – or each individual dollar which is lost?

In other words, does the clock start to run as soon as the first dollar is lost, or does it restart each time an instalment of rent would have fallen due?

  • Are there mitigating factors, such as the time it takes for an owner to connect the dots and realise that the loss of rent is being cause by defective common property? 
  • Does the fact that each day a breach of section 106 goes unremedied is considered a new cause of action mean the clock restarts each and every day? 

Thousands of dollars may hinge on the answers to these questions.

The case in Tezel 

In Tezel, the Tribunal was faced with the question about what the words “first becomes aware of the loss” actually meant.

In summary, the applicant (an owner) had been suffering loss of rent since 2016. The owner had commenced proceedings in the NSW Civil and Administrative Tribunal against the respondent (the owners corporation) on 6 November 2020, in which she claimed loss of rent from 6 November 2018 onwards. The respondents disputed the loss of rent claim and argued the owner was out of time because of the limitation period in section 106(6).

The Applicant argued that because an owners corporation’s responsibility to keep the common property in a stage of good and serviceable repair is what is known as a “continuous” or “ongoing” duty – that is, one that applies each and every day – a fresh cause of action arose each day that a breach of that duty went unremedied. Because of this, the relevant cause of action actually arose on 6 November 2018, meaning the Applicant could recover rent from that point onward.

The Tribunal rejected the Applicant’s argument, instead making the following findings:

  1. The 2 year limitation period attaches to the “loss” and not the “breach”. 

That a new cause of action accrued each day the common property remained in disrepair (which the Tribunal accepted) did not allow the owner to bypass the fact that she had become aware of her loss of rent in 2016.

As a matter of statutory interpretation, the words “first becomes aware of the loss” must be given some work to do. If an owner was found to have become “aware” of the loss over and over again simply because a new cause of action arose each day, then section 106(6) could never truly apply. That is because the two-year limitation period would just re-set every day.

  • It does not matter when an owner realises that the loss is/has been caused by the owners corporation’s failure to repair and maintain common property.

The question of whether the common property is in “disrepair” may be technically complex. For example, the question may involve an assessment of what building standards apply and to what purpose the common property is put to. This is not something that a lay owner may be expected to discern and it should have no bearing on when the 2 year limitation period starts.

  • A continuation of the same type of loss does not restart the clock.

If, for example, an owner becomes aware he/she is losing rent on 1 January 2020, the fact than a rental instalment would have fallen due on 8 January 2020 does not restart the two year limitation period from that point on. Further rental instalments are merely a continuation of the type of loss the owner became aware he/she was suffering on 1 January 2020.

As a result, the Tribunal found the 2 year limitation period for the Applicant to recover her loss had expired before the proceedings were commenced.

So what does this mean for me?

There are a number of important takeaways from the decision in Tezel:

  1. It is crucial for owners corporations and public liability insures to determine the date an owner first becomes aware of loss. This means not accepting an owner’s assertions about when they first became aware of loss without investigation.

It may be necessary to consider things such as summons or subpoenas to rental agents or third party contractors to determine when the owner truly became aware of loss.

  • To protect their ability to bring a claim within time, owners should be vigilant about investigating common property issues if they suspect it is causing them loss.

Whilst an owners corporation has the right to investigate common property issues independently including by engaging its own expert consultants, an owner should not necessarily wait for the owners corporation to do so. Ultimately, it is in an owners corporation’s best interests to see the limitation period expire so it can avoid any claim for compensation.

Therefore, owners hitching their wagon to the owners corporation to get to the bottom of whether an issue is defective common property or not could regret that decision in the long run.

  • The decision in Tezel does not necessarily mean that claims for reasonably foreseeable loss are limited to two years from the date the owner becomes aware of them.

For example, if legal proceedings are commenced on 1 January 2022, it may be open to the owner to continue claiming for loss of rent from 1 January 2022 onwards as unliquidated damages (assuming the loss of rent is ongoing).

If facing a claim for ongoing loss of rent, it is crucial for owners corporation to get legal advice and lodge claims with their public liability insurers as soon as possible.

GRACE LAWYERS SUCCESSFULLY SUES DEVELOPER OF COMMERCIAL STRATA BUILDING

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Defects “test” case win for client

In a landmark decision last week, the NSW District Court found in favour of a group of strata owners in a Commercial building in Sutherland Shire who took action against their developer for construction defects.  

At a time when many lot owners, especially in residential strata buildings, shy away from testing their rights in the Courts, this indeed is an important case. 

The defects themselves included water damage and construction issues which are of course, very much in the news in NSW.

