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2 Strata Managers Educational Forum The York Conference & Function Centre 11 September 2015 By-laws Under the Strata Schemes Management Bill 2015 James Moir: BA LLB

3 CHANGES TO BY-LAWS UNDER THE STRATA SCHEMES MANAGEMENT BILL 2015 A. RENOVATION BY-LAWS Under the new Act, there are three categories of renovations:- 1. Cosmetic renovations (s.109) Cosmetic work can be carried out without the approval of the owners corporation. Cosmetic work includes:- (a) Installing or replacing hooks, nails or screws for hanging things on walls; (b) Installing or replacing handrails; (c) Painting; (d) Laying carpet; (e) Installing or replacing built-in wardrobes; (f) Installing or replacing blinds or curtains. When carrying out cosmetic work, owners must ensure that any damage to common property is repaired and that the works are carried out in competent and proper manner. The by-laws can specify additional work that is to be cosmetic work. Section 109 does not state who is responsible for the maintenance and repair of cosmetic work. Section 106(1)-(3) is basically a replica of Section 62(1)-(3) of the current Act. Accordingly, if any cosmetic work or any part of it is common property, then it would appear that the owners corporation will be responsible for the maintenance and repair. In terms of what constitutes cosmetic work the following is specifically excepted:- (a) Work that constitutes minor renovations; (b) Work involving structural changes; (c) Any work changing the external appearance of a lot. So if installing or replacing blinds or curtains changes the external appearance of a lot (as it often will), then it is not cosmetic work;

4 (d) Work that detrimentally affects the safety of a lot or common property, including fire safety systems; (e) Work involving waterproofing or the plumbing or exhaust system of a building; (f) Any work for which consent is required under another Act (for example a DA), or prescribed by the regulations. 1. Minor renovations (s.110) Minor renovations include:- renovating a kitchen; renovating a bathroom (unless it affects the waterproofing); changing recessed light fittings; installing or replacing wood or hard floors; installing or replacing wiring, cabling or power or access points. If an owner wants to carry out minor renovations, then they must provide to the owners corporation the following information:- (a) details of the work, including copies of plans; (b) duration and times of work; (c) details of the persons carrying out the work, including their qualifications; and (d) arrangements resulting to rubbish or debris. Minor renovations require approval, but only by an ordinary resolution at a general meeting. A special resolution is not required, even if the minor renovations involve changes to common property. When carrying out minor renovations, the owner must ensure that any damage caused to the common property is repaired and that the minor renovations are carried out in a competent and proper manner. The following work is not a minor renovation, and therefore requires approval by special resolution and a by-law:- Cosmetic work (no approval needed here); Any work involving structural changes; Work involving changes to the external appearance of a lot;

5 Work involving water proofing; Work which requires a DA; Work that is authorised by a by-law or prescribed by the regulations. Once interesting point that is not clear from reviewing the examples of what constitutes cosmetic work or minor renovations is that the definitions of each are inclusive definitions. That is, the new Act gives examples of what is cosmetic work or what is a minor renovation, saying that this includes the listed examples of works, but is not limited to this work. How do we know what other types of work can constitute cosmetic work or a minor renovation? This is not clear. The definitions in section 109(2) and 110(3) include those examples and suggest other things could be cosmetic work or minor renovations. However, no parameters are given to determine what could be cosmetic work or a minor renovation. 2. Alterations or additions to Common Property (s.108) Section 108 of the new Act is very similar to section 65A of the old Act. It states that the owners corporation or an owner may add to alter the common property or erect a new structure on the common property, but only if a special resolution is first passed that specifically authorises that work. Again, if the special resolution species that the lot owner is to be responsible for the maintenance and repair of the work, then the owner s written consent and a by-law are required. Common Property Memorandum Strata Schemes may decide to adopt a Common Property Memorandum prescribed by the Regulations. The purpose of the Memorandum is to make it clear what is lot property and what is common property. We have previously not considered that one generic memorandum is not particularly effective, as different strata plans have different delineations between lot and common property. For example, one strata plan might say that the garden boundary is 3m above and 2m below floor level and another might only be 2m above the slab and not below at all. The previous draft version we saw didn t entirely reflect the correct position as we saw it. In any case, strata schemes have the option of adopting the memorandum. It is not imposed on them by the new Act.

6 Lot Owner Suing for Breach of Statutory Warranty You will have heard in previous talks from us that the previous position under Seiwa, where an owners corporation could sue for a breach of statutory warranty, was changed by one of the Thoo cases. Under the Thoo Court of Appeal case owners could only sue in negligence, if a failure to maintain common property damaged lot property. However, section 106 (5) of the new Act will make it perfectly clear that the previous Seiwa position will apply again. That is, an owner of a lot has a specific right to sue the owners corporation for damages for breach of Statutory duty if that owner suffers any loss as a result of the owners corporation s failure to maintain common property. Summary of types works and differences A summary of the changes in the legislation and how they affect different types of work is set out below: Type of work Position under current Act Position under new Act Installing hooks and nails Under standard by-law 5, approval required, Can be done without approval maintenance and repair not clear Internal painting No approval required No approval required as long as there is no change to the external appearance of a lot, otherwise a bylaw is required Installing new carpet No approval needed unless there are changes No approval required to common property in which case a special resolution and by-law are required Installation of built-ins Special resolution and by-law needed if being bolted into a common property wall No approval needed unless work involves structural changes Installing blinds or curtains Special resolution and by-law needed if alteration to common property (which is likely) No approval needed unless there is a change to the external appearance of a lot in which case a Special Resolution and a by-law are required Kitchen renovation with appliances staying in same Special resolution and by-law needed if any change to common property Approval needed by ordinary resolution at a general meeting position Kitchen renovation with exhaust or plumbing changing Special resolution and by-law needed if plumbing or exhaust penetrates common property, which is most likely Only an ordinary resolution at a general meeting is required

7 Type of work Position under current Act Position under new Act Bathroom renovation with no Special resolution and by-law needed if Ordinary resolution at general meeting needed. change to waterproofing, (eg just changing vanity and shower screen) changes to common property. Otherwise no approval needed. Bathroom renovation Waterproofing is common property, so Special resolution and by-law required (no change) involving changes to water proofing special resolution and by-law required Changes to or installing new Special resolution and by-law needed, as Ordinary resolution at general meeting required recessed light fittings i.e. within ceilings these are going above the paint on the ceiling (ie into common property) Changes to wiring, cabling or power or access points Most likely involves an alteration to common property, so special resolution Approval needed by ordinary resolution at general meeting and by-law required Structural changes If changes to bricks or installation of beam involves changes to common property, All structural changes require a special resolution and by-law then special resolution and by-law required. If bricks below ceiling being changed and lintel installed below ceiling, then no approval needed Other work involving change If no change to common property, then no Special resolution and by-law required to external appearance of lot special resolution needed. Possible approval needed under by-law 17 (if not in keeping with the rest of the building) Installation of bathroom exhaust fan. Special resolution and by-law needed, as this will penetrate a common property Approval required by ordinary resolution at general meeting external wall Installing awnings, air conditioners bolted to a balcony, air conditions with ducting in roof void, and other attachments Special resolution and by-law needed as these are alterations to common property Unless a specified minor renovation or cosmetic work, then a special resolution and by-law most likely required A. COMMON PROPERTY RIGHTS BY-LAWS

8 The previous category of exclusive use and special privilege by-laws are now called Common Property rights by-laws. The provisions relating to these by-laws are very similar, with one notable change. Currently, section 52(1)(a) states that an exclusive use or special privilege by-law can only be made with the written consent of the owner or owners of the lot or lots concerned. The original case defining what this meant was Young s case, which found that lots concerned included owners giving up common property. It effectively meant that in most circumstances, every owner s consent is required, as every owner would be giving up common property when an exclusive use by-law is created. This changed with the James case, where only the consent of the owners receiving exclusive use or taking on the burden of maintaining common property was required. Under section 143(1) of the new Act, it is clear that the owners corporation can only make a common property rights by-law with the written consent of each owner on whom the by-law confers rights or special privileges. This makes it clear that the position in the James case will be the correct one under the new Act. A. WHAT BY-LAWS ARE IN FORCE? The new Act will most likely include new regulations, which will include new sets of model by-laws. For Strata Schemes registered from (or really 30 June 2016), the by-laws in force for that Scheme are the by-laws adopted or lodged with that Strata Plan, subject to any alterations. That is, there is no change. For new Strata Schemes created after 1 July 2016, the by-laws in force are those that were adopted or lodged with that Strata Plan. For Strata Schemes pre-dating the Strata Schemes Management Act 1996 (which came into effect on 1 July 1997), the by-laws in force are the by-laws set out in the Regulations to the new Act, for the purposes of this section including any changes (ie special by-laws created after registration of the Strata Plan). The suggestion appears to be that the Regulations will set standard by-laws for all Strata Schemes that were registered prior to the commencement of the Strata Schemes Management Act 1996 (1 July 1997).

