Loss of rent and related damages claims under s.106 SSMA in NSW

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By Mike Roberts, Partner

The regime

The Strata Schemes Management Act 2015 NSW – s.106 (1) provides that an Owners Corporation (OC) must properly maintain their common property. If they don’t, a lot owner can bring a claim for damages for loss suffered as a result of a breach of this statutory duty. But that claim must be brought within two years of the lot owner first becoming aware of the loss.

The nature of such a claim, based on breach of statutory duty, is almost strict liability. But, it must be foreseeable (s.106 (5)). And it is suspended while the OC has proceedings on foot (actually issued) against the party responsible for the defect, e.g. a builder/developer or warranty insurer, or another lot owner s.106(4).

All residential strata policies in Australia must have a liability component that covers this loss as well as normal public liability.

Indemnity issues

In granting indemnity to the OC in such a claim the strata insurer will consider some of the following issues:

  1. Has the insured courted the risk? (Gray v Barr (1971) [2 QB 544). Has the OC ignored the plight of the lot owner and refused to rectify the defect causing the loss, or failed to attempt to mitigate those losses while rectification work is taking place?
  2. What is the proximate cause of the loss? Defects in the Common property or something a lot owner has done?
  3. Would the liability to pay arise in the absence of a claim for compensation? E.g. does the loss of rent arise from the necessary vacation of a lot rendered uninhabitable by the rectification work actually under way. The liability policy would not respond to such a loss because the loss of rent or temporary accommodation has arisen from the need to rectify rather than a claim for compensation.
  4. Breach of duty of good faith. E.g. The OC refuses to provide necessary documents or information to allow an indemnity decision to be made.
  5. Egregious failure to maintain.
  6. Significant defects known to the insured but not notified to the insurer as it takes on the risk.
  7. Is the period of the breach covered by another insurer’s period of risk?

Quantum assessment

In assessing a claim for damages under s.106 the court is obliged to apply the normal assessment of damages process that is used in common law damages claims (Mitchelmore, J in Smith v Owners – Strata Plan No. 3004 [2022] NSWSC 1599) and similar principles apply, e.g. mitigation. (Leeming, J in Vickery v The Owners – Strata Plan No 80412 [2020] NSWCA 284).

Expert evidence will be required to show a property is uninhabitable to support a claim for loss of rent.  Szeto v The Owners – Strata Plan No 1418 [2023] NSWCATAP 105 (12 April 2023)

In Shousha v The Owners Strata Plan 2657 [2021] NSWCATCD 6 (21 May 2021) NCAT found loss of rent had not established, there was no evidence of market rental for the period and the applicant continued to live there.

In Carli v The Owners – Strata Plan No 56120 [2018] NSWCATCD 55 (4 October 2018) NCAT found   the lot owner did not vacate so there was evidence the lot owner was seeking to rent the premises.

Practical considerations for strata insurers in loss of rent claims

An insurer will consider the following in handling such claims, and sometimes there is a need to  educate stakeholders such as brokers and strata managers about recent development sin the law and these important issues:

  1. Indemnity must always be considered. i.e. how long has the OC known about the defects? What steps have they taken to rectify same – which must be done at their cost. Indemnity should only be granted if the Insured agrees to fix the defects thereby preventing further claims.
  2. Liability – is the loss foreseeable
  3. Factual evidence about how long the Lot Owner has known about or complained of the defects is essential in determining if the limitation period blocks the claim
  4. Documents – executive committee minutes and correspondence needs to be obtained and inspected. Strata manager and the OC must cooperate with providing information.
  5. Failure to mitigate e.g., if the lot owner’s property is rented how often were they doing inspections? Has the defect (e.g., water penetration and mould) been present for over a year but though lack of inspections not discovered nor reported to the OC?
  6. Expert evidence as to uninhabitability and quantum of market rental
  7. Quantum Is the rent being claimed a realistic reflection of market returns for such a property. What is the Lot owners actual loss? Is gross loss of rent a reasonable measure of damages or should that loss be nett, i.e. after payments to property managers or after tax?

Mike acts for four strata insurers nationally, including the two largest strata insurers in Australia, in claims, recoveries, wording reviews, coverage advice, AFCA representation and complaints, as well as Owners Corporations in actions against builders and developers.

For further information, please do not hesitate to contact us.

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