Owners Corporations, VCAT and Some Current Issues - Part 1

well good morning everybody and welcome to our breakfast briefing today on owners corporations VCAT and some current issues now today's first speaker is James Makai James was admitted to practice in 2007 and he signed the bar role in 2009 already five years ago how time flies James has a general commercial practice with an emphasis on real property contractual disputes equity and trade practices James is a consultant author of CCHS Victorian conveyancing law and practice the other co-authors are Justice Croft of the Supreme Court and Jeremy masters of counsel James is a regular speaker at seminars and public lectures for a variety of organizations and law firms and of course for greens lists here today he provides legal opinions and advice on a wide range of commercial regulatory and structural matters including property development financial services licensing GST and stamp duty today James is going to examine some of the more important recent decisions that will have an effect on how owners corporations are managed in the future so I'll hand you over to James good morning everyone and thanks Bill for that introduction there's four topics that I wanted to speak to you about this morning the first one involves a new Supreme Court case or a relatively recent case dealing with the management of the finances of an owners corporation and it deals with really the new rules or clarifying the existing rules as to how owners corporations both collect and spend their money deals with the difficult question of maintenance plans and what kind of effect those plants have and in particular maintenance plans as you know will often have things like precise budget that allocates a certain amount of money to a particular purpose or to a particular set of works and the case that I'll be looking at examines really how binding that budget is it's contained in the maintenance plan and the circumstances in which it's open to the corporation to depart from the maintenance plan and use the money in the maintenance fund for other purposes that case we'll also look at the so-called benefit principle which is the principle enshrined in sections 49 and 28 of the Act which can be boiled down or or described as saying that the person who benefits more from our particular works or repairs or upgrades should actually pay more for those works in this case that I'll be looking at deals with that quite extensively and has laid down some new rules that have partly now been enshrined in legislation so to the extent that you've heard that there's legislative changes that have come about fairly recently it was late last year I believe that will be looked at briefly as well and you'll see that some of the changes are discussed in this case have been picked up and reflected in that legislation the second topic that I wanted to look at really involves practice and procedure from the perspective of somebody that does appear quite regularly in the owners corporations list at VCAT and sees a number of problems that are frequently arising that are encountered by owners corporations that are seeking to litigate and it's seeking to have their grievances err then in my opinion or from my experience one of the most common problems is getting around the special resolution issue so often you'll have corporations that simply commence an action without getting the required resolution or you'll have a position where the owners corporations properly advised and they're aware of the requirement to get that resolution except they don't have the numbers to achieve that and so I'll be discussing a number of cases that deal both with the consequences of a purse aiding that's commenced without obtaining that resolution the ways to fix things up if you like after the fact to regular odds the preceding and continuous once the mistake is made and ways to bypass that requirement entirely if need be so that the true grievance that particular lot owners have who are really pushing the agenda of the litigation can be agitated through other means without actually suing through the owners corporation there's an important Supreme Court case that's discussed some of these issues and also some other quite important recent vCard decisions that we'll be looking out there the third topic deals with common property and the plan within a subdivision that is affected by an owners corporation and many of you will have come across cases like this I've certainly had quite a number in the last year or so where there's a number of lot owners that want to do something with the plan of subdivision perhaps changed a lot entitlement and liability or fuse two Lots together or put in some kind of easements services that's not recorded in the initial plan and given that you need a unanimous resolutions to do any of those things all of you will be aware that's basically impossible to achieve in reality to get consensus on something or anything really these days is impossible so the vCard has a jurisdiction to step in and make orders over the top of or against the wishes of a minority of members in certain circumstances and there's been a recent case that looks at and examines the power that VCAT has to do that and the requirements that exist in order for VCAT to make those orders it's an important case because the requirements have been softened very much recently so that all the hurdles have been lowered excuse me so that's now much easier to commence proceedings and achieve orders along those lines to alter a plan of subdivision in some way without being burdened by a very difficult procedural requirements that used to exist now the fourth topic is managers you would have seen this from the outline that's been disseminated this is important just because the pure number of cases that are coming out more and more people seeking to air grievances against