Podcast: Lawyer in the hot seat, part two

This week we bring you the second part of strata lawyer David Bannerman’s Q&A session, with Flat Chat’s JimmyT asking the questions sent by Flat Chat readers and Bannerman Lawyers’ clients.
This week the topics include: 

• Reclassifying common property in community schemes (to avoid paying levies);
• Fraud on the minority;
• Cost recovery by-laws to deter action by owners;
• Breaches of property development deeds;
• By-laws about drying laundry on balconies;
• Renter’s objection to renovation;
• Banks paying levies for properties called in after mortgages unpaid.

Yes, there’s something for everyone.  And, if you missed it, you can catch up with the first part of the Hotseat session HERE and get in touch with Bannermans Lawyers HERE.

TRANSCRIPT IN FULL

Jimmy  00:00

A couple of weeks ago, I was guest interrogator (for want of a better term), on strata lawyer, David Bannerman’s ‘Lawyer in the Hot Seat’ session, on his podcast. We ran the first half of that session last week; it’s still up, obviously, as a podcast. And this is, as promised, the second part of that session, and it covers quite a lot of ground. So, sit back, relax and listen to ‘Lawyer in the Hot Seat,’ part two. I am Jimmy Thomson, I write the Flat Chat column for the Australian Financial Review. And this is the Flat Chat Wrap. The first question; I’m hoping you have it in front of you… It’s complicated. ‘Can the strata committee, or owners corporation use bylaws to reclassify standard strata common property as exclusive use, so that the first three stages of a community (and this is referring to 117 semi-detached villas on private roads), do not have to fund maintenance for the final stage; the minority of 46 apartments?’

David  01:19

Okay, so let’s assume that the question was relating to a strata scheme and not a community scheme… Limiting it to a strata scheme in New South Wales; quite often, what this would be, would be a stage development. So the first stage was a particular series of buildings, or a building. The second stage, another building, third stage, another building, or series of buildings. And the strata development contract, which would have been registered to identify the existence of such a site, would have given the developer 10-years to conclude the project. And so what you typically have is a scenario where there was an original strata scheme, or it could have been a house, or a series of houses, that were subsequently strata-subdivided, with these other two stages to conclude it, at the back-end of the 10-years, and that was subdivided in such a way, that it left many of the owners there fixing their own property. And then when they subdivided these latest stages, they had to contribute to fixing more than the property of their own, that the other owners had to fix for theirs.

A typical example is where there’s an old house; a big house, a country farmstead house, and then at the back, there’s a strata subdivision; they put it in a new strata subdivision. And when they created this right to finish this other stage, they said that everything within the cube for which the house is located, is part of the lot and they’ve got to pay for all their structures and waterproofing and roof, and everything like that. But then when they registered the second stage, the owners for that house have to pay for the roof and the walls and the slabs and the floors and the doors, for the second stage and they feel as though this is an unfair situation here. Coming back to the answer to the question; can a bylaw, give those owners in that second building, the obligation solely, to repair and maintain those items, so that these people in the first building do not, then yes, they can. However, the bylaw, it would be limited; it couldn’t cover everything.

It would be limited pretty much, to the repair and maintenance of those structures. And that is the common property structures. But you’d need to have a registered bylaw, in which each owner in that second building, having provided their written consent to take on that obligation. Typically, when somebody is looking to provide their signature on a document, to give consent to something, they’ll be looking at “what’s in it for me?” And if there’s nothing in it for them, they’re not likely to want to all of a sudden have to pay more, unless they’re compelled to. Hence why somebody from that first building could propose a bylaw by way of general meeting, which could be refused, at a general meeting in which those other owners voted. And then they could go to mediation to try and cut a deal. We have been involved in cutting a deal like that in that scenario. Or, it could go to  NCAT for an order, that the Tribunal make the bylaw to transfer the obligations to those owners; we have been involved in those, as well. So the answer to the question is yes; the problem is it would require the written consent of each of those owners to obtain and the “what’s in it for me” factor will come into play.

Jimmy  04:27

It’s an interesting one about the minority… We had a communication recently; there was a community title. It’s like three or four strata schemes, basically, under the same system.

David  04:38

Under a community management statement?

Jimmy  04:40

Yes. They each had their own strata, but they also had a community committee. And there was one guy in the biggest building; he was just… Nobody wanted him; he was a pain. They wanted rid of him. And so they put forward a motion to the committee, to vacate the chair. They couldn’t throw him off the committee, but they could stop him being the chairman.

David  05:07

Yes, you can change that role at any committee meeting, and nobody can flex with unit entitlement benefit there. That’s the committee…

Jimmy  05:18

Yes, David. But, this guy had more than 25% of the voting power and so he was able to have the motion removed from the agenda.