9 A. SHORT TERM LETTING The new Act (section 137) specifically states that an owners corporation can pass by-laws which limit the number of adults who may reside in a lot by reference to the number of bedrooms. Common short-term letting by-laws we have done have stated that no more than two adults per bedroom can live in a residence. Under section 137(2), the limit cannot be fewer than two adults per bedroom. Short term letting also has difference monetary penalties for breach of by-law which I will discuss below. The new section also states that such a by-law has no effect if it is inconsistent with a planning approval or other by-law. For example, if an owner obtains development approval to use their lot as a boarding house with more than two adults per room, then the by-law cannot prohibit this. A. GUIDE OR HEARING DOGS You would be aware of section 49(4) of the current Act which states that any by-law banning animals cannot prevent the keeping of a guide or hearing dog. Section 139(5) of the new Act has extended this. It now states that a by-law has no force or effect to the extent to which it purports to prohibit the keeping of an assistance animal, as referred to in section 9 of the Commonwealth Disability Discrimination Act That is, owners corporations will no longer be able to prevent people from keeping an assistance animal, which is an animal registered on a State register. The exception previously applied only to guide or hearing dogs. A. REGISTRATION OF BY-LAW As you would be aware, changes of by-laws currently have to be registered within two years of the bylaws being passed. Most of you would know that it is two months for Community Schemes. For works by-laws and exclusive use by-laws, after two years from the by-law being made, it is conclusively that all of the necessary steps were followed. We consider that this applies to obtaining the consent of every owner affected by the by-law. With many generic by-laws, you will be unable to obtain the consent of every owner. This could you mean that if the by-law is registered 23 months after it is passed, then owners only have 1 month to challenge it after registration, for not obtaining every person s consent.

10 Under the new Act, however, by-laws have to be registered within 6 months of being passed. I believe that this will apply to by-laws that were commenced before the new Act commences (1 July 2016). A. PROCEEDINGS FOR BREACH OF BY-LAWS There are significant changes with the enforcement of by-laws:- 1. The penalty for the first breach is 10 penalty units, which is $1,100.00; 2. Previously, if there was another breach, the owners corporation would have to serve another section 45 notice and then commence fresh penalty proceedings. However, under section 147(2) of the new Act, if an owner commits another breach of a by-law within 12 months after the Tribunal imposes the first monetary penalty, then the maximum penalty is doubled to $2, The situation is different when dealing with a contravention of a by-law made under section 137 of the new Act. This is the section which allows owners corporations to pass by-laws limiting the number of adults by reference to the number of bedrooms i.e. no more than 2 adults per bedroom may live in a lot. For those types of by-law breaches, the maximum penalty for the first breach is $5, and if there is another breach within 12 months, the maximum increases to $11, Under the current Act, section 204 specifically states that the Tribunal may make an order for costs when requiring the payment of a pecuniary penalty for breach of adjudicator s orders, or a breach of a section 45 notice. Under the new Act there is no specific section providing for legal costs for penalty applications. This would most likely mean that section 60 of the Civil & Administrative Tribunal Act would apply, whereby costs are only awarded in special circumstances. 5. The largest change in proceedings for breach of a notice, is that unless the Tribunal otherwise orders, the monetary penalty will be paid to the owners corporation. This will create a huge incentive to owners corporations to commence these types of action.

11 James Moir Senior Lawyer P: E: W: Disclaimer: The information contained in this newsletter is provided for your personal information only. It is not meant to be legal or professional advice nor should it be used as a substitute for such advice. You should seek legal advice for your specific circumstances before relying on any information herein. Contact for any required legal assistance.

12 Strata Managers Educational Forum The York Conference & Function Centre 11 September 2015 Meetings Under the Strata Schemes Management Bill 2015 Adrian Mueller: Lawyer BCOM, LLB, FACCAL STRATA SCHEMES MANAGEMENT BILL 2015 REFORMS TO MEETING PRACTICE AND PROCEDURE

13 Introduction The NSW Government is reforming NSW strata laws. The reforms seek to bring strata laws into the 21st century. The Government says the reforms will create a modern framework for residents living in strata schemes today. The strata law reforms will include changes to meeting practice and procedure of owners corporations and executive committees. This paper will review those aspects of the reforms. The Reforms The strata law reforms are contained in the draft Strata Schemes Development Bill 2015 and Strata Schemes Management Bill 2015 which were released for public consultation on 15 July The reforms to meeting practice and procedure are contained in the Strata Schemes Management Bill 2015 (Bill). The object of the Bill is to provide for the management of strata schemes and the resolution of disputes in connection with strata schemes. The Bill re-enacts the current law relating to the management of strata schemes with some important changes. Object of Reforms to Meeting Practice and Procedure The reforms concerning meeting practice and procedure are intended to modernise and improve the way strata schemes are managed. This will be achieved by: Creating flexible meeting options; Introducing new ways to vote at meetings; Preventing proxy farming; Improving tenants participation in meetings; and Making miscellaneous changes to meeting practice and procedure. Flexible Meeting Options The strata law reforms will enable use of modern forms of communication in connection with meetings of owners corporations and executive committees.

14 Service of Meeting Notices An owner of a lot will be able to give an owners corporation an address as an address for service of meeting notices and other documents under the Bill (section 256). Meeting notices will be able to be distributed to owners and others by to any address that is given as an address for service of documents without an empowering by-law (section 258). Attendance at Meetings via Video The strata regulations that will supplement the Bill (which have not been released) will allow attendance at meetings through social media, video and teleconference. This is because: the owners corporation or strata committee (as the executive committee will become known) will be able to allow votes to be cast at meetings other than in person (Schedule 1, clause 28; Schedule 2, clause 10); and a person who votes, or intends to vote, at a meeting by a permitted means other than a vote in person will be taken to be present for the purposes of determining whether there is a quorum (Schedule 1, clause 17; Schedule 2, clause 12). Flexible Quorum Arrangements If there is no quorum for business at a general meeting, the chairperson, after half an hour, will be able to declare that the persons present constitute a quorum for that purpose (Schedule 1, clause 17). The chairperson will also still be able adjourn the meeting for at least 7 days. Timing of AGMs The new strata laws will also give owners corporations flexibility to determine when their annual general meetings are held. Under the reforms, the annual general meeting of an owners corporation will need to be held once in each financial year rather than within 1 month of the anniversary of the first annual general meeting (section 18). New Ways to Vote

15 The owners corporation and strata committee will be able to determine that a vote at a meeting may be made other than in person (e.g. a postal vote or vote cast by electronic means) (Schedule 1, clause 28; Schedule 2, clause 10). The strata regulations will provide for the means of voting (other than in person) that may be adopted by an owners corporation, procedures for voting by those means, and prohibit the use of specified means of voting (Schedule 1, clause 28; Schedule 2, clause 10). Voting including on an election of the strata committee will also be able to occur by secret ballot if the strata committee or at least one-quarter of the persons entitled to vote agree (Schedule 1, clause 29). The strata regulations will make provision for voting by secret ballot. Proxy Farming Many people have raised concerns about the practice of proxy farming in strata schemes. This occurs where one person controls the decisions made by the owners corporation by obtaining a majority of votes using proxies. The new strata laws will curb proxy farming. The reforms will limit the number of proxy votes able to be held by one person to: for schemes of up to 20 lots - one proxy vote only; or for schemes with more than 20 lots - proxy votes of not more than 5% of the total number of lots; except where the proxies are held as the joint owner of a lot (Schedule 1, clause 26). A provision of a contract for the sale of a lot, and any provision of an associated contract or arrangement, that requires the owner of a lot to vote as directed at a meeting of an owners corporation or to give a proxy will be void and unenforceable (Schedule 1, clause 27). Tenants Participation The new strata laws will allow tenants in schemes where the majority of units are tenanted to take part in owners corporation meetings and have an elected representative on the strata committee, while respecting the financial decisions of owners. The new laws concerning tenants will only apply to those tenants who have been notified to the owners corporation under a written tenancy notice.

16 The notice for the first annual general meeting will need to be given to each tenant of a lot at least 14 days before the meeting (section 14). The agenda for each other general meeting will need to be given to each tenant at least 7 days before the meeting (Schedule 1, clause 11). A tenant will be entitled to attend a general meeting but not to vote (unless a proxy holder) and may be excluded from a meeting when financial matters (such as the raising and recovery of levies) and termination of a strata scheme are being discussed or determined (Schedule 1, clause 21). A tenant will not be entitled to speak at a meeting unless permitted to do so by resolution of the owners corporation. A tenant representative on the strata committee may be nominated by the tenants of lots in the strata scheme but will not be able to vote on committee decisions and may be excluded from discussion about certain financial matters (section 33; Schedule 2, clause 9). Miscellaneous Changes 1 st AGM The agenda for the first annual general meeting of an owners corporation will now need to include motions to: consider the report by any strata manager as to whether, and what, commissions have been paid or are likely to be payable to the strata manager for the following 12 months; receive the documents required to be provided by the developer under section 16; consider the initial maintenance schedule provided by the developer; consider building defects and rectification (section 15). AGM Notice The notice of each annual general meeting of an owners corporation will now need to include: a call for nominations for members of the strata committee at least 7 days before the meeting and the nominations already received (Schedule 1, clause 5); a motion to consider a report as to commissions by any strata managing agent of the owners corporation (Schedule 1, clause 9);