managers there's been a wealth of decisions which deal with many many different factual scenarios it's an interesting area of the law that's certainly a growth area in my opinion and it's worthwhile having a look at for that reason alone and perhaps the reason why it's becoming a growth area in my submission is that more and more in the last two years it's being realized by VCAT that there is standing on the part of individual bot owners to sue and air these grievances against managers as direct plaintiffs themselves without necessarily suing through or in the name of the owners corporation which is an extrordinary thing in itself because what a lot owner is seeking to do in those circumstances is to intervene if you like in a contractual relationship between two 3rd parties being the owners corporation and the manager and to seek often the revocation of the managers appointment over the top of often the interests of lot owners or the objections of lot owners that are not joined as parties and that do not want the applicant to succeed so that topic is bound up also in the procedural issues I'll be discussing as part of topic 2 now to move on the first decision I'll be looking at is the Machine decision and you'll have the citation there in the paper the background there is that it's a 39 loss residential subdivision in Melbourne out of those 39 apartments 34 of them had balconies with balustrade and there was a difficult issue at first instance as to whether the balustrade are on common property or not but it was determined that they were in fact part of the common property the ballast trades were in the end extremely defective to the point where every single balustrade needed to be replaced and the total value of the works needed to do that was 242 thousand dollars now a shame of financing was put in place by the owners corporation by way of three special resolutions that were passed simultaneously the first resolution was one that required a special levy or a payment 32,500 from all of the lot owners and that was levied in accordance with lot liability so there was no distinguishing feature if you like or or allowance made before the fact that five of the apartment did not have these balustrade another thirty two thousand five hundred was raised in a way that did take into account that factor so that only the thirty four parties had actually benefited were required to actually pay now the balance was taken from the maintenance fund that this owners corporation had and there was a large amount of money in that fund all of the money's in that fund had been collected on the basis of lot liability so in other words in front had just paid in accordance with the status quo in accordance with their percentage of ownership without any taking into account or factoring in of the disparity and benefit here by virtue of the fact that five people did not own any ballast roads now the owner of the penthouse within the building was one of the people that did not have ballast trades on his apartment and he obviously had the means to do something about this and this ended up going all the way to the Supreme Court was silt briefed and there are a number of complex arguments that were made and all of these issues about financing the collection of funds this benefit principle all of these ideas were given quite detailed treatment in the Supreme Court of Victoria now the penthouse owner ultimately ended up failing and the arguments that he made in that file can be summarized in this way first of all he relied on this benefit principle this idea that when there's benefit or additional benefits to certain lot owners and they should pay more for for those particular works the other argument that was run was based on this limitation in the maintenance plan the maintenance plan had said that the works for these ballast raids were not to take place until the year 2027 and that when they did take place the amount spent was to be about 72 thousand dollars so when you're talking about two hundred and forty two thousand being the amount ultimately spend you can see that there's a massive dis reppin si and the works will move forward in time and it was alleged by this plaintiff or applicant that that was improper and that the maintenance plan had to be adhered to now in order to understand that first point about other way funds are collected and spent and this idea of the benefit principle it's important just to very briefly consider how it is that what requirements under the legislation govern the collection of fees and the expenditure of money section 23 deals with the collection of annual fees and the basic idea there is that they're set annually obviously and that they're collected in accordance with lot liability special levies are also dealt with separately in section 24 and as you'd all be aware they're for extraordinary charges that are levied at points other than annually as and when required and they can be done by ordinary resolution and if the amount that's sought to be collected exceeds the annual fees by more than double a special resolution is required now according to section 28 subsection 2 it says that there's to be no contribution towards the owners corporations liabilities in a proportion that exceeds lot liability so there was this notion originally that prevailed that you couldn't ask someone to pay more than their lot liability in virtually all circumstances the exception to that was that if the repaired maintenance or other works were wholly or substantially for the benefit of one or some but not all of the lots and that's in section 28 subsection 3 section 49 subsection ones also relevant which says the owners corporation may recover as it did the cost of works wholly done or so wholly or substantially for the benefit of one or some but not all of the Lots so that that's the statutory language that picks up this idea that the person