David  05:30

Well, to the extent it’s a valid committee decision; and it would be, to just re-elect office bearers, because it’s the committee that chooses the office bearers, and everyone just carries an equal vote in that forum. And assuming it was well-drafted, then it would have been entitled to be voted upon. If it’s poorly-drafted, the chairperson can rule a motion out of order. And from that point of view, he could have ruled it out.

Jimmy  06:00

But isn’t it true that 25% of owners’ or voting power, can have a motion removed from discussion at a committee?

David  06:11

No, what you can do (at least in a strata scheme level, I’d have to check for the community level, but I imagine the fraction is still the same)… But in a strata scheme, you can have 1/3 of the owners sign a petition to say that we don’t want the committee to vote on this motion. So it’s a bit like the opposite. It’s like the power to veto the decision on something. If he had the requisite support, he could have provided, prior to the committee’s decision on that, an ability to veto the committee making that decision, so they wouldn’t have to go through it. I can’t remember in community, whether it’s 25% or 1/3. I’d say it’s probably mirrored to strata, because I try to make things as simple as possible.

Jimmy  06:56

Well, that’s what he was doing; they were turning up, ready to vote him out and he was saying “yes, I’ve got more votes than you. I’m stopping you even discussing this.” Okay, I’ll go back to your much more sensible questions here… “Just as the oppression of minority shareholders is an established area of company law, have you seen a similar trend emerging in strata law? And what are your views on the transferability of minority oppression in company law, to strata law?”

David  07:34

Firstly, the company law is specifically excluded from strata law; it’s specifically expressed in legislation not to apply. And so it’s up to the strata legislation to pick up ideas from the corporations’ law and fold it into the strata law. They have been doing that over the years, in the Strata Scheme’s Management Act. Now, Fraud on the Minority has been run; last time it was successfully run, it was decades ago. And so it’s rarely run. It was recently run about 10-years ago, in relation to a building next to me, but not successfully run. Where the Strata Schemes Management Act picks up on the corporations’ law on the Fraud and Minority part more effectively, is where somebody can make an application for a Section 237 manager, to employ a  compulsory manager.

And basically, a lot of those applications are where a certain minority, no matter how sensible the decision is, and how compliant the decision is, they’re being refused by the committee, or the owners corporation. And so the minority is just not able to progress successfully at a general meeting vote, or at a community-level decision-making basis. And so where they’re the minority, and the decisions that have been made by the majority are incorrect, the Tribunal will displace the majorities’ voting rights, together with the minorities’ voting rights, appoint a manager for 12-to-24 months, to have full control and make all the decisions to avoid this majority flex.

Jimmy  09:02

I mean, the case that springs to mind (and it was years and years and years ago), was the owners of the majority voting power in a building, gave themselves the right to move into the attic space of the building, for a peppercorn…

David  09:21

It was a matter of Horton and Iema. And in this case, there were three lots; two lots got together, who controlled more than 75% of the unit entitlements. They sold themselves the airspace above the building, developed the airspace above the building. And then, the third owner put their hand up for a share of profits and was given a share of the profits, on the basis of Fraud on the Minority.

Jimmy  09:46

But that came up with a formula, which was basically, the cost of the renovations was subtracted from the profit; the increased value, and then that money was paid by back into the owners corporation. Would that still fly today, do you think?

David  10:04

Well, I think in that case, it was paid to the owner, and hence the framing of the application, for a minority, why it’s so rare that that event would occur. But if it was paid to the owners corporation, it would have to be divvied out on the basis of unit entitlements, which would mean that that owner would only get…

Jimmy  10:23

He would only get 25%.

David  10:27

I’ll have to double-check that, but that was my recollection. It’s been many years since I’ve read that case in entirety.

Jimmy  10:40

“If strata still want to have a cost-recovery bylaw, is it practical? How are we going to respond to the request of the strata committee?” I understand that a lot of strata committees are now saying “if you take us to NCAT, or whatever, we are going to charge you the cost of defending the case.” There are variations on that. I mean, is that valid; is it allowable?

David  11:07

Time and time again, such a clause in a bylaw will render the entire bylaw invalid, so it’s highly inadvisable. And if it exists in a bylaw, and you want to be able to rely on that bylaw for some other purpose, then you’ve just invalidated your alliance on that other purpose, with that invalid purpose.

Jimmy  11:24

Because only the Tribunal can award costs, or not; is that correct?

David  11:30

That’s right.

Jimmy  11:38

“If a deed is signed, but the builder is in breach of the deed, can the owners corporation consider terminating the deed and seek cash settlement?”