17 a motion to decide how to deal with overdue contributions payable to the owners corporation (proposed clause 9). The notice of an annual general meeting will no longer be required to include the last financial statements prepared by the owners corporation, but these must be provided to an owner or mortgagee who asks for them at least two days before the meeting (Schedule 1, clause 10). Minutes Minutes of general meetings and strata committee meetings will now need to be given within 14 days after the meeting, to: each member of the strata committee; each owner - if the strata scheme is not a large strata scheme; any owner who requests a copy of the minutes - if the strata scheme is a large strata scheme and the owner requests a copy within the period of 7 days (Schedule 1, clause 22). Unfinancial Owners An owner will be able to require that a motion be included on the agenda for a general meeting of an owners corporation even though the owner cannot vote because of unpaid strata contributions (Schedule 1, clause 4). Any requirement given by an owner must include an explanation of the motion of not more than 300 words in length (Schedule 1, clause 4). An owner will be able to nominate a candidate for election to the strata committee even though the owner is unfinancial (Schedule 1, clause 5). An unfinancial owner will not eligible for appointment or election to the strata committee (section 32). An unfinancial owner will still not be allowed to vote at general meetings (Schedule 1, clause 23). A member of the strata committee will not be entitled to vote on any motion put or proposed to be put to the strata committee if the member was, or was nominated as a member by a member who was, an

18 unfinancial owner at the date notice of the meeting was given and the amounts owed by the unfinancial owner were not paid before the meeting (Schedule 2, clause 9). A committee member will not be entitled to move a motion at a committee meeting unless the person is entitled to vote on the motion (Schedule 2, clause 14). Conflicts of Interest A developer will not be entitled to vote or exercise a proxy vote on a matter concerning building defects or rectification of building defects (Schedule 1, clause 15). Members of a strata committee will need to disclose any pecuniary interest in a matter that is being or is about to be considered at a meeting of the committee and, unless the committee otherwise determines, must not be present for any deliberations on the matter or vote on the matter (Schedule 2, clause 18). Strata Managers An owner who is seeking appointment as a strata managing agent will not be entitled to vote or cast a proxy vote on the appointment at a meeting of the owners corporation (Schedule 1, clause 49). A strata managing agent will need to report the following at each annual general meeting: (a) whether any commissions have been paid to the agent (other than by the owners corporation) in connection with the exercise by the agent of functions for the scheme during the preceding 12 months and particulars of any such commissions; (b) any such commissions and the estimated amount of any such commissions that the agent believes are likely to be received by the agent in the following 12 months (section 60). A strata manager will need to inform the strata committee of any changes that need to be made to the report presented at the annual general meeting as soon as practicable if, for example, commissions are paid to the strata manager which differ from those referred to in the report (section 60).

19 A strata manager who does not give or update that report will be liable to a penalty of up to 20 penalty units. Insurance A strata managing agent will need to provide an owners corporation with not less than 3 quotations from different providers for each type of insurance proposed by the agent to the owners corporation or provide written reasons to the owners corporation if less than 3 quotations are provided (section 167). Vacancy in Office of Executive Committee Member A strata committee will now be able to appoint a person eligible for election as a member to fill a vacancy in the office of a member of the strata committee or an office bearer, other than a vacancy arising as a result of the election of a new committee at an annual general meeting (sections 35 and 45). Currently there is some doubt about the committee s ability to fill a casual vacancy on the committee. The reforms will remove that doubt. Chairperson For the first time, some of the functions of the chairperson of the owners corporation will be prescribed (section 42). The functions of the chairperson will include the following: (a) (b) to preside at meetings of the owners corporation and the strata committee of the owners corporation; to make determinations as to quorums and procedural matters at meetings of the owners corporation and the strata committee of the owners corporation. Budgets The initial budget for the administrative and sinking funds prepared before the first annual general meeting will need to take into account the initial maintenance schedule provided by the developer for that meeting (section 79). An owners corporation of a large strata scheme will need to include in the budget for the capital works fund (previously known as the sinking fund) prepared at each annual general meeting a note as to

20 any difference between the estimates in the budget and the estimates in the 10-year capital works fund plan and the reasons for the difference (section 79). Special Levies Special levies will now be able to be raised at a general meeting to either the administrative fund or the capital works fund (section 81). Audits The owners corporation for a large strata scheme, or a strata scheme for which the annual budget exceeds $250,000, will need to ensure that the accounts and financial statements of the owners corporation are audited before presentation to the annual general meeting (section 95). Currently, this requirements only exists for large schemes. Legal Action An owners corporation will still need to pass a resolution at a general meeting before obtaining certain types of legal services or taking certain types of legal action but if it fails to that will not invalidate any legal action it takes (section 103). Building Defects The agenda for the annual general meeting of an owners corporation will need to include consideration of building defects and rectification until the end of any applicable statutory warranty (Schedule 1, clause 6). As mentioned earlier, the developer will not be entitled to vote or exercise a proxy vote on a matter concerning building defects or rectification of building defects (Schedule 1, clause 15). Strata Inspections by Developers For the purpose of complying with requirements for giving notice of a meeting of the owners corporation, the developer or an agent authorised in writing by the developer will be entitled to inspect the strata roll without payment on making a written application (section 183).

21 Conclusion The Bill contains some very useful reforms concerning strata meeting practice and procedure. The highlights of the new laws include provisions allowing: meeting attendance and voting by video; flexible quorum arrangements; power to decide when to hold the AGM each year. The new laws that will outlaw proxy farming and clarify that strata committees will be entitled to fill casual vacancies on committees will also prove helpful. However the jury is still out on whether the reforms designed to increase tenant participation will prove worthwhile. And some of the new laws, particularly those giving more rights to unfinancial owners, will certainly prove controversial. Ultimately, the new laws will prove useful and should modernise and improve the way strata schemes are managed. Adrian Mueller Senior Lawyer P: E: W: Disclaimer: The information contained in this newsletter is provided for your personal information only. It is not meant to be legal or professional advice nor should it be used as a substitute for such advice. You should seek legal advice for your specific circumstances before relying on any information herein. Contact for any required legal assistance.

22 Strata Managers Educational Forum The York Conference & Function Centre 11 September 2015 Levy Collection Under the Strata Schemes Management Bill 2015 Faiyaaz Shafiq: Senior Lawyer LLB, GD

23 About the Author: Faiyaaz Shafiq Faiyaaz has been in practice since 1995 as a litigation lawyer. His primary focus has been commercial litigation, including debt recovery, personal and company insolvency, strata litigation and building and construction. He is admitted to the Supreme Courts of NSW, Queensland and as a Barrister and Solicitor to the High Courts of Australia and Fiji. Faiyaaz obtained his Bachelor of Laws from Queensland University of Technology in 1994 and then completed his graduate diploma in legal practice in 1995 from the same university. Since completing his studies, he has worked for reputable firms in Queensland, New South Wales and Fiji prior to joining. Faiyaaz is an experienced litigator with over 17 years experience and is very well respected by his colleagues. Faiyaaz is of Fijian descent and speaks fluent Native Fijian, Hindi and Urdu.

24 LEVY COLLECTION UNDER THE STRATA SCHEMES MANAGEMENT BILL 2015 Introduction The New South Wales Government has recently released in draft the Strata Schemes Management Bill 2015 (SSMB) and the Strata Schemes Development Bill The proposed bills are designed to overhaul the way strata schemes will be managed in the future in New South Wales. Consultation in relation to these changes to strata laws commenced in 2011 when submissions were invited from key stakeholders in the industry and strata experts. The proposed Bills reflect community sentiments and the submissions received by the Government during the consultation process. This paper is limited to the consideration of levy recovery under the proposed SSMB In particular it focuses on some of the important changes proposed in the area of collecting overdue contributions, interest and costs. In this paper contributions will be referred to as levies. Levy Recovery It is settled law that before an owners corporation (OC) can recover outstanding levies it has to levy a contribution to be paid into the Administrative or Sinking Funds of the OC by a lot owner. Current Position Currently the raising of a levy is primarily governed by Section 78 of the Strata Schemes Management Act 1996 (the SSMA). Section 78 of the SSMA states:- (1) An owners corporation levies a contribution required to be paid to the administrative fund or sinking fund by an owner of a lot by serving on the owner a written notice of the contribution payable. (2) Contributions levied by an owners corporation must be levied in respect of each lot and are payable (subject to this section and section 77) by the owners in shares proportional to the unit entitlements of their respective lots.

25 (3) If, at the time a person becomes owner of a lot, another person is liable in respect of the lot to pay a contribution, the owner is jointly and severally liable with the other person for the payment of the contribution and interest on the contribution. (4) A mortgagee or covenant chargee in possession of a lot (whether in person or not) is jointly and severally liable with the owner of the lot: (a) (b) for any regular periodic contributions to the administrative fund or sinking fund together with any interest on those contributions, and for any other contribution together with interest on that contribution if the mortgagee or covenant chargee has been given written notice of the levy of the contribution. (5) Subsection (4) does not affect the liability of an owner of a lot for any contribution levied under this section. (6) Regular periodic contributions to the administrative fund and sinking fund of an owners corporation are taken to have been duly levied on an owner of a lot even though notice levying the contributions was not served on the owner. Proposed Position Under the new laws the levying of contributions will now be contained in Section 83 of the SSMB which states as follows:- (1) An owners corporation levies a contribution required to be paid to the administrative fund or capital works fund by an owner of a lot by giving the owner written notice of the contribution payable. (2) Contributions levied by an owners corporation must be levied in respect of each lot and are payable (subject to this section and section 82) by the owners in shares proportional to the unit entitlements of their respective lots. (3) Any contribution levied by an owners corporation becomes due and payable to the owners corporation on the date set out in the notice of the contribution. The date must be at least 30 days after the notice is given.

