Is your stra­ta scheme functioning?

We recent­ly act­ed for a lot owner/​building man­ag­er in a Stra­ta Appli­ca­tion to the NSW Civ­il and Admin­is­tra­tive Tri­bunal (NCAT) suc­cess­ful­ly seek­ing orders for the removal of the exist­ing stra­ta com­mit­tee and the com­pul­so­ry appoint­ment of a stra­ta man­ag­er to the scheme under s237 of the Stra­ta Schemes Man­age­ment Act 2015 (SSMA 2015) to effec­tive­ly restore ​‘func­tion’ to the own­ers corporation.

UNILODGE AUS­TRALIA PTY LTD & ANOR V THE OWN­ERS STRA­TA PLAN 54026 [2020] NSWCATCD

Sec­tion 237 of the SSMA 2015, allows NCAT to make an order appoint­ing a per­son as a stra­ta man­ag­ing agent to exer­cise some or all of the pow­ers of an own­ers cor­po­ra­tion, in cir­cum­stances where the scheme is not func­tion­ing, or is not func­tion­ing satisfactorily.

On 29 April 2020, Prin­ci­pal Mem­ber Simon hand­ed down her deci­sion in the above case which can be viewed here.

Whilst the SSMA does not spec­i­fy any par­tic­u­lar mat­ters to be con­sid­ered when it comes to deter­min­ing dys­func­tion, in this case, Prin­ci­pal Mem­ber Simon referred at [25] to the deci­sion of Bischoff v Sahade [2015] NSW­CAT­AP 135 at [122] and not­ed that the main areas of dys­func­tion iden­ti­fied by the Appli­cants included:

• improp­er refusal to accept as valid, proxy and cor­po­rate own­er nom­i­nee forms sub­mit­ted pri­or to numer­ous gen­er­al meet­ings, dis­en­fran­chis­ing hun­dreds of lot own­ers and enabling the then cur­rent Chair­per­son and Stra­ta Com­mit­tee to gain, and retain, control;
• fail­ure to repair a dan­ger­ous awning above a pub­lic foot­path adja­cent to the Stra­ta Scheme, notwith­stand­ing that the need to do so has been known since July 2015; and
  
• spend­ing inor­di­nate amounts on legal costs since March 2019.

THE IMPROP­ER REFUSAL OF PROXIES

At para­graphs [28] to [31] of her deci­sion, Prin­ci­pal Mem­ber Simon referred to the writ­ten instru­ments, which had the effect of grant­i­ng an irrev­o­ca­ble pow­er of attor­ney, form­ing part of res­i­den­tial ten­an­cy agree­ments (RTAs) entered into by lot own­ers and the addi­tion­al terms of each RTA as being rel­e­vant to the treat­ment of proxies.

This includ­ed clause 15(a)(1) which empow­ered the ​‘ten­ant’ to, among oth­er things, com­plete, sign and lodge any proxy form, cor­po­rate own­er nom­i­nee noti­fi­ca­tion form, owner’s rep­re­sen­ta­tive noti­fi­ca­tion form and any oth­er notice or doc­u­ment required under the SSMA 2015 or the Stra­ta Schemes Man­age­ment Reg­u­la­tions 2016 (NSW), so often as was nec­es­sary to allow the ten­ant to vote in the name of the ​“Land­lord”, i.e. the lot own­er who had leased their lot, at all meet­ings of the body cor­po­rate or the stra­ta com­mit­tee held dur­ing the term of the RTA.

Pur­suant to the pow­ers of attor­ney con­ferred by the RTAs, the ten­ant appoint­ed var­i­ous prox­ies on behalf of the rel­e­vant lot own­ers, and com­pa­ny nom­i­nees on behalf of var­i­ous lot own­ers that are com­pa­nies, in accor­dance with the require­ments of the SSMA 2015, that is to cast votes at gen­er­al meet­ings of the own­ers cor­po­ra­tion (OC). How­ev­er, at the three gen­er­al meet­ings held on 14 June, 11 July and 14 August 2019, the proxy forms and com­pa­ny nom­i­nee forms from lot own­ers were reject­ed by the then cur­rent Chairperson.

In those cir­cum­stances, Prin­ci­pal Mem­ber Simon con­sid­ered the deci­sion of Ward J (as her Hon­our then was) in Quest Rose Hill Pty Ltd v White [2010] NSWSC 939 (Quest v White), sub­mit­ted by the Appli­cants to be direct­ly on point.