In what some parties thought was a legally difficult case and one not argued before the Courts before, Grace Lawyers was successful in arguing that the original owners of lots had rights to sue the developer for their share of strata levies required to pay for original construction defects.

The defendant argued in part that the plaintiffs pleaded claim was for the cost of remedying the defects and because they have no entitlement to undertake any repairs to the common property, they would never suffer loss.

The Court found this was not correct.  The Statement of Claim submitted by Grace lawyers argued that the plaintiffs have suffered and continues to suffer loss and damage proportionate to the unit entitlement of the lots affecting the common property of the building.  The Court agreed.   

This case considered another landmark case where Grace Lawyers acted for Brookfield (Brookfield Multiplex V Owners) some years ago, which prevented a Commercial Owners Corporation from lodging claims against builders and developers.

In following the reasoning in Brookfield, the District Court last week said that owners who had bought in off the plan had contractual rights that required the developer to ensure what was promised was delivered.  Some owners in this case had purchased as far back as 2014.

In this latest decision, the Court ordered the developer to pay all four lot owners over $1.2M together with legal and expert witness costs.

Grace Lawyers is restrained from naming the specific parties in the case because of a possible appeal and for privacy reasons.

Congratulations to the Grace Lawyers team and to our clients for having the faith in running what was a test case in this area. 

The only strata community in Queensland that has banned short term letting

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Fairway Island: the only strata community in Queensland that has banned short term letting

Six months ago a decision by a Magistrate was released which upheld the validity of a by-law that prohibited lots within its strata community from being let for one month or less.  Our article on that decision is accessible here.

The story caught the attention of every major news source in Queensland.  The industry’s excitement over the possibility of this decision setting a precedent for all strata communities was placated by the realisation that the by-law applied to a body corporate that was not governed by the Body Corporate and Community Management Act 1997 (Qld) (the BCCMA), so it would only be of immediate assistance to a select few strata communities still governed by much older legislation.

It was not necessarily the fact that this decision was made that held everyone’s attention.  It was the feeling of futility most were left with when they realised that a judicial decision-maker saw nothing unreasonable or oppressive in a by-law banning short term letting while the BCCMA did not provide the same sensible power to most bodies corporate in Queensland.

The Magistrate’s decision was appealed by the lot owners.  We suspect most in the industry thought it was an anomaly to an otherwise consistent stream of decisions over the last ten years all holding that a by-law cannot restrict short term letting.

On 27 April 2020, His Honour Judge Barlow QC of the District Court of Queensland delivered his decision dismissing the lot owners’ appeal and upholding the validity of the by-law.  This comes only two weeks after NSW legislation took effect allowing an owners corporation to prohibit most forms of short term letting by special resolution.

When will Queensland catch up?

The by-law

The by-law relevantly provided:

“…each proprietor shall not use or permit his lot to be used other than as a private residence of the proprietor or for accommodation of the proprietor’s guests and visitors. Notwithstanding the foregoing, the proprietor may rent out his lot from time to time provided that in no event shall any individual rental for a period of less than one (1) month.”

The by-law was made by one of those rare bodies corporate, Fairway Island, still governed by the Building Units and Group Titles Act 1980 (Qld) (BUGTA).

Similar to the position under the BCCMA, a BUGTA body corporate has the power to make by-laws to regulate the use and enjoyment of a lot.

The fundamental focus for this body corporate was to impose restrictions on the use of lots in order to protect the special residential amenity of its community.

At first instance, a referee (the BUGTA equivalent of a BCCMA adjudicator) simply found that the by-law offended a provision of BUGTA that provided that a by-law cannot prohibit or restrict a lease or other dealing with a lot.  The referee followed the way that many other referees and adjudicators had applied the same provision in the BCCMA, such as in Washingtonia [2018] QBCCMCmr 256:

“…a by-law that purports to prevent a lot from being rented for a term of less than 6 months, or more than twice in one year to different tenants, would operate to ‘restrict’ a ‘lease’ of that lot.”

Fairway Island argued that the referee’s interpretation was wrong because short term letting did not amount to a ‘lease’ that would be protected by that provision.  On 18 October 2019, the appeal tribunal, presided over by his Honour Magistrate Sinclair, agreed.

The District Court’s decision

The lot owners appealed the Magistrate’s decision to the Court of Appeal, who then remitted it for determination by the District Court of Queensland.

On 27 April 2020, His Honour Judge Barlow QC dismissed the appeal and upheld Magistrate Sinclair’s decision: Redman v The Proprietors – Fairway island GTP 107328 [2020] QDC 68.

If there is another appeal, it will be heard by Queensland’s Court of Appeal.

Why can’t BCCMA community titles schemes make the same by-law?