who benefits more pays more now the problem of course is you've got two contradictory ideas at play there that that don't sit well you've got the payment in accordance with lot liability which is really in accordance with the value of the land holding of the person involved on the one hand and then payment according to benefit on the other and there's a difficult question as to how those sips interrelate now one of the questions that's plagued this area is to what extent the benefit principle arises when you're collecting funds as distinct from spending funds and the difficulties that can arise there or questions along these lines can arise in annual fees for example do you have to look forward in time anticipate the repair and maintenance works for a particular year work out in advance or at least try and work out in advance whether there's going to be works that will benefit some or others more than other people within the subdivision and then adjust the contribution in advance to take into account those factors in other words does the benefit principle operate for annual fees in advance so that there's got to be a really a speculation or guesswork that takes place about what kind of works might be done in a particular year is it confined only to especial levees does it apply only when the works have already been done and the owners corporation is seeking to recover from the members for works that have been completed and paid for all of these things were questions that were somewhat unclear until fairly recently the existing law is dealt with in a case a car or at least was before this decision is dealt with in a case called McCarthy and Danny non-region body corporate which is in the paper and boiled down a senior member Vasi in that case gave this description of the law as it existed it never becomes relevant to inquire whether fees and charges set and levied prospectively might become spent on things that benefit some lot owners more than others so what that's saying is if the works had not been actually completed and done and you're asking people to contribute to something that's already paid for then it's never relevant to consider this benefit principle it doesn't matter that works that arise along the way during the course of the year benefits some more than others it's only when the works are complete that debts been incurred by the Josie and the OSI seeks to recover from the members that at that point the apportionment is made on the basis of here opposed more who benefits more so in other words this benefit principle had quite a rare application as it was decided under the existing law now the propositions that were laid down by the Supreme Court in this machine decision were these it said first of all when collecting any money and that seemed to include annual fees special levies and retrospective charges and underline their annual fees I mean that the rule laid down here is incredibly broad it's saying that any time the OSI collects money the owners corporations got to look forward in time and try and assess as best it can what kind of works are going to be needed to be done and to collect the fees on the basis of this benefit principle if their works to be done that would benefit some more than others so that in itself was a broad and important alteration to the law if you like what the Machine decision also did though was to destroy this notion that when the funds are actually spent out of an existing pool of money that the benefit principle had to be employed at that time so to give an example if there's yearly fees that have been collected you've got all this money sitting there in the owners corporations account or if you have money in the maintenance fund for example everybody has contributed equally to that fund on the basis of their lot liability but then some works need to be done that benefit only some of the lot owners at that point according to this machine decision there's no requirement that the money they spent in accordance with the benefit principle so the money can be taken out of this common fund to which everyone's contributed without there being any adjustment along those lines so can operate unfairly in other words you know people that you might have contributed your share to the maintenance fund and then the money is deducted from that fund to carry out works that do not benefit you as a lot owner that was the finding and Michonne one of the only real limitations that was laid down in machine for the expenditure out of those funds in that way was the good faith principle which is enshrined in section 5 of the Act so they still had to be some connection with the maintenance plan if it came out of the plan they still had to be a general fairness in relation to that payment but that was a very sort of weak and nebulous limitation now there's been legislative changes that have now dealt with this issue machine has not been replicated in terms of feed collection for annual fees so this difficult exercise that I've discussed that the Supreme Court would have had owners corporations undertake which is to each meeting it there would have been a this speculative exercise of looking forward in time and working out what works needed to be done who would benefit from those works and then adjusting the fees accordingly this new legislation the amendment to section 23 of the Act does away with all of that so now annual fees are just collected on the basis of lot liability as they have always been and the section that confirms that that's been added in recently is subsection 3a in 23 and that basically says that you to collect the fees on the basis of lot liability even if there's works that are ultimately done that benefits some people more than others so fee collection is being preserved in its traditional way it's nice and simple the members just vote on what the fee should be in a particular year