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Thanks for providing that additional detail, but regrettably it negates one of the other options that I was contemplating.
Please don’t take this as a criticism, but managing disputes in two-unit Strata Schemes is difficult enough particularly when the units of entitlement are equal, but doing things on the basis of a wink and a nod can be a recipe for disasters; as you’ve now found out.
Anyway, that doesn’t really help.
So in preparation for Mediation, if you haven’t done so already, you should put pen to paper and as politely as you can in the circumstances, advise your neighbour that you have just become aware that the informal arrangement previously agreed to whereby they have the use of an area of Common Property contravenes various provisions of NSW Strata Schemes Management Act (FYI both Division 4 and Sections 65A & B; but I wouldn’t mention that), and that consequently you are of the opinion that the situation needs to be corrected without delay by them removing the fence and everything else that they’ve placed on that Common Property.
Invite them to respond to your request within say 30 days.
If your neighbours respond in writing or otherwise, you need to keep that response and/or notes of who said what and when, and if they don’t respond cooperatively or at all within the timeframe that you’ve suggested, then your openly polite approach and detailed notes can only assist you in the formal Mediation process, which by the way you should also politely inform them about if you have to go that way.
It’s good that it’s going to be by-the-book from now, lesson learnt, and just so you know what’s in the book (even for 2-Unit Schemes), have a careful read through THIS to see what else the two of you may have slipped-up on.