Court of Appeal deals with strata obligation to maintain the common property

September, 2013

The recent decision of the New South Wales Supreme Court of Appeal (“NSWCA”) in The Owners – Strata Plan No. 50276 v Thoo has provided some interesting guidance on the obligations of owners corporations to maintain the common property (in the context of a retail and commercial strata), as well as associated issues relating to upgrading shared facilities and services.

The Basic Facts

The Appellant was the Owners Corporation (“the Owners”) of a commercial strata scheme known as “Hunter Connection” beneath Wynyard Station. The lot occupants ran businesses cooking and selling food to the public. The Respondent, Dr Thoo, purchased a lot property and sought to subdivide the lot into 3 shops and connect each to the mechanical ventilation exhaust system (“MEVS”). He requested that the Owners guarantee him an exhaust ventilation capacity of 3,600 litres per second, which would require an upgrade to the current ventilation system.

The Owners unanimously passed Special Resolution 7, resolving that it was inappropriate for the Owners to renew or replace the MEVS pursuant to section 62(3) of the Strata Schemes Management Act 1996 (“SSMA”).

Section 62 provides as follows:

What are the duties of an owners corporation to maintain and repair property?

(1) An owners corporation must properly maintain and keep in a state of good and serviceable repair the common property and any personal property vested in the owners corporation.

(2) An owners corporation must renew or replace any fixtures or fittings comprised in the common property and any personal property vested in the owners corporation.

(3) This clause does not apply to a particular item of property if the owners corporation determines by special resolution that:

(a) it is inappropriate to maintain, renew, replace or repair the property, and

(b) its decision will not affect the safety of any building, structure or common property in the strata scheme or detract from the appearance of any property in the strata scheme.

The Owners Duty to Maintain and Repair

Dr Thoo brought proceedings seeking a mandatory injunction, amongst other orders, that the Owners repair or replace the MEVS to provide him with the requested 3,600 litre capacity.

At first instance, Slattery J found that the MEVS was in a good and serviceable state of repair, but the Owners were in breach of its statutory duty to renew or replace the MEVS to provide Dr Thoo with a reasonable level of exhaust capacity. Accordingly, Slattery J ordered the Owners to “modify, or add to, repair, or replace the MEVS to ensure that Lot 17 receives a reasonable supply of exhaust ventilation capacity from the MEVS of not less than 3,600 l/s.”

The Owners then brought an appeal in the NSWCA.

The NSWCA, per Tobias J at [118], held that:

“where a system is operating as expected and a new user demands a level of future performance which an owners corporation cannot guarantee, that is not a case in which the system is no longer operating efficiently or effectively. It is in substance a demand for an improvement or enhancement of the system…Accordingly, mere incapacity to service future lot owners over and above capacity of the system as designed is insufficient to engage the duty in s 62(2).”

And at [130]:

“Once it was found, as [Slattery J] did that the system has not fallen into disrepair but was operating according to its original design capacity, there could be no breach of s 62(2) by reason of the Owners Corporation to replace the system.”

The Lot Owner’s Proprietary Rights

Dr Thoo also pleaded that he had the right to use and enjoy the common property MEVS as an equitable tenant in common, and the Owners had a positive general law duty to provide that right.

The NSWCA found that the duties and functions imposed on an owners corporation by the SSMA are positive duties. Negative duties (such as the duty not to benefit from the trust) are imposed on an owners corporation by general equity law, and do not extend to the positive enforcement of the right of a lot owner to use and enjoy the common property. As such, “any complaint that the activities of one owner impair another owner’s enjoyment of the common property is a dispute to which the owners corporation, as trustee, is a stranger.”

The Requirements of a Valid Section 62 Resolution

Dr Thoo submitted that Special Resolution 7 was invalid because the Owners had failed to form an opinion in respect of the requirements at sections 62(3)(a) and 62(3)(b), and without a proper basis to form that opinion a “determination” cannot be made by the Owners.

The NSWCA held that there was no requirement that an owners corporation provide reasons for its determination, and it is clear that section 62(3) require that the Owners form an opinion in respect of the requirements set out in sections 62(3)(a) and 62(3)(b) as a precondition to making a “determination” under section 62(3).

Furthermore, the Owners were correct in finding that a fire safety risk (per section 62(3)(b)) did not arise because the occupants of Lot 17 were not permitted to connect their exhaust systems to the MEVS under the Australian Standards or Building Code of Australia, and thereby could not overload the system and create that risk.

The individual lot owners were entitled to find it “inappropriate” to replace the MEVS per section 62(3)(a) because of the high cost and lack of benefit to them personally.

Fraud on the Minority

Dr Thoo also claimed that by resolving not to upgrade the MEVS, there was a fraud on the minority who could not access the system.

The NSWCA found at [196] that there was no fraud on the minority because:

“the negative impact that such a determination may have upon the minority, if otherwise the resolution is valid, is, at least inferentially, contemplated by s 62(3) itself, as it has the effect of negativing what would otherwise be a breach of duty on the part of an owners corporation in declining to renew or replace an item of common property that would no doubt benefit lot owners otherwise entitled to its use and enjoyment. But that is the nature of the legislation.”

Finally, the NSWCA expressed support for McColl JA’s reasoning in Ridis v Strata Plan 10308 [2005] NSWCA 246 that a breach of section 62 of the SSMA by an owners corporation does not give rise to a claim in damages.

Conclusion

At first glance the decision seemed to absolve the Owners from providing a lot owner with an upgrade that was required to service their lot(s) properly.  However, under closer scrutiny the case was more in the nature of a dispute between an owners corporation and a lot owner trying to have the owners corporation bear the costs associated with providing services required as part of changes in their lot(s) to their benefit. Whilst the relevance of the case (like many) will depend on the specific facts, it does provide some useful guidance for owners corporations as to how the courts are likely to deal with such issues in the future.

Contact Mills Oakley

For more information, please contact:

paul-jurdeczka

Paul Jurdeczka | Partner
T: +61 2 8289 5819
pjurdeczka@millsoakley.com.au

 

  • Strata

  • Privacy Policy | Terms of Use