In Quest v White, the plain­tiff had leas­es with var­i­ous land­lords who owned lots in the build­ing, pur­suant to which the plain­tiff oper­at­ed a ser­viced apart­ment busi­ness by let­ting out (both short and long term) those leased lots to the plaintiff’s cus­tomers. Under the leas­es at clause 13.2, each rel­e­vant land­lord had grant­ed an irrev­o­ca­ble pow­er of attor­ney to the plain­tiff in the fol­low­ing form:

To bet­ter secure the per­for­mance by the Land­lord of the oblig­a­tions under this clause the Land­lord irrev­o­ca­bly nom­i­nates and appoints the Ten­ant and each direc­tor and offi­cer of the Ten­ant from time to time joint­ly and sev­er­al­ly to be the attor­ney of the Land­lord and to act, attend and vote as attor­ney in the Tenant’s absolute dis­cre­tion on behalf of the Land­lord (includ­ing to allow the Ten­ant the pow­er to appoint and dis­miss the Own­ers Cor­po­ra­tion man­ag­er and to grant to the Ten­ant any leas­es or licences in respect of the Com­mon Prop­er­ty that are rea­son­ably required for the oper­a­tion of the Tenant’s Busi­ness) at all or any meet­ings of the Own­ers Cor­po­ra­tion or of the com­mit­tee of the Own­ers Cor­po­ra­tion to the exclu­sion of the Land­lord if present.

A dis­pute sub­se­quent­ly arose in which the land­lords chal­lenged the right of the plain­tiff to rely on the pow­er of attor­ney giv­en under the lease they had signed and sought to argue (unsuc­cess­ful­ly) at the hear­ing before Ward J that clause 13 was incon­sis­tent and irrec­on­cil­able with the var­i­ous pro­vi­sions in the stra­ta schemes leg­is­la­tion which applied at the time, i.e. Stra­ta Schemes Man­age­ment Act 1996 (NSW), and pro­vid­ed for the enti­tle­ment of lot own­ers to vote at gen­er­al meet­ings and in the exer­cise of vot­ing rights by proxy.

As not­ed by Prin­ci­pal Mem­ber Simon at [38] of Unilodge v The Own­ers Stra­ta Plan 54026, Ward J reject­ed that sub­mis­sion in Quest v White and held at [106]:

It seems to me that clause 10(3) of sched­ule 2, which pro­vides for the man­ner in which a vote may be exer­cised, is per­mis­sive in its terms. It is open to a Land­lord to appoint a proxy or an attor­ney to act on his or her behalf with­out in any way con­tract­ing out of the Act in breach of s 245. Sim­i­lar­ly, I see no rea­son why the Land­lord could not (sub­ject to com­pli­ance with any pro­ce­dur­al require­ments under the Act) irrev­o­ca­bly appoint some­one to attend and vote on his or her behalf at meet­ings of the Own­ers Cor­po­ra­tion (and/​or exec­u­tive com­mit­tee, if so per­mit­ted under the rules of the Own­ers Cor­po­ra­tion). There must be many lot own­ers of stra­ta title units with­in New South Wales who, for what­ev­er rea­son, do not seek per­son­al­ly to exer­cise their vot­ing rights (whether or not they choose to attend such meet­ings) from time to time or at all and wish to do so by appoint­ing prox­ies for that pur­pose. If they do so by con­tract, they sure­ly can­not all be said to be so doing in con­tra­ven­tion of the Act.

In Quest v White, Ward J also accept­ed that prox­ies in stra­ta schemes oper­ate anal­o­gous­ly to prox­ies under the Cor­po­ra­tions Act 2001(Cth) and applied Palmer J’s deci­sion in Cor­diant Com­mu­ni­ca­tions (Aus­tralia) Pty Ltd v The Com­mu­ni­ca­tions Group Hold­ings Pty Ltd (2005) 194 FLR 322 at [24] to hold at [111]:

What clause 13.2 does, in my view, is to appoint Quest as the Landlord’s attor­ney (that expres­sion includ­ing proxy) for the stat­ed purpose(s). With that appoint­ment would sure­ly come the implied oblig­a­tion on the par­ties to do what is nec­es­sary to enable the proxy rights so con­ferred to be valid­ly exer­cised in accor­dance with any pro­ce­dur­al require­ments under the leg­is­la­tion. There­fore, to the extent that it is nec­es­sary for a Land­lord or Quest to sub­mit duly exe­cut­ed notices or forms to the Own­ers Cor­po­ra­tion in order to com­ply with the statu­to­ry require­ments for the valid exer­cise of a vote as proxy, that fact of itself does not seem to me to negate or con­tra­vene the Act. It sim­ply means that fur­ther steps need to be tak­en before any vote is valid­ly cast by the attor­ney act­ing as the Landlord’s proxy.

In light of the fore­go­ing, and hav­ing con­sid­ered the sub­mis­sions and evi­dence of the par­ties, Prin­ci­pal Mem­ber Simon stat­ed at [40] that she was sat­is­fied (for the same rea­sons out­lined by Ward J in Quest v White) the prox­ies and com­pa­ny nom­i­nee forms had been valid­ly exer­cised by the ten­ant and con­clud­ed at [50] to [52] that:

1. she was sat­is­fied that the refusal to accept the ​“UniLodge” prox­ies and com­pa­ny nom­i­nee forms as valid, at three sep­a­rate gen­er­al meet­ings, amount­ed to an unwar­rant­ed denial of vot­ing rights for those lot own­ers, the then Chair­per­son and Sec­re­tary was part of the deci­sion not to allow the prox­ies, that this result­ed in a dis­en­fran­chis­ing of those lot own­ers of a vote in those meet­ings and that this demon­strat­ed that the gen­er­al meet­ings of the OC were not being con­duct­ed prop­er­ly / the scheme was not func­tion­ing sat­is­fac­to­ri­ly; and
2. she was also sat­is­fied that the res­o­lu­tions passed at gen­er­al meet­ings held on 14 June, 11 July and 14 August 2019 refus­ing to accept vir­tu­al­ly all of the sub­ject proxy forms and com­pa­ny nom­i­nee forms were invalid.