at their AGMs and they don't have to engage in this difficult exercise of looking forward as to what works are needed and adjusting the fees on the basis of the benefit principle with special levies though any kind of payment throughout the year that's not an annual fee in that circumstance the Machine decision does apply now so the owners corporation when it's collecting that money any other means in that way throughout the year we'll have to adjust the collection in accordance with this idea of he who benefits war pays more and that's in section 24 2a now the other important point that's dealt with in Maschine as I said earlier is the issue of maintenance plans it's long been a relatively confusing issue because maintenance plans set up often for very long periods of time or with a view taken that you put money in now for works that may not be done for years or in this case perhaps even decades on in time so to have a very precisely allocated plan or budget that apportions all of the money in the fund in a detailed way if that was binding on the owners corporation so that was difficult to use the funds for other purposes then that would be very inconvenient for the management of owners corporations and yet that was the argument that was made by the plaintiff in Maschine the plaintiff was basically saying that the fact that these funds according to the maintenance plan could not be used until 2027 and the fact that only 72,000 had been allocated towards these works meant that that was essentially binding and you couldn't have a situation then where the owners corporation took three times that amount of money and brought the works forward by 15 years odd now that argument ended up failing basically because of the fact that a special resolution was obtained to withdraw the fund what justice McAuley and the supreme court was saying was that pretty much in most cases a special resolution will be the magic bullet that solves this issue if you have requirements in a maintenance plan that say that the money's to be used for this purpose then if you have a special resolution then that's generally good enough to overcome those limitations and to allow expenditure in whatever way the owners corporation sees fit there's a couple of preconditions or limitations to that first of all there's the good faith instable again clearly the money just can't be used for some purpose it's totally foreign to maintenance it's got to be used for something that benefits the property of the earnest corporation second of all there's a power under the Act for the owners corporation to set conditions on when money is or the circumstances in which money can be deducted so to flesh out that distinction consider this if a maintenance plan says we estimate that seventy-two thousand will be needed for a particular job but it doesn't then go on and say and you cannot I'll rephrase that if there's a condition lay down on the deduction of money along these lines that says you shall not use money for this purpose or if you do deduct money you shall go through these requirements or do these things first or any kind of condition where it says that the money cannot be deducted from that fund unless certain things are done or certain conditions adhered to if the maintenance plan is that clear then those conditions are themselves binding so the decision was difficult in the sense that it's creating this distinction between conditions on the one hand which were said to be enforceable and you can't get around them even with a special resolution versus on the other just the contents of the maintenance plan so the budgetary items that are listed there and and those things are non-binding and can be overcome with a special resolution just quickly to deal with the the next decision G arena and the special resolution issue as I was saying earlier that the problem with that whole topic is that first of all usually the owners corporations when they're suing and their self represented don't obtain that resolution for some reason they're not aware of the requirement as I said earlier often they don't know they're meant to obtain it often you can't get the numbers what Jai Arena has decided is that if a suit is commenced without obtaining the requisite special resolution it can be cured after the fact so in that case the suit was cured by joining other applicants to commence or continue the action themselves other decisions which are dealt with in the paper suggest that you can actually just get a special resolution after the fact so the important point there is that this what we're seeing really is a fatal weakness to a case I the absence of obtaining that resolution that can now be overcome retrospectively in a number of ways and you'll see there's a few different techniques if you like that I've dealt with in the paper before overcoming that just very quickly as well with the subdivision Act changes which deal with common property there used to be very onerous requirements that were laid down to seek relief from VCAT you basically had to prove that the benefits to the subdivision as a whole would outweigh any detriment to the particular people whose interests were being overridden by VCAT the decision of conroy which is dealt with in the paper overcomes all of that so now there's the legislations been read so as to allow another way to achieve the same result that gives VCAT an absolute discretion to make whatever order it considers fair so if you now want to do anything like just lot entitlement or fuse lots together create easement through any of those things to common property you can now do you can now approach VCAT without seeking any resolutions first and achieve those results in a very easy way that is not burdened by any procedural or legal limitation they cat just has a discretion to make what order it's a sphere thank you you

Author Since: Mar 11, 2019

Related Post