26 (4) Regular periodic contributions to the administrative fund and capital works fund of an owners corporation are taken to have been duly levied on an owner of a lot even though notice levying the contributions was not given to the owner. Key differences between Section 78 -v- Section 83 Section 78 at present regulates levying of contributions on owners of lots within a strata scheme and the liability of mortgagees in possession and other persons for such contributions. The new Section 83 is in part similar to Section 78 but not entirely. Section 83 will now be the new provision which will regulate levying of contributions on owners within a strata scheme. It will no longer be the provision which will also regulate the levying of contributions on persons other than owners such as a mortgagee in possession. An entirely new provision, namely Section 84, will now regulate the liability of persons other than owners for contributions such as a mortgagee in possession (see discussion below re: Section 84). At present there is no requirement under Section 78 that requires a levy notice to specify that a levy will become due and payable 30 days after the levy notice is given. However, Section 80 of the SSMA enables recovery of outstanding levies at the end of 30 days. The new Section 83(3) now specifically states that any contribution becomes due and payable on a date specified in the levy notice which must be a date at least 30 days after the notice is given. It appears that s83(3) will now require a levy notice to specify a specific date when the levy will become due and payable which must be a date at least 30 days after the notice has been given. Issuing levy notices One issue that is almost always raised by lot owners in defending a levy claim under the current law is the need for the OC to issue a levy notice. In almost every defended levy collection claim, lot owners will often claim that they did not receive a levy notice and therefore they are not liable to pay the levy, interest or costs.

27 Section 83(4) retains Section 78(6) of the SSMA and therefore there will be no legal obligation for an OC to issue a levy notice (even though this is usually done) to an owner under Section 83(4) for ordinary levies. If the proposed changes were to require the issuance of a levy notice as a precondition to the collection of an outstanding levy then the process of collecting levies would have been cumbersome and time consuming. Thankfully from an OC s perspective the new proposed section 83(4) does not require a levy notice to be issued even though almost all strata schemes do issue levy notices to owners. The onus therefore under the new regime still remains with the lot owner i.e. it is the owner who has to be proactive and diligent in paying levies even though a levy notice may not have been issued by the OC. Liability of mortgagees in possession and other persons to pay contributions A new Section 84 will now separately deal with a liability for levies of former owners and mortgagees in possession of a lot. Section 84 states: 1) If, at the time a person becomes the owner of a lot, another person is liable to pay a contribution in respect of the lot, the owner is jointly and severally liable with the other person for the payment of the contribution and any interest on the contribution. (2) A mortgagee or covenant chargee in possession of a lot is jointly and severally liable with the owner of the lot: (a) for any regular periodic contributions to the administrative fund or capital works fund together with any interest on those contributions, and (b) for any other contribution together with interest on that contribution taken to recover unpaid contributions, if the mortgagee or covenant chargee has been given written notice of the levy of the contribution, and

28 (c) for any costs payable as a debtor in respect of enforcement action to recover unpaid contributions. (3) Subsection (2) does not affect the liability of an owner of a lot for any contribution levied under this section. The liability for other persons to pay contributions under section 84 is the same as that contained in the present Section 78(3), (4) and (5), however, Section 84 goes a step further. Section 84(c) states that the mortgagee in possession will be jointly and severally liable for any costs payable [emphasis added] as a debtor in respect of enforcement action to recover unpaid contributions. At present, Section 78 does not say that a mortgagee in possession of a lot is also required to pay costs and expenses of an OC incurred in an action to recover outstanding levies, although, levy recovery lawyers always argued that since the mortgagee in possession stands in the shoes of the lot owner, therefore, it is obliged to pay the costs of a levy recovery claim. The mortgagee in possession usually argued otherwise. Section 84(c) now clarifies this uncertainty by making clear that a mortgagee in possession is also liable for any recovery expenses for unpaid contributions. 10% Interest Section 79(2) of the SSMA, states that if a contribution is not paid at the end of one month after it becomes due and payable, that contribution attracts 10% interest or any other rate if such is prescribed by the regulations. Section 79(2) is retained in the new Section 85(1). Section 85(1) states: (1) A contribution, if not paid when it becomes due and payable, bears until paid simple interest at an annual rate of 10% or, if the regulations provide for another rate, that other rate. Section 85 is in two parts. Section 85(1) and (2). Section 85(1) states that a contribution if not paid when it becomes due and payable, bears until paid, simple interest at an annual rate of 10%.

29 Section 85(1) omits from it the words at the end of one month after... which is contained presently in section 79(2). Instead of keeping these words in Section 85(1) there is now a new Section 85(2) which is a separate provision. Section 85(2) states exactly the same thing which is said in the current Section 79(2) but with more clarity so that no interest will accrue if the contribution is paid no later than one month after it becomes due and payable. Waiver of interest on overdue levies Presently Section 79(3) states that the owners corporation may by special resolution decide that no interest will be payable on a contribution. To obtain such a resolution, the legislation requires a general meeting to be requisitioned and a motion carried at that general meeting to waive the interest in favour of the lot owner who has requested a waiver of interest. In the new Section 85(3), it is interesting to observe that a special resolution is no longer necessary. An ordinary resolution will suffice. In other words the executive committee is able to pass a resolution agreeing to a request for the waiver of interest. The executive committee can convene a meeting and resolve that the OC will waive interest either generally or in a particular case. The proposal seems designed to make the process of granting a request for the waiver of interest in certain cases much easier than it is presently. Discounts Similarly, section 79(4) presently is a provision under which a lot owner can request the owners corporation to determine that a person will pay 10% less of a contribution if the person pays the contribution before the due date of the contribution. This request at present can only be approved by the owners corporation at a general meeting and by special resolution. Under the new section 85(4) a special resolution is no longer required.

30 Therefore if a person pays or intends to pay a levy before it becomes due and payable, the OC, if requested, may give a discount of 10% to that person without any need for the OC to approve such a discount by a special resolution at a general meeting. Payment Plans Under the current SSMA, there is no specific provision or allowance to cater for payment plans for the payment of overdue levies. Even though there is no provision allowing the OC to enter into payment plans, a number of strata schemes enter into payment plans with owners on an ad hoc basis and in appropriate cases. In cases which have proceeded to Court for a recovery action, a number of strata lawyers have used payment plans or instalment orders as a way of settling levy claims. Often a clause will be negotiated for inclusion in the court orders stating that if the judgment debtor defaults on any instalment then the entire sum, i.e. the entire judgment sum, will become due and payable less any payments made such that the OC can recover the entire debt immediately. Currently, the OC has no legal obligation to accept payment plans under the SSMA. In other words, the existing law treats all owners equally and makes no allowance for owners facing financial stress. During the consultation period, it was suggested to the NSW Government that executive committees or strata managers should be given the ability to defer the whole or any part of the levies payable for a reasonable period on conditions as it thinks fit, or approve a flexible payment plan if an owner is facing genuine financial hardship. It was further suggested that if an OC unreasonably refuses any request of deferring payment of levies or payment plans, then the owner should be able to apply for an appropriate order. Payment plans are now reflected in the new section 85(5)-(7).For the first time the owners corporation will be given a statutory right to enter into payment plans for the payment of overdue levies, by approving payment plans by a resolution. It is important to note that a special resolution is not required for the approval of a payment plan if the OC is minded to enter into one. Section 85 further states that the regulations may prescribe the requirements for payment plans. At present, the regulations have not been finalised. Hence the contents of the

31 regulations are unknown. Therefore, it is not known what the requirements for payment plans will be. Section 85 further states that a payment plan will not limit the right of the OC to take action to recover the amount of unpaid levies. Therefore the suggestion that the OC or the strata manager be given the authority to defer in whole or in part the time for payment of levies has not been adopted by the Government in its proposed bill. As the proposed bill is still open for discussion, it is unknown whether the final bill will in fact include a provision for formally deferring the timeframe for payment of levies either in full or in part. In the author s opinion, it is unlikely that the proposed bill in its final form will attempt to include the ability of the OC to defer in whole or in part the timeframe for payment of levies as it appears that the bill is almost finalised and is likely to become law shortly with a very small window of opportunity remaining for any amendments to be requested and made. Some concerns have been raised in relation to payment plans. Even though the OC may enter into a payment plan, there is nothing to prevent the OC from taking action to recover unpaid levies. This is said to bring about some level of confusion and unfairness. It has been suggested that section 85(7) should be amended to clarify that the OC cannot take any action to recover levies the subject of a payment plan where there is no default under that payment plan. Conversely, if an owner does not comply with a payment plan and defaults under it, the legislation should provide that the OC can immediately recover the balance with or without interest. Section 85 as proposed only allows payment plans for overdue levies. Can overdue interest be covered under a payment plan? This needs to be clarified as there is no mention in section 85 that interest or even expenses could be subject of a payment plan. The use of the phrase generally or in particular cases, in section 85(5) is vague. The phrase is not defined and therefore it is unknown what can be a general or particular case. It is expected that the regulations that will follow will give some guidance as to what will amount to a general or a particular case. Commentators have suggested that the legislation should spell out the circumstances which could lead to the establishment of a payment plan such as the owner suffering financial hardship due to unemployment, illness, a special levy or any other reasonable cause.