THE FAIL­URE TO REPAIR COM­MON PROP­ER­TY AND SPEND­ING ON LEGAL COSTS

Prin­ci­pal Mem­ber Simon also accept­ed that the scheme was not func­tion­ing sat­is­fac­to­ri­ly because the own­ers cor­po­ra­tion had failed to repair the scheme’s com­mon prop­er­ty, in par­tic­u­lar, the awning, that was sit­u­at­ed above a pub­lic foot­path which was adja­cent to the Stra­ta Scheme. In respect of this issue, Prin­ci­pal Mem­ber Simon observed at [54] to [58] that:

1. sec­tion 106 of the SSMA required the OC to prop­er­ly main­tain and keep in a state of good and ser­vice­able repair the com­mon prop­er­ty and any per­son­al prop­er­ty vest­ed in the OC;
2. since July 2015 the awning had required repair and had not been repaired;
3. a Notice of Inten­tion to Give an Order was issued by the City of Syd­ney Coun­cil on 20 April 2017, warn­ing of ​“cat­a­stroph­ic fail­ure” of the awning, with the OC’s pre­vi­ous solic­i­tors hav­ing advised the OC to embark upon the repair of the awing as required by the Coun­cil let­ter of April 2017;
4. the sit­u­a­tion of con­flict in the OC had been the rea­son for the fail­ure to finalise the repair to the awning which clear­ly required under­tak­ing (and nei­ther par­ty denied);
5. by 22 Novem­ber 2019, all that was being done about the awning was to accept a fee pro­pos­al from a build­ing engi­neer con­sul­tant to ​“car­ry out an assess­ment of the awning and prepa­ra­tion of a report’’ and in rela­tion to the win­dows and façade (which also need­ed to be repaired), not to do any actu­al reme­di­al work but only to ​“car­ry out an assess­ment” and ​“pre­pare a report” on the con­di­tion of the windows.

In light of the above find­ings, Prin­ci­pal Mem­ber Simon con­clud­ed at [59] that the seri­ous and pro­longed fail­ure by the OC to car­ry out the urgent repair to the awning in these cir­cum­stances evinced that the scheme was not func­tion­ing satisfactorily.

Con­cern­ing the issue of the OC spend­ing sig­nif­i­cant amounts of mon­ey on legal costs, in par­tic­u­lar, since March 2019, i.e. an amount like­ly to exceed $700,000, Prin­ci­pal Mem­ber observed at [62] of her judg­ment that:

There can be no doubt that the dis­pute between the var­i­ous fac­tions of the Own­ers Cor­po­ra­tion has caused an extra­or­di­nary amount of time and mon­ey to be spent in lit­i­ga­tion on legal expen­di­ture and pro­ceed­ings. That is a clear indi­ca­tion that this scheme is not function[sic] sat­is­fac­to­ri­ly and is in a high lev­el of dis­pute par­a­lyz­ing it in mak­ing decisions.

ORDERS MADE BY NCAT

Prin­ci­pal Mem­ber Simon ulti­mate­ly held that the scheme was not func­tion­ing sat­is­fac­to­ri­ly and that in the cir­cum­stances a com­pul­so­ry stra­ta man­ag­ing agent should be appoint­ed by NCAT to exer­cise all func­tions of the OC for a peri­od of 2 years to ​“allow [Bright & Dug­gan] time to facil­i­tate the main­te­nance required and move the par­ties towards non-com­pul­so­ry man­age­ment”.

DYS­FUNC­TION

Dys­func­tion in a stra­ta scheme can arise for many rea­sons. Com­mon exam­ples include:

• the lack of main­te­nance and repair of the scheme’s com­mon property
• the refusal to raise spe­cial levies to meet nec­es­sary repair and main­te­nance costs
• the stra­ta committee’s inabil­i­ty or unwill­ing­ness to make deci­sions in rela­tion to main­te­nance and repair of com­mon property
• non-com­pli­ance with meet­ing and vot­ing pro­ce­dures at gen­er­al meet­ings of the scheme or improp­er con­duct of meetings.

If there is a need to restore func­tion and good gov­er­nance to your stra­ta scheme, a stra­ta man­ag­ing agent may be appoint­ed by the NCAT under sec­tion 237 of the SSMA 2015.

To obtain advice please con­tact Helen Kow­al, Part­ner at Swaab on 02 9777 8321. View our Stra­ta team https://​www​.swaab​.com​.au/ expertise/​strata.