Governance & Strata Schemes

Buying into a strata community means signing up for a system of governance characterised by collective decision making.

Numerous provisions of the Strata Schemes Management Act 1996 (NSW) (and like provisions in other states) operate to qualify freedom of action or decision making within a strata scheme.

There are provisions which inform that certain things "must" be (or not be) done, such as:

  • s 50 (restrictions on by-laws during initial period)
  • s 68 (what money can be paid out of the administrative fund?)
  • s 71 (what money can be paid out of the sinking fund?)
  • s 80A (limit on spending by executive committees of large strata schemes)
  • s 113 (restrictions on powers of owners corporation during initial period)

Others provisions use the word "cannot" signifying the denial of  capacity to do something, such as:

  • s 28  (what functions of an owners corporation can a strata managing agent exercise?)
  • s 230 (restrictions on owners corporation levying contributions for expenses)

The reality of modern strata life is that a scheme can very quickly become embroiled in an expensive legal dispute, a reality propelled by poorly built or ageing buildings, inadequate or outdated bylaws, and the consequences of overcrowding (particularly in inner-city strata schemes).

But when it comes to commencing legal proceedings or obtaining legal advice, an owners corporation's executive committee might overlook an important statutory prohibition in section 80D of the Strata Schemes Management Act 1996 (NSW).

Prohibition on seeking legal advice or initiating legal action without approval

Section 80D is a "must not" provision, although it does not indicate consequences of a criminal kind or consequences in terms of actionable wrong.

Even so, section 80D prohibits an owners corporation from seeking legal advice or initiating legal action for which payment may be required without first passing a resolution at a general meeting approving the decision.

There is a narrow exemption in regulation 15 of the Strata Schemes Management Regulation 2010 (NSW) - which stipulates that section 80D may not operate if the cost of the legal services or legal action are reasonably estimated to not exceed (a) an amount equal to the sum of $750 for each lot in the strata scheme concerned or (b) $12,500 (previously $10,000), whichever is the lesser.

(The estimated cost of taking or initiating legal action is not the estimated costs of the first stage of litigation. It is the estimated costs in respect of which payment may be required to be made by the owners corporation.)

A recent decision of the NSW Court of Appeal has confirmed that section 80D is a provision that controls or regulates the exercise of an owners corporation's power to sue, although (fortunately), it does not deny or restrict its corporate capacity to do so: see 2 Elizabeth Bay Road Pty Ltd v The Owners - Strata Plan No 73943 [2014] NSWCA 409 esp at [10] per Barrett JA, agreeing with Leeming JA.

Accordingly, an owners corporation (whose executive committee inadvertently breached s 80D, but arranged for the lack of approval to be cured reasonably promptly by a ratification vote by a general meeting) successfully resisted an application for its claim for damages for defective work to the common property to be struck out or dismissed as a nullity.

As Justice Basten further explained (at [5]):

Section 80D is not a provision which purports to regulate the relationship between potential litigants: rather, it imposes a constraint on an owners' corporation, limiting its freedom to incur expenses without approval of the lot owners. Failure to obtain such approval may have consequences, not identified by the section, for third parties, including lawyers who contract with the owners' corporation and those against whom the owners' corporation initiates legal proceedings. The purpose (or at least the primary purpose) of s 80D is neither to provide protection to third parties, nor to confer rights on third parties: the protection is directed to lot owners. At least where the lot owners favour continuation of the proceedings, from which they may anticipate obtaining a benefit, that purpose will not be promoted by having the proceedings dismissed on the motion of the other party. Indeed, depending on the circumstances, the result may be to confer an unintended benefit on a tortfeasor or party otherwise in breach of its legal obligations, to the detriment of the lot owners.

A warning note on ratification by the general meeting

True it is that a contravention of section 80D does not necessarily lead to proceedings being struck out. But the Court of Appeal decision also makes it clear that the approval of the general meeting must be given prior to the litigation being commenced - and most certainly, not after it has finished.

The Owners - Strata Plan No 70798 v Bakkante Constructions Pty Ltd [2014] NSWCA 410 was heard by the same judges, immediately after the above appeal. It too concerned the legal consequences of an owners corporation initiating legal action without obtaining approval at a general meeting, contrary to the prohibition in section 80D.