32 Entry into the payment plan is not mandatory because of the use of the word may in section 85(5). In other words, it is the OC which holds the sole right to determine whether it will enter into a payment plan or not, rather than the owner having a legal right when experiencing financial hardship to ask for and be granted an appropriate payment plan. The owners corporation can choose not to enter into a payment plan for any reason that it chooses or, for that matter, no reason at all. Representatives of owners have argued that the draft legislation gives an incentive to debt collectors and lawyers to be litigious rather than resolving disputes and encouraging payment arrangements. As a consequence of this imbalance of power, it has been strongly argued that there is a need to establish in section 85 a right for an owner to enter into a payment plan in deserving cases and a further right to be given to the owner to a review process if such becomes necessary. It is also noted that section 85(5) in its present form only allows entry into a payment plan when contributions have become overdue. The section in its current form prevents the OC from entering into a payment plan prior to any contribution becoming overdue. In other words, an owner cannot expect an OC to agree to a payment plan until such time that the levy has become overdue, even though the owner may wish to enter into a payment plan knowing full well that a levy, or a set of levies, will in all likelihood not be paid on time. Recovery of Unpaid Contributions and Interest Current Position At present, the OC recovers any overdue levies, interest and expenses due to it from a lot owner under section 80(1) of the SSMA. Section 80(1) of the SSMA states as follows: An owners corporation may recover as a debt a contribution not paid at the end of one month after it becomes due and payable, together with any interest payable and the expenses of the owners corporation incurred in recovering those amounts.

33 Section 80(1) requires an OC to recover as a debt a contribution together with any interest and expenses. It is settled law that under section 80(1) an overdue contribution, interest and any expenses incurred in recovering contributions are treated as a statutory debt because section 80 says so. In the case of Dimitriou the NSW Court of Appeal held that the word expenses in section 80 includes legal expenses reasonably incurred and reasonable in amount. Interest and expenses as explained in Dimitriou requires that those amounts be claimed in the same legal proceedings that have been brought for the recovery of levies because of the words together with in section 80. Currently it is only a Court of Law that has jurisdiction to hear levy recovery claims and not the NCAT. Proposed position under the SSMB Sections 86(1) and (2) will become the substantive section that will regulate the recovery of unpaid contributions, interest and expenses. Section 86(1) states as follows: (1) The Tribunal may, on application by an owners corporation, order an owner of a lot in the strata scheme, or other person, to pay any of the following that are payable by the owner or other person under this Act: (a) a contribution not paid at the end of one month after it becomes due and payable, (b) any interest payable on an unpaid contribution, (c) the expenses of the owners corporation incurred in recovering any such amounts. Note. Section 78 of the Civil and Administrative Tribunal Act 2013 provides for the recovery as a judgment debt of amounts ordered to be paid by the Tribunal. New South Wales Civil & Administrative Tribunal (NCAT) For the first time, jurisdiction will be given to NCAT by extension to allow NCAT to accept and determine levy recovery claims.

34 Section 86(1) is not designed to give NCAT the exclusive jurisdiction to hear levy recovery actions but it is an alternative route. If a claim is lodged in NCAT and a judgment is given in favour of the OC, then section 78 of the Civil and Administrative Tribunal Act 2013 requires the Registrar to issue a certificate which can then be filed with a Court of competent jurisdiction and registered as a judgment of that Court for enforcement purposes. One interesting observation of section 86(1), in comparison to section 80(1) of the SSMA, is that section 86(1) does not say that the outstanding levies, interest and expenses is or will be treated in the Tribunal as a statutory debt to begin with, although it is anticipated that the Tribunal is more than likely to hold that those amounts are a statutory debt in light of Dimitriou. Further, section 86(1) does not have the words together with as is the case presently under section 80(1) of the SSMA. On the one hand, the exclusion of the words together with is a favourable development for the OC as it allows the owners corporation not to be forced into bringing a claim for any interest and expenses in the same proceedings for the claim for outstanding levies. In other words, under section 86(1), if the owners corporation decides to go to NCAT, separate proceedings can still be brought to claim interest and expenses if they have not been brought as part of the same proceedings for recovering levies. And if an owner pays an overdue levy but not interest or recovery expenses, the OC will be able to take legal action to recover the interest and expenses. To minimise costs, it is still anticipated that action will still be brought for levies, interest and expenses in the same proceedings, and a second or third action may only become necessary if the OC has missed out on any interest or expenses that should have been claimed in the first instance. One issue which seems to be unclear under s 86(1), is whether the exclusion of the words statutory debt means that the OC cannot include on the owner ledger legal costs and other recovery expenses that have been incurred in the process of recovering levies until they have been adjudged to be reasonable. As stated above, section 86(1) nonetheless gives the OC an option to go to NCAT to recover outstanding levies, interest and the expenses although it is to be noted that the right of getting an order for costs in NCAT is limited.

35 Section 86(2) in contrast is similar to the existing section 80(1) as this section gives an OC the right to recover levies, interest and expenses in a Court of competent jurisdiction and the outstanding levies, interest and expenses are treated under this section as a statutory debt as is the case currently under section 80(1). Section 86(2) also omits from it the words together with, which means a levy recovery claim does not necessarily have to also be a claim together with interest and expenses. It is common for an OC to incur in some cases substantial enforcement costs after the conclusion of the proceedings. Under section 80(1) of the SSMA and in the light of what has been said in Dimitriou, enforcement costs which come after the conclusion of the proceedings cannot be claimed in later proceedings. This meant that the OC has to fund those expenses from its own pocket. The omission of the words together with from sections 86(1) and (2), means that further proceedings can be commenced to recover any interest and expenses that the OC may have missed or not claimed as part of the initial proceedings. One further observation in relation to sections 86(1) and (2) is that they do not pick up the comments in Dimitriou that expenses have to be reasonable. The word reasonable does not appear before the word expenses. Some lawyers have argued that the legislation should have inserted before the words the expenses in section 86(1) and (2) the word reasonable reflecting what the Courts have recently said in relation to the recovery of expenses. It has been argued that these sections should be amended and as a bare minimum, the word reasonable be inserted prior to the word expenses so as to avoid any doubt that only reasonable expenses will be recoverable. In the author s view it does not really matter whether the word reasonable is introduced or not prior to the word expenses in sections 86(1) and (2) because the Court of Appeal in Dimitriou has explained that the recovery of expenses incurred in recovering outstanding levies have to be reasonable in amount and reasonably incurred. In light of this there is no need to insert the word reasonable before the word expenses in sections 86(1) and (2).

36 Conclusion The SSMB 2015 does not in the area of levy recovery bring about any drastic changes in comparison to the existing position such as to place the OC at a serious disadvantage when it comes to collecting overdue levies, interest and costs. The proposed changes have attempted to strike a fine balance between the rights of the OC and the lot owner. There were some outrageous suggestions received by the Government during the consultation process which, if adopted, would have made recovering of levies, interest and costs much more difficult. Fortunately these suggestions have not been included in the new laws. Faiyaaz Shafiq Senior Lawyer P: E: faiyaazshafiq@muellers.com.au W: Disclaimer: The information contained in this newsletter is provided for your personal information only. It is not meant to be legal or professional advice nor should it be used as a substitute for such advice. You should seek legal advice for your specific circumstances before relying on any information herein. Contact for any required legal assistance.

37 Strata Managers Educational Forum The York Conference & Function Centre 11 September 2015 Strata Managers Under the Strata Schemes Management Bill 2015 Iain Fairholm: Lawyer BA (Hons) LLB

38 STRATA SCHEMES MANAGEMENT BILL 2015 THE CHANGING LANDSCAPE FOR STRATA MANAGEMENT INTRODUCTION The New South Wales Government has for some time been grappling with the issue of reforming the strata management industry and strata living generally. There have been various different promulgations of proposed legislative reform, with the latest (and hopefully the last on the merry-go-round of reform) being the Strata Schemes Management Bill 2015 (SSMB). In spruiking the legislative reforms, insofar as they relate to strata managing agents, the NSW Government identified the following key desired results from the proposed statutory changes: Improved Accountability (including Fairer Terms of Appointment) Greater Disclosure This paper does not intend to traverse all of the minutiae which may impact upon your roles as strata managing agents, but rather to deal with the two key Governmental desired outcomes from the passing of the SSMB. DESIRED OUTCOME 1 IMPROVED ACCOUNTABILITY This is the first identified desired outcome which is meant to flow from the passing of the SSMB but how is it achieved?

39 The SSMB purports to achieve the desired outcome of improved accountability through the following measures: By altering the terms of appointment of strata managing agents By placing additional administrative requirements upon strata managing agents By given increased powers to the NSW Civil & Administrative Tribunal (NCAT) By altering liability in respect of breaches by strata managing agents Measure 1 - Terms of Appointment Presently, Section 27 of the SSMA governs how strata managing agents are appointed and does so in the following manner: You are appointed by instrument in writing authorised by a resolution at a general meeting of the owners corporation; Your appointment may be terminated in accordance with the instrument of appointment if authorised by a resolution of the owners corporation at a general meeting; and Your functions may be transferred to another person by you, but only with the approval of the owner s corporation for the strata scheme. A person to whom an appointment is transferred is taken to have been appointed in accordance with the section. The duration of your appointment under the present system is governed by the contractual arrangements entered into between you (or your business) and the owners corporations. Such contracts are generally standard throughout the industry, but the parties are entitled to negotiate the terms of such in good faith and at arm s length without overactive legislative interference as to such critical clauses as the duration and renewal of the appointment. What does the SSMB propose by way of changes to your Terms of Appointment?