David  11:49

We’ve been involved in some 500-odd defect cases over the years and many of them settled by way of a deed, or many of them settled by way of, what’s called a Work Order through NCAT. A deed is like a contract; to the extent that it’s breached, you can sue for damages off the breach. So you’d have to put somebody in breach of the deed to sue for breach. To the extent you’ve got a Work Order, which is an order in NCAT, where the builder or the developer have been ordered to perform a certain range of works… With such a Work Order, if there’s been a breach of the Order; say for instance, they were supposed to remove the cladding by June, and it’s nearly 11 months on and they still haven’t done it, then you’re entitled to go back to NCAT within 12 months of the breach of that particular part of that order, and ask for a cash payment. We recently had a matter, where we had a Work Order in place and with this Work Order, the value of it exceeded the jurisdictional threshold of the Tribunal, which was then $500,000. We then went to cash it out within the 12-months of the breach and said that we’re not limited by that $500,000 threshold, to which it was agreed on by the Tribunal that we were correct, and that we could cash out above the $500,000 jurisdiction.

Jimmy  13:17

We’re past our scheduled end-time, but I feel guilty for having delayed the start… There’s a few q & a out there, Jimmy. Okay, let’s have a look. “What are your thoughts on prohibiting the hanging of laundry, which are common in New South Wales strata schemes, given it is generally a purely cosmetic concern? However, encouraging use of internal dryers exacerbates mould issues, and has material costs for residents and environmental impacts. Do you believe they are likely eventually, to be found unreasonable, comparably to what happened to the blanket pet bans?”

David  13:47

When we do reviews of schemes’ bylaws and we see such a bylaw, we advise them that we think that the Tribunal would view that as harsh, oppressive, or unjust, and that you should modify that, to provide the hanging of washing on the balcony is fine, so it’s not visible from the street view.

Jimmy  14:10

I mean, I’ve heard of cases where people have been issued fines by their strata committee, or they’ve been breached, because they were drying laundry inside their apartment, but it could be seen from the street.

David  14:23

Attitudes change over time and so accordingly, do bylaws. Those sort of bylaws have been around since the 80s. And there was a solid attitude when I first started in the strata industry back in about 2003; there was a great concern that they didn’t want to turn strata buildings into slums. They didn’t want it looking like there’s sheets and towels all over the balustrades. And so there was a strong view that this was a proper requirement. But then, all of a sudden, the world turned, in relation to carbon emissions, energy savings, efficiency, and then that attitudes changed. But people haven’t changed their bylaws, to change with the attitude.

Jimmy  15:12

Because I mean, I would imagine with electricity prices going up, people would be buying washing lines by the truckload now, because the sun and wind, of which we have plenty, will do the job. I’ve got another question….  I know I’m intruding on our listener’s time, but I do feel I owe you this. I’m going to crunch this question down…. She is a tenant in an eastern suburbs strata building; that puts her at a disadvantage right away. But, her neighbour has taken the wall out; one of the walls out of her bathroom, to make the bathroom bigger and it means that she can hear all the noise from the bathroom, which must be very unpleasant. Now, they are saying, how can they get the neighbours’ flat inspected, to show that they have removed a wall illegally?

David  16:12

Okay, as a tenant, you’re always on the backfoot, because unless the landlord gives you permission, you’re not going to be able to inspect the scheme’s records to see who did what and when. Now, you should have been provided the registered bylaws and the bylaws would make reference to such works, if they were approved. Now, this person’s best footing, would be to make a complaint through the local council, to advise about unauthorised building works, which they believe were performed, which they’d like investigated and remediated, because the council will have the power of entry to investigate and look at that issue. Now, where it becomes a bit of a problem, is that when it comes to the owners corporation enforcing bylaws, they need to enforce it against the owner at the time, who performed the works, not the current owner, who may have inherited the works.

They would have been able to have a crack at the current owner in relation to the works, if they had a proper bylaw authorising it, because typically they’ll say that you’ll need council approval…That doesn’t sound like it was obtained for what happened there. And they also say that you’ll be liable for repairing and maintaining that problem. It sounds as though noise insulation hasn’t been maintained properly. But in the absence of such a bylaw, transferring that from the current owner who did the works, to the new owner, it’s up to the owners corporation to track down and look at a claim against the old owner, who may not be around; who may not be easy to find. Now, to the extent that a tenant thereafter can’t succeed with the council application, they could look at an application to NCAT, following mediation.

The owners corporation is not adhering to its obligation to repair and maintain the common property. And that is the common property, that existed at the time of registration, subject to any authorizations, which had been approved by a bylaw. The owners corporation could find itself on the back foot of an order from the Tribunal, to repair and maintain the common property, although it was modified by a former owner, and then look to try and recover compliance with that order, from the former owner, through some court action.