His Honour Judge Barlow QC said:

“I see no reason why, absent any restrictions imposed by other provisions in the Act, it would not entitle a body corporate to make a by-law that regulates a lot owner or occupier in undertaking a wide range of specified activities including, for example, installing a shed or a trampoline in a back yard, smoking or drinking alcohol in or around a lot, or perhaps even leasing or otherwise renting out or allowing the occupation of a lot other than by the owner and the owner’s (or its directors’) immediate family.”

The difficultly for BCCMA schemes is that section 180(3) does not allow a by-law to restrict the type of residential use that can be lawfully made of a lot.  The BUGTA does not have the same restriction.

Judge Barlow QC found that:

“Short-term use of a house by holiday makers or other persons seeking short-term accommodation is different from longer term residential use, even though it may be difficult to draw a clear dividing line. In its ordinary meaning, to use a building for a residential purpose does not include using it for the purpose of letting it out to others (and those others using it) for holidays or other temporary accommodation.”

His Honour could look at the ordinary meaning of those words because they were not defined in the BUGTA or the by-laws.  That is different to the approach taken by the Queensland Civil and Administrative Tribunal (QCAT) in Body Corporate for Hilton Park v Robertson [2018] QCATA 168, where it was held that the legislature had intended that the term ‘residential’ under the BCCMA would include holiday letting and/or short term accommodation.

There is another interesting point of difference between Fairway Island and Hilton Park.

In substantially the same way, section 180(4) of the BCCMA and section 30(6) of the BUGTA provide that a by-law cannot restrict a dealing with a lot.

In the Fairway Island decisions, the appellate tribunal and court found that holiday letting is not a lease (a form of a dealing), and that a by-law does not restrict a lease if it is simply imposing conditions on a lease.

In Hilton Park, QCAT found that holiday letting is a form of a lease, and that imposing a restriction on holiday letting would contravene section 180(4) of the BCCMA.

In Fairway Island, it was successfully argued that a ‘dealing’ is a type of transaction effected by registration under the Land Title Act 1994 (Qld), a short-term letting arrangement is not registrable, and the by-law only imposes conditions on, but does not prevent, possible dealings.  The reasons in Hilton Park do not reveal these same arguments being put to QCAT.

A court and a tribunal can hardly be criticised for not agreeing with an argument not put before it.

But a fresh perspective on whether short term letting is a lease will not overcome whether short term accommodation is a type of residential use that a by-law restricts or prohibits.  That is the challenge for BCCMA schemes.

Where to from here?

When we last wrote about the Fairway Island decision handed down by the appeal tribunal constituted by Magistrate Sinclair (accessible here), it was met by a wave of articles and commentary from other law firms calling it irrelevant to BCCMA schemes and saying it will not have any impact on the wider strata industry in Queensland.

Most would have advised Fairway Island that it would be futile to make a by-law restricting short term letting because a referee would invalidate it, as referees and adjudicators had already done in numerous prior decisions on the belief that it would amount to a restriction on a lease.  In our view, the District Court’s decision in Fairway Island has authoritatively determined at short term letting is not a ‘lease’ or a ‘dealing’ for the purposes of section 30(6) of the BUGTA, and this should be applied by adjudicators interpreting section 180(4) of the BCCMA because the commonalities of these provisions has already been noted and relied upon.

While it may be convenient to dismiss the Fairway Island decisions as being irrelevant because they do not deal with the BCCMA, the same could have been said about O’Connor v Proprietors, Strata Plan No 51 [2018] 4 WLR 22 where the Privy Council upheld the validity of a short-term letting by-law made in the Turks and Caicos Islands as a means of protecting residential use within a condominium development.  The O’Connor decision inspired the arguments led for Fairway Island.

The law is fluid.  Those who practice in the law must also be fluid.  If circumstances do not arise within BCCMA communities to see a challenge to the conventional thinking laid out in Hilton Park, then legislative change is required.

In early April 2020, legislative change occurred in New South Wales that allows an owners corporation to pass a special resolution to restrict forms of short term lettings within their strata community.

Short term letting, Air Bnb, holiday making – however else we wish to describe it – is a serious concern within strata communities that predominately consist of lots used for a long-term residential purpose.  Hitherto, the conventional thinking has been that bodies corporate should simply enforce by-laws to address the nuisance short term letting can cause to the rest of the community when the problems arise, and that it is unreasonable of them to make by-laws based on ‘hypothetical’ concerns.