40 Proposed Section 49 provides: 49 Appointment of strata managing agents (1) An owners corporation for a strata scheme may appoint a person who is the holder of a strata managing agent s licence under the Property, Stock and Business Agents Act 2002 to be the strata managing agent of the scheme. (2) The appointment is to be made by instrument in writing authorised by a resolution at a general meeting of the owners corporation. (3) A reference in this section to a strata managing agent s licence under the Property, Stock and Business Agents Act 2002 includes a reference to a corporation licence under that Act that authorises the holder to act as, or carry on the business of, a strata managing agent. (4) An owner who is seeking appointment as a strata managing agent is not entitled to vote or cast a proxy vote on the appointment at a meeting of the owners corporation. The proposed section reflects the present position that a strata managing agent is to be appointed pursuant to an instrument in writing authorised by a resolution at a general meeting of the owners corporation. The change as to the terms of appointment of strata managing agents comes in the form of Proposed Section 50, which provides: 50 Term of appointment of strata managing agents (1) The term of appointment (including any additional term under an option to renew) of a strata managing agent for a strata scheme expires (if the appointment is not ended

41 earlier for any other reason): (a) if the strata managing agent is appointed by the owners corporation at the first annual general meeting, at the end of the period of 12 months following that appointment, or (b) in any other case, at the end of the period of 3 years following the appointment. (2) A person may be reappointed as the strata managing agent for a strata scheme at the end of the person s term of appointment. (3) The appointment of a strata managing agent may be terminated in accordance with the instrument of appointment if authorised by a resolution at a general meeting of the owners corporation. (4) The term of appointment of a strata managing agent may be extended by the strata committee for successive periods of up to 1 month after it would otherwise expire pending a decision as to the reappointment of the strata managing agent. (5) A strata managing agent must give the owners corporation written notice of the end of a term of appointment: (a) at least 3 months before the end of the term of appointment, other than an extension of a term permitted by this section, and (b) at least 7 days before the end of each extension of a term permitted by this section. (6) In this section, a reference to the appointment of a strata managing agent includes a reference to the reappointment of a strata managing agent.

42 The proposed section now provides a prescriptive regime which governs how long you, as strata managing agents, can be appointed for. This is a new statutory intrusion upon your rights to negotiate the duration of your appointments under your contracts with owner s corporations. Now, the proposed position as to your appointment is: If you re the first strata managing agent appointed to a scheme you have an initial lifespan of just 12 months; or If not the first strata managing agent appointed to a scheme, then you have a maximum of a 3 year lifespan. But, despite the above restrictions on the duration of your appointments it is possible that you may be reappointed by an owner s corporation at the end of the term of appointment. Of course, you may be terminated during the term of your appointment in accordance with the provisions of your contract if authorised by a resolution at a general meeting of the owner s corporation. An interesting addition to the proposed regime is that your term of appointment may be extended by the strata committee for successive periods of up to 1 month after it would otherwise expire pending a decision of the owners corporation as your reappointment. This roll over period is similar to holding over periods under periodic leases except that the roll over period must be continually renewed by a decision of the strata committee in formal meeting. The proposed section also requires you, as strata managing agent, to give written notice of the end of a term of appointment at least 3 months before the end of the appointment (other than an extension) and at least 7 days before the end of each extension of a term permitted under the section. It is interesting to note that Proposed Section 68 of the SSMB allows the possibility for a building manager to be appointed for a period of 10 years, followed by a further term of 10 years.

43 Proposed Section 51 deals with the transfer of your functions as strata managing agent and provides: 51 Transfer of functions of strata managing agent (1) A strata managing agent may transfer his or her functions as a strata managing agent, but only if the transfer is authorised by a resolution at a general meeting of the owners corporation for the strata scheme. (2) A person to whom the functions are transferred is taken to be appointed under this Division as a strata managing agent for the strata scheme. (3) The term of appointment as a strata managing agent of the person to whom the functions are transferred ends on the same day as the term of the person by whom the functions were transferred would have ended if the transfer had not taken place. The proposed section is really only notable from the point of view that it provides that the term of appointment also transfers to the new strata managing agent, meaning that if that is 6 months left in the transferred term of appointment then that s all that remains. It makes it highly unattractive to a potential incoming strata managing agent to take on the task of managing a new owners corporation for what may be a very limited time there are no guarantees that you will remain in that role past the expiration of the transferred term. Measure 2 - Additional Administrative Requirements Your roles as strata managing agents and what your responsibilities are (or will be) are principally contained within the provisions of your contracts of appointment. Both the SSMA and the SSMB provide that you may be given more responsibilities than that which are detailed in your contracts. The carrying out of your contracted and delegated functions requires you to generate and maintain records for and on behalf of the owners corporation.

44 An interesting addition under the SSMB is Proposed Section 177 relating to the making and storing of those records. The Proposed Section provides as follows: 177 Form of Records A strata roll or any other record required to be made or stored by an owners corporation may be made or stored in the form determined by the owners corporation. The purpose in highlighting this addition to the SSMB is that the manner of making and storing records may now vary between owners corporations depending on how an owners corporation determines that those records should be made and stored. This may ultimately increase the administrative burden faced by strata managing agents and their businesses due to the creation of a potential multiplicity of ways in which to record and store records required to be made and stored. The manner of recording and storing the strata roll is not likely to make much difference. Measure 3 - Increased Powers to NCAT Previously, NCAT did not have the ability to make any orders with respect to the private contractual arrangements which existed between strata managing agents and owners corporations. That has changed with the advent of Proposed Section 72 which provides: 72 Strata managing agent and building manager agreements may be terminated or varied by Tribunal (1) The Tribunal may, on application by an owners corporation for a strata scheme, make any of the following orders in respect of an agreement for the appointment of a strata managing agent or building manager for the scheme:

45 (a) an order terminating the agreement, (b) an order requiring the payment of compensation to a party to the agreement, (c) an order varying the term, or varying or declaring void any of the conditions, of the agreement, (d) an order that a party to the agreement take any action or not take any action under the agreement, (e) an order dismissing the application. (2) The Tribunal may make an order under this section on any of the following grounds: (a) that the strata managing agent or building manager has refused or failed to perform the agreement or has performed it unsatisfactorily, (b) that charges payable by the owners corporation under the agreement are unfair, (c) that the strata managing agent has contravened section 58 (2), (d) that the strata managing agent has failed to disclose commissions (including estimated commissions or variations and explanations for variations) in accordance with section 60 or has failed to make the disclosures in good faith, (e) that the strata managing agent or building manager has failed to disclose an interest under section 71, (f) that the agreement is, in the circumstances of the case, otherwise harsh, oppressive, unconscionable or unreasonable.

46 Only an owner s corporation itself can make an application to NCAT for orders under the Proposed Section 72. It deals specifically with the agreements which you will negotiate and enter into with an owners corporation. For example, the NCAT can: Terminate the agreement Make an order requiring a party to maker an order for compensation (which could work either way) Vary any term, or vary and declare void any term of the agreement Dictate to parties the actions which they should or should not take under the agreement Simply dismiss an application Sub-section 2 of Proposed Clause 72, sets out the grounds under which the NCAT can make an order (as described above). You will note under the proposed text of the section set out above that the majority of the grounds relate to your conduct (or not) as strata managing agents. The proposed section is heavily favoured to owner s corporations. The reasons provided are also to be viewed in light of the NCAT s general jurisdiction to make orders on any basis that it thinks fits which strongly suggests that any Member may take into account other matters which aren t necessarily detailed in the proposed section. This is where Proposed Section 227 comes into play. It provides as follows: 227 General order-making power of Tribunal The Tribunal may, in any proceedings before it under this Act, make any one or more of the following orders or other decisions: (a) an order or decision that provides for any ancillary or consequential matter the Tribunal thinks appropriate, (b) an interlocutory decision within the meaning of the Civil and Administrative Tribunal Act 2013.

47 Proposed Section 227 is supported and extended by the operation of Proposed Section 228 which provides the NCAT with a wide discretion to make such orders as it thinks fit to settle any dispute before it. Proposed Section 228 provides: 228 Orders to settle disputes or rectify complaints (1) Orders relating to complaints and disputes The Tribunal may, on application by an interested person, original owner or building manager, make an order to settle a complaint or dispute about any of the following: (a) the operation, administration or management of a strata scheme under this Act, (b) an agreement authorised or required to be entered into under this Act, (c) an agreement appointing a strata managing agent or a building manager, (d) an agreement between the owners corporation and an owner, mortgagee or covenant chargee of a lot in a strata scheme that relates to the scheme or a matter arising under the scheme, (e) an exercise of, or failure to exercise, a function conferred or imposed by or under this Act or the by-laws of a strata scheme, (f) an exercise of, or failure to exercise, a function conferred or imposed on an owners corporation under any other Act. (2) Failure to exercise a function For the purposes of this section, an owners corporation, strata committee or building management committee is taken not to have exercised a function if:

48 (a) it decides not to exercise the function, or (b) application is made to it to exercise the function and it fails for 2 months after the making of the application to exercise the function in accordance with the application or to inform the applicant that it has decided not to exercise the function in accordance with the application. (3) Other proceedings and remedies A person is not entitled: (a) to commence other proceedings in connection with the settlement of a dispute or complaint the subject of a current application by the person for an order under this section, or (b) to make an application for an order under this section if the person has commenced, and not discontinued, proceedings in connection with the settlement of a dispute or complaint the subject of the application. (4) Disputes involving management of part strata parcels The Tribunal must not make an order relating to a dispute involving the management of a strata scheme for a part strata parcel or the management of the building concerned or its site unless: (a) any applicable strata management statement provides for the determination of disputes by the Tribunal under this Act, or (b) all the parties to the dispute consent to its determination by the Tribunal.

