Strata Management Statements and the Strata Schemes Management Act 2015: Inconsistencies in Owners Corporations' rights

In brief

The case of Walker Corporation Pty Ltd v The Owners – Strata Plan