Jimmy  18:15

And what about the landlord; would it be an easier option for the tenant to approach the landlord or the rental agent and say “the value of your property has been diminished by the work done next door?”

David  18:29

What could occur is that the tenant arcs up against the landlord and seeks an abatement of rent, on the basis that the property isn’t as advertised. And then he would get a reduction in his rent. That would leave the owner in the same position as the tenant, in an action against the owners corporation, to repair and maintain common property, coupled with a section 1065 claim for damages for loss of rent, on the basis of the owners corporations’ failure to repair and maintain the common property.

Jimmy  18:59

So that would actually be the optimum avenue; talk to the owner and say “I want a rent reduction.” And then six months later, you get a ‘termination of lease’ notice, coincidentally.

David  19:12

That’s what you’d have to give careful consideration to, is the length of the duration of the lease and how willing you are to move out.

Jimmy  19:22

“The majority, in the early stages (so 17-to-30 years old), I approved and opposed the exclusive-use bylaw, on a new-stage before they moved in. The cost of the bylaw was not known until budget and levy advised six-months later.” I don’t even understand what that is… I think it ties in with the former paragraph. A Mr. Anonymous attendee… He is saying that this was put in and nobody noticed. So they’re now retrospectively, trying to unpick that piece of knitting, I guess. I don’t know. I mean, is that possible? Can they go back and say “they should never?” Well, as you said, an exclusive use bylaw requires the people who are taking responsibility for the common property; they have to all sign off, that they’re prepared to do that.

David  20:24

There used to be a practice, that after two years of the meeting making the bylaw, that written consent is deemed to have been given. And there were some managers who had a practice of just registering such a bylaw at the end of the two years, so there was nothing you can do about it. And then you’d have the deemed consent given. We always advise against that, because that’s a fraud on the Title and under the Property Act, there’s a lot of consequences that can occur against somebody committing a fraud. There are some bylaws that were registered without the consent, but if two years has marched on, then you’re limited to an action of fraud, against the person who committed the fraud. But in this case, it looks like an old two-lot scheme. There was a bylaw, where they did envisage transferring certain common property items to owners, to repair and maintain. Unless that bylaw’s invalid, it needs to be adhered to.

Jimmy  21:29

There’s another one come up in the q & a. We’ll have to make this the last one, because I have to dash off to my other job (which I hope I still have). “Are there any legal precedents where a bank that is not completing their mortgagee and possession process has been ordered to pay arrears levies and be responsible for future levies, until such time as they decide to sell the property?” So basically, you’re taking the bank to the Tribunal and saying “you’ve got to pay your levies.”

David  21:57

With an owner who has typically lost possession of his property to the bank, because he wasn’t paying his mortgage, the owner remains liable for the levies (although they may not be occupying it), and the bank becomes liable for all the former levies and the expenses incurred in recovering those former levies now, since November 2016. Once they supply a Mortgagee in Possession Notice and they’re entered on the strata role as such, but not until that point in time; they need to give you a Mortgagee in Possession notice. So you could ask the bank, say “nice to meet you. Can you please provide your Mortgagee and Possession notice, and then I can deal with you?” And then upon receipt of that entry on the strata role, you can ask the bank to stump up the arrears.

Jimmy  22:42

An anonymous attendee has asked “in a BMC, who pays for the cost of shared facilities, where only one strata plan is currently operational and the other schemes and lots in the DP (whatever that is), are still being built?”

David  23:01

As to who it will be, will be as specified in the Shared Facilities Register. It’ll specify the shared facilities, and it’ll say who is paying what proportions. If the other members of the stratum subdivision are not yet completed, it would normally, subject to reverse-drafting, just fall to the owner of that particular lot, whether it’s constructed or not, to pay their contribution. They could have drafted it in another way.

Jimmy  23:33

Okay. All right, David, I’m going to have to go; I feel that you have to go as well.

David  23:38

For those of you would like to CPD certificates, if you can please email Allison, and she’ll send it through to you, for your PSS points. Thanks everybody for attending. There is no quiz today, hence why if you want to a CPD certificate, please email Allison. Thank you Jimmy, always a pleasure!

Jimmy  23:55

David, if it’s okay with you, I’ll put this out on the podcast next week. Thank you and apologies again for the delays. Thanks, David. Thanks for listening to the Flat Chat Wrap podcast. You’ll find links to the stories and other references on our website flat chat.com.au. And if you haven’t already done so, you can subscribe to this podcast completely free on Apple podcasts, Google podcasts, Spotify, Stitcher, or your favourite pod-catcher. Just search for Flat Chat Wrap with a W, click on subscribe, and you’ll get this podcast every week without even trying. Thanks again. Talk to you again next week.