49 (5) The Tribunal must not make an order relating to a dispute involving a matter to which a strata management statement applies that is inconsistent with the strata management statement. (6) Disputes relating to consent to development applications The Tribunal must consider the interests of all the owners of lots in a strata scheme in the use and enjoyment of their lots and the common property in determining whether to make an order relating to a dispute concerning the failure of an owners corporation for a strata scheme to consent to the making of a development application under the Environmental Planning and Assessment Act 1979 relating to common property of the scheme. (7) Excluded complaints and disputes This section does not apply to a complaint or dispute relating to an agreement that is not an agreement entered into under this Act, or the exercise of, or failure to exercise, a function conferred or imposed by or under any other Act, if another Act confers jurisdiction on another court or tribunal with respect to the subject-matter of the complaint or dispute and the Tribunal has no jurisdiction under a law (other than this Act) with respect to that subject-matter. (8) This section does not apply to a complaint or dispute relating to a function of or a failure to exercise a function by an owners corporation if the function may be exercised only in accordance with a unanimous resolution or a special resolution (other than a special resolution relating to common property). Measure 4 - Breaches by Strata Managing Agents

50 In order to achieve the stated goal of Improved Accountability, the SSMB deals with penalties applicable to strata managing agents who breach the provisions of the SSMB. It must be recognised that strata managing agents will also be liable for damages caused as a result of a breach of contract or in negligence, which technically fall outside of the operation of the SSMB. Proposed Section 57 relevantly provides: 57 Breaches by strata managing agent (1) If a strata managing agent has been delegated a duty by an owners corporation and a breach of the duty by the owners corporation would constitute an offence under a provision of this Act, the agent is guilty of an offence under that provision (instead of the owners corporation) for any breach of the duty by the agent occurring while the delegation remains in force. (2) A strata managing agent must not, in connection with the provision of services as a strata managing agent or the exercise of functions as a strata managing agent, request or accept a gift or other benefit from another person for himself or herself or for another person. Maximum penalty: 20 penalty units. (3) Subsection (2) does not apply to: (a) remuneration paid to a strata managing agent or an employee or contractor of a strata managing agent by an owners corporation, or (b) a monetary commission paid to a strata managing agent, if the payment of such a commission is in accordance with the terms of appointment of the strata managing agent by the owners corporation or has been otherwise approved by the owners corporation, or

51 (c) a gift or other benefit that has a value that is less than the amount prescribed by the regulations for the purposes of this subsection. (4) In this section: gift has the same meaning as it has in Part 6 of the Election Funding, Expenditure and Disclosures Act You will note that proposed sub-section (3) provides certain exemptions to the operation of Proposed Section 57. The paper deals with the issue of receiving gifts or nominal benefits below as part of Desired Outcome 2 Greater Disclosure. The penalty which applies for a breach of the proposed section is 20 penalty units which equates to $2, per offence. This is a significant financial impost when the breach may arise from matters completely outside of your control as strata managing agent. DESIRED OUTCOME 2 GREATER DISCLOSURE This is the second desired outcome which is meant to flow from the passing of the SSMB. How is it to be achieved? The SSMB purports to achieve the desired outcome of greater disclosure through the following measures: By requiring the disclosure of all third party commissions

52 By requiring strata managing agents to disclose any links to the Original Owner (Developer) of the scheme By placing a control on the receipt of nominal gifts or benefits By providing significant penalties for breaches Measure 1 Disclosure of Commissions As we all know, a significant portion of strata managing agent income is generated from the receipt of commissions from third parties. These commissions are generally related to the sourcing and placing of policies of insurance on behalf of the owner s corporation. The ability of a strata managing agent to receive such commissions is well known and generally accepted. Proposed Section 60 of the SSMB sets out a specific requirement that strata managing agents must provide disclosure of commissions received and expected to receive and the method for such disclosure. It states: 60 Disclosure of commissions (1) A strata managing agent for a strata scheme must report the following at the annual general meeting of the owners corporation for the scheme: (a) whether any commissions have been paid to the agent (other than by the owners corporation) in connection with the exercise by the agent of functions for the scheme during the preceding 12 months and particulars of any such commissions, (b) any such commissions and the estimated amount of any such commissions that the agent believes are likely to be received by the agent in the following 12 months.

53 Maximum penalty: 20 penalty units. (2) A strata managing agent must, as soon as practicable after becoming aware that commissions paid to the agent (other than by the owners corporation) differ from the commissions or any estimate of commissions disclosed at the annual general meeting, disclose to the strata committee the variation and give an explanation for the variation. Maximum Penalty: 20 penalty units (3) The Tribunal may, on application by an owners corporation, order a strata managing agent to pay to the owners corporation: (a) the whole or part of the amount of any commissions paid to the agent and not disclosed in accordance with this section, or (b) the whole or part of the amount of any commissions paid to the agent that are not of a kind or an amount disclosed by the agent under this section, if the Tribunal is satisfied that the disclosure of commissions at the previous annual general meeting was not made in good faith. Note. It will be an offence for an agent to receive commissions that are not of a kind permitted by the agent s terms of appointment or approved by the owners corporation (see section 57). The disclosure of expected commission entitlements is already addressed in the agency agreement at the time of execution, as required under the Property, Stock and Business Agents Act It will be imperative that the contract between you and an owner s corporation specifically sets out the types of commissions which are expected to be received these should always include commissions to be received from placing policies of insurance and finance facilities. If the types of commission aren t identified then you will commit an offence under the SSMB if you receive any such commissions during the term of your appointment. The proposed section requires you to provide a report to the owners corporation at the annual general meeting (note that this does not appear to include Extraordinary General Meetings which may be held

54 throughout the year). Conceivably, this is a separate report which must be generated by you for delivery to the owners corporation this of course increases further the administrative burden placed upon you. It may be possible to include a provision in your contract documents which specifically provides that you are able to charge a sum for provision of the report. Measure 2 Interests to be Disclosed The Proposed Section 71 provides: 71 Interests must be disclosed by potential strata managing agents or building Managers (1) A person appointed as the strata managing agent or building manager for a strata scheme who has an interest that must be disclosed under this section must disclose the interest to the owners corporation before the appointment of the person. Maximum penalty: 50 penalty units. (2) The following are interests that must be disclosed to the owners corporation by a person: (a) that the person is connected with the original owner, (b) any direct or indirect pecuniary interest in the strata scheme (other than an interest arising only from the prospective appointment). The first disclosure requirement relates to whether you, or your business, are connected to the original owner (ie. the developer). In many strata schemes the original owner still owns certain lots and will have appointed the first strata managing agent for the scheme as a result of a relationship with that particular managing agent or their business. The disclosure requirement appears designed

55 to ensure that all owners are aware of the connection and if they consider that the role of the strata managing agent is comprised then steps could be taken to remove that person from the management of the scheme. The second disclosure relates to whether you have a direct or indirect pecuniary (ie. financial) interest in the strata scheme. This requirement does not relate to your prospective or actual appointment which is governed by the terms of your agreed contracts and the applicable provisions of the SSMB. It relates to situations where you may be an owner or part owner of a lot(s) within the strata scheme, or you derive income from the leasing of a lot (whether because you lent money to the owner or you re also acting in a letting agent capacity). Measure 3 Control on Receipt of Nominal Gifts or Benefits The SSMB deals with this issue in Proposed Section 57 which is again set out below. 57 Breaches by strata managing agent (1) If a strata managing agent has been delegated a duty by an owners corporation and a breach of the duty by the owners corporation would constitute an offence under a provision of this Act, the agent is guilty of an offence under that provision (instead of the owners corporation) for any breach of the duty by the agent occurring while the delegation remains in force. (2) A strata managing agent must not, in connection with the provision of services as a strata managing agent or the exercise of functions as a strata managing agent, request or accept a gift or other benefit from another person for himself or herself or for another person. Maximum penalty: 20 penalty units. (3) Subsection (2) does not apply to:

56 (a) remuneration paid to a strata managing agent or an employee or contractor of a strata managing agent by an owners corporation, or (b) a monetary commission paid to a strata managing agent, if the payment of such a commission is in accordance with the terms of appointment of the strata managing agent by the owners corporation or has been otherwise approved by the owners corporation, or (c) a gift or other benefit that has a value that is less than the amount prescribed by the regulations for the purposes of this subsection. (4) In this section: gift has the same meaning as it has in Part 6 of the Election Funding, Expenditure and Disclosures Act Under sub-section (2), you cannot, whether in connection with the provision of services as a strata managing agent or the exercise of functions as a strata managing agent, request or accept a gift or other benefit from another person whether for themselves or another person. Presently, there are no regulations proposed which assist in the interpretation of this section. However, the definition of gift as provided in the Election Funding, Expenditure and Disclosures Act 1981 provides: gift means any disposition of property made by a person to another person, otherwise than by will, being a disposition made without consideration in money or money s worth or with inadequate consideration, and includes the provision of a service (other than volunteer labour) for no consideration or for inadequate consideration. Essentially, without regulations being put in place specifying exemptions or threshold levels as to value, the above definition of gift for the purposes of the proposed section means that you cannot receive any gift or benefit from another party which is any way connected with your role as strata managing agent. This will include say a Christmas gift from a particularly grateful owner s corporation