In this case, proceedings had been commenced in the Consumer, Trader and Tenancy Tribunal on the initiative of the chairperson of the executive of the owners' corporation  in contravention of section 80D (the reasonable estimate of the costs of the proceedings commenced in the Tribunal exceeded the then regulatory limit of $10,000). Indeed, it was common ground at the trial that not all members of the executive committee were involved in the decision to commence proceedings.

Here, ratification by a general meeting was not promptly sought. Furthermore, approval of the general meeting was avoided, and the owners corporation commenced proceedings, and expanded proceedings, without ever obtaining the approval of a general meeting.

Ratification was only sought after judgment had been given against the owners corporation, by which time the costs incurred were more than $750,000, with a lot owner complaining of near tripling in the quarterly levies, and special levies having been raised to pay for the litigation.

A reminder about the executive committee's place in the governance of a strata scheme

Before passing from these decisions, it is useful to record that the judgment of Barrett JA in 2 Elizabeth Bay Road Pty Ltd v The Owners - Strata Plan No 73943 [2014] NSWCA 409 includes some useful analysis of the distinction between the owners corporation and its executive committee.

The role of the executive committee is to "assist" the owners corporation in carrying out its management functions: section 9Section 21(2) makes it clear, however, that certain kinds of decisions within the competence of an owners corporation may not be made by the executive committee:

(a) a decision that is required by or under any Act to be made by the owners corporation by unanimous resolution or special resolution or in general meeting, 

(b) a decision on any matter or type of matter that the owners corporation has determined in general meeting is to be decided only by the owners corporation in general meeting.

The executive committee, as an unincorporated body of persons playing an "assisting" role, has statutory authority to make any decision that the owners corporation can make (subject to the s 21(2) exceptions) and decisions so made are binding on the corporation.

But as Justice Barrett pointed out (at [30]):

The analogy with the board of directors of a company is clear but incomplete. While members of the executive committee no doubt owe fiduciary and other general law duties to the owners corporation in the same way as directors owe such duties to their company, the executive committee is not the repository of powers and functions distinct from those exercisable by the owners corporation through action of its corporators assembled at a meeting. The two decision-making bodies have corresponding decision-making powers, except to the extent that matters expressly put by the legislation within the province of the owners corporation in general meeting (or that a general meeting has reserved exclusively to itself) are, by s 21(2), excluded from the authority of the executive committee.

Conclusion

Urban consolidation, population growth and lifestyle choices mean that property ownership via strata and community schemes will continue to rise. Indeed, it is estimated that by 2030, half the population of Sydney will be living in strata developments.

With the legislative scheme governing strata schemes in NSW so complex, there is a general consensus that reform is needed (which I first noted in my September 2012  post "Strata reform - time for change?").

In November 2013, the NSW Government released a Position Paper which proposed a number of changes to strata law, including significant governance changes:

  • changing the name of the ‘executive committee’ to ‘strata committee’ to reflect that the members have no special 'executive' status or authority;
  • introducing an obligation that committee members are to carry out their functions without favour, for the benefit of all owners and to act with due care, skill and diligence;
  • including an exclusion of personal liability clause for executive committee members who act in good faith for the purpose of executing their functions under the Act;
  • requiring committee members to disclose any conflict of interest in a matter to be considered by the committee;
  • prohibiting non-owners with a financial interest in the scheme (for example, managing agents, letting agents and building managers) from being a member of the committee;
  • introducing a new regime of disclosure and accountability for strata managing agents seeking commissions from third parties.

Similar reforms to community title schemes were subsequently proposed in a Position Paper released in September 2014.

Interestingly, both Position Papers set out an intention to deal with the very issue now resolved by the Court of Appeal, proposing that the failure to obtain approval would not affect the validity of any proceedings or legal acton taken by a committee.

With NSW now housing around 75,000 strata schemes worth $350 billion in assets, these reforms are mooted to affect some 2 million industry professionals, strata owners, and residents in strata-titled townhouses and units.

One might think they cannot come soon enough.

6 December 2014

Dominique Hogan-Doran is a Sydney-based barrister practising in commercial litigation and with a special interest in governance issues.

This blog does not constitute legal advice. Liability limited pursuant to a scheme established under professional standards legislation.