His Honour Magistrate Sinclair made these helpful comments on the topic in his decision that the District Court upheld on appeal:

“It appears to me that BUGTA intended to allow the BC to pass by-laws to protect lot owners from even a hypothetical nuisance of the occupier of a lot. They need not wait until a marching band starts rehearsals at midnight in one lot to ban such an activity. The requirement to get approval for a pet is a standard by-law. This is based on no evidence whatsoever that any particular animal is a problem but on the potential for one to be….

…Regulation is not just about stopping proven past behaviours from repeating but also about preventing anticipated breaches based on experience elsewhere or common sense. Likewise regulations need not be limited to just preventing certain noise during certain hours but may in principle act to eliminate the source of some potential problems altogether. The response must be appropriate but there is no need to wait until a problem has actually manifested before addressing it.”

The Fairway Island decisions do much more than deal with the validity of a by-law restricting short term letting.  The arguments ventilated within this litigation and the detailed reasoning of Magistrate Sinclair and Judge Barlow QC reveal the core purpose of by-laws: to enable bodies corporate to regulate activities within their strata community to enhance the use and enjoyment of the properties in that community.

If the proper interpretation of the BCCMA is that a strata community that predominately consists of long term residents cannot make a by-law to stop a small handful of lots from being used for short term letting, then the legislation needs to change.

Grace Lawyers is pleased to have acted for Fairway Island throughout the course of this litigation.  You can learn more about our unique approach to strata law here.

Limitation period on levy recovery overturned

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Overview

On 12 October 2017, we sent out an industry update on the recent District Court of Queensland’s decision that barred a body corporate from recovering outstanding contributions where those contributions had been outstanding for more than two years and two months.

This caused significant confusion and disrupted longstanding practices in the strata industry.

For 14 years body corporate managers, committees, specialist strata lawyers and other stakeholders in the industry had not considered the wording of section 145(2) of the Body Corporate and Community Management (Standard Module) Regulation 2008 (Qld) (the Regulation) as imposing a limitation period on the recovery of outstanding levy contributions.

The good news for bodies corporate across Queensland is that the decision has now been overturned by the Queensland Court of Appeal.

As a reminder, the relevant provision under consideration was section 145(2) of the Regulation which provides:

“If the amount of a contribution or contribution instalment has been outstanding for 2 years, the body corporate must, within 2 months from the end of the 2-year period, start proceedings to recover the amount.”*

The Appeal

On 31 July 2018 the Court of Appeal delivered its unanimous decision that allowed the appeal from the District Court and set aside the decision to strike out that part of the body corporate’s claim that included levy contributions that had been outstanding for around 3 and a half years.

The Court of Appeal disagreed with the District Court Judge that the question to be determined was one of competing limitation periods.

Instead, the Court held that section 145(2) of the Regulation does not lend itself to the position that proceedings will be barred when they have not been commenced within 2 years and 2 months because of the following reasons:

Section 145(2) does not expressly state if a body corporate fails to commence proceedings within the time period that it will lose its right to make a claim for outstanding levy contributions in the future;
There is nothing unique about a claim for outstanding levy contributions that would support a limitation period of 2 years and 2 months applying instead of the 6 year limitation period afforded to debt disputes pursuant to the Limitations of Actions Act 1974 (Qld); and
The explanatory notes for section 145(2) focus solely on compelling a body corporate to commence a proceeding and do not consider the interests of a defaulting lot owner which one would expect to see in the explanatory notes if a limitation period was being imposed.
So what does all that mean?

The Court of Appeal has confirmed that section 145(2) creates a duty for a body corporate to commence proceedings to recover the contributions within the 2 year and 2 month time period. Whilst failure to bring a proceeding within that time period may expose a body corporate to criticism by lot owners and lead to the filing of dispute resolution applications for breach of a statutory duty, it won’t render an outstanding levy unrecoverable.

In our view, the Court of Appeal has made a sensible decision and one that is consistent with longstanding industry practices. The Queensland strata industry can breathe a sigh of relief.

Lesson to take away

We appreciate the patience and resolve of all of our body corporate clients who were concerned that they would lose the right to recover historical levies because of the original District Court decision. We were confident that the decision would be successfully appealed, and structured many of our recovery actions on that prediction to ensure no historical levy claims were compromised or abandoned.

The only lesson to be learnt from this saga is that the law is fluid and full of surprises, but the system can ultimately lead to sensible and consistent decisions because of appeals.

* Identical provisions are seen in section 143(2) of the Body Corporate and Community Management (Accommodation Module) Regulation 2008 (Qld), section 104(2) of the Body Corporate and Community Management (Commercial Module) Regulation 2008 (Qld), 79(2) of the Body Corporate and Community Management (Small Schemes Module) Regulation 2008 (Qld).