57 and/or owner for the terrific services (including services perhaps not charged for) that you d provided over the course of the year. The penalty which applies for a breach of the proposed section is 20 penalty units which equates to $2, per offence. That is a significant financial impost which may be placed upon you as a result of receiving a gift which you have not sought and thereby being in breach of the SSMB. It remains to be seen whether the Government puts in place reasonable regulations which will exempt certain gifts or nominal benefits (such as going to a corporate or charity golf day) but until that happens you will not be able to accept so much as a grape. CONCLUSION In the author s view, the measures which have been proposed to achieve the two desired outcomes from the SSMB, insofar as they relate to strata managing agents, may indeed be successful. However, it is likely that they will be achieved at significant commercial and personal cost to strata managing agents and their businesses. Your work as strata managing agents has over the years increased and become more complex. The SSMB introduces further areas for compliance and restricts your ability to earn income and reduces the security of your contractual arrangements with owner s corporations. The author considers that strata managing agents have been unfairly and improperly targeted for increased regulation and have been discriminated against (see for example the preferential treatment of building managers as to their terms of appointment). Iain Fairholm Lawyer P: E: iainfairholm@muellers.com.au W:

58 Disclaimer: The information contained in this newsletter is provided for your personal information only. It is not meant to be legal or professional advice nor should it be used as a substitute for such advice. You should seek legal advice for your specific circumstances before relying on any information herein. Contact for any required legal assistance. Strata Managers Educational Forum The York Conference & Function Centre 11 September 2015 Building Defects Under the Strata Schemes Management Bill 2015

59 Bruce Bentley: BA LLB, LLM, AIAMA, FACCA

60 About the Author: Bruce Bentley Bruce is a partner at, a specialist firm of strata law solicitors. He commenced working in strata law in Bruce specialises in strata law and those areas of the law that particularly affect the development, management and administration of group title communities. He has acted for owners corporations, owners and developers over a long career which includes numerous highlights such as the first strata title leasehold development in NSW. Bruce is a Fellow and Councillor of the Australian College of Community Association Lawyers Inc (ACCAL), the peak body for strata lawyers in Australia. He also sits on the Urban Development Institute of Australia (NSW) Strata and Community Advisory Committee and the ACCAL NSW Legislative Reform Committee. Bruce is a regular presenter at seminars and conferences on matters concerning strata and community title law. He has presented numerous papers to ACCAL conferences, one of which was requested for reference by the West Australian Attorney General when drafting that State s strata legislation. Bruce has presented to conferences on Taking Over A Strata Title Management (NSW), Conducting A Hearing In VCAT (Vic), Seiwa Common Property Defect Claims (NSW), Recent Cases In Strata Title Law (NSW), Meetings What The Legislation Doesn t Tell You (Vic), Amendments To The Home Building Act (NSW), Development Applications and Renovations (NSW) and Short Term Tenancies The current State of the Law (NSW). Bruce also prepared the Institute of Strata Title Management CPD curriculum for levy recovery. Bruce has extensive experience in building and construction law and holds a Masters degree from the University of New South Wales. He has conducted building and commercial litigation since 1980 in all jurisdictions. He has held appointment as an arbitrator to the NSW Local Court since 1991 and as a Costs Assessor to the NSW Supreme Court since He also held appointment as an arbitrator to the District Court of NSW for six years. He is a commercial arbitrator, graded with the Institute Arbitrators and Mediators Australia since 1993.

61 BUILDING DEFECTS UNDER THE STRATA SCHEMES MANAGEMENT BILL 2015 What the Act Covers The Act will make provision for defective building work contained in a building or part of a building that forms part of a strata plan if the work was carried out by or on behalf of the original owner for the purposes of or contemporaneously with the registration of a strata plan being building work completed after the commencement of the Act. The provisions will cover residential strata schemes and mixed use strata schemes that include a residential purpose but will not include completely non-residential schemes. The provisions to do not apply to schemes which are subject to the requirement to obtain home building compensation insurance (exceeds 3 storeys or work is $20K or less). Defective building work is defined in terms of the Home Building Act 1989 warranties. Completion of building work is defined in accordance with s3c of the Home Building Act That section provides that where the issue of an occupation certificate is required to authorise commencement of the use or occupation of the building the completion date of the building work occurs on the date of issue of an occupation certificate authorising occupation and use of the whole of the building. The provisions will not affect other rights of the owners corporation in relation to defective work. If the residential building work comprises the construction of two or more separate buildings the date of completion of that work is determined as if they were separate buildings constructed under separate contracts with a separate completion date for each building capable of being used and occupied separately from any other building. Interim Report The developer must appoint an unconnected qualified building inspector approved by the owners corporation not later than 12 months after completion of the building work to inspect and report to the owners corporation not earlier than 12 months and not later than 18 months after completion.

62 If the initial period has not expired within 12 months after completion of the building work the original owner must notify the Chief Executive who will appoint a building inspector to carry out an inspection and report to the developer, the owners corporation, if the initial period has ended, and the Chief Executive. If the original owner and the owners corporation fail to agree on a building expert or the developer fails to comply with the requirement to appoint a building inspector, the owners corporation may advise the Chief Executive who will appoint a building inspector to carry out an inspection and report to the developer, the owners corporation, if the initial period has ended, and the Chief Executive. The report must: o o o o Identify any defective building work; If reasonably practicable identify the cause of that defective building work; Be in the form and contain the matters prescribed by the Regulations. The cost of the report is to be borne by the developer. An appointed building inspector may enter and inspect any part of the strata scheme upon giving at least 7 days written notice of intention to enter. The owners corporation, the strata manager, the building manager, owners, occupiers and exclusive users must provide reasonable assistance to enable the inspection to take place. Final Report The developer must, not later than 18 months after the building work is completed, arrange for the building inspector who prepared the interim report to do a final inspection and prepare a final report not earlier than 18 months and not later than 2 years after the completion of the building work and if that building inspector is unavailable to advise the Chief Executive who will appoint another qualified building inspector. If the developer fails to arrange for a building inspector to prepare a final report the owners corporation may notify the Chief Executive who must appoint a qualified person to provide the final report. If the interim report identified no defective building work a final report does not have to be prepared.

63 The final report must: o o o o o Identify defective building work identified in the interim report that has not been rectified; Identify any defective building work arising from rectification of defective building work identified in the interim report; Specify how the defective building work identified in the report should be rectified and the estimated costs of rectification; Not contain matters that relate to defective building work not identified in the interim report other than work arising from rectification of defective building work; Be in the form and contain the matters prescribed by the Regulations. The builder may enter the strata scheme at any time before completion of a final inspection on the giving of at least 7 days written notice to rectify any defective building work. Building Bonds A building bond in the sum of 2% of the contract price for the building work (to be defined by the Regulations) is to be paid to the Chief Executive before an occupation certificate is issued for the building work for the purpose of securing funding for the payment of the cost of rectifying defective work identified in a final report. The whole or part of the building bond is payable as follows: o o o o o To the owners corporation to meet the estimated cost of rectifying defects identified and estimated in the final report. To the developer if there is no defective building work or no further costs for rectification identified in the final report. To the owners corporation with the consent of the developer on joint application to the Chief Executive made within 30 days after the final report is given to the developer. To the developer with the consent of the owners corporation on joint application to the Chief Executive made within 30 days after the final report is given to the developer. To the owners corporation or the developer in accordance with an order of the Tribunal or the Supreme Court.

64 The developer cannot cast a vote on a motion on a building defect matter. The bond is payable to the owners corporation irrespective of whether the developer is liable to the owners corporation or the owner of a lot in relation to the defective work. The building bond must be paid out within either 2 years after the date of completion of building work or 60 days after the final report is given to the developer, whichever is later. An owners corporation that has been paid either the whole or part of a building bond must within a reasonable time use the amount paid for or in connection with rectifying the defective building work for which it was received or costs related to the rectification and must repay to the developer any amount of a building bond that is not required for such a purpose and give to the developer written notice of the completion of the rectification work. The owners corporation or a person carrying out rectification work for the owners corporation is entitled to enter any part of the strata scheme on giving at least 7 days written notice to the owner of any affected lot. The Tribunal may make orders requiring any occupier to grant access for inspection or rectification of defective building work on the application of an owners corporation, developer, building inspector or builder. The Tribunal may on application by an owners corporation, developer or the Chief Executive make any of the following orders: o o o o An order that the Chief Executive not pay, or pay, the whole or part of the amount of a building bond to a specified person. An order that an amount of building bond be repaid by an owners corporation to a developer. An order specifying the amount of the contract price of building work for the purpose only of determining the amount of the building bond. An order varying the time within which an action is required to be taken under this part, if the application for the order was made by or with the consent of the Chief Executive.

65 Bruce Bentley Partner P: E: W: Disclaimer: The information contained in this newsletter is provided for your personal information only. It is not meant to be legal or professional advice nor should it be used as a substitute for such advice. You should seek legal advice for your specific circumstances before relying on any information herein. Contact for any required legal assistance.

66 P: E: W: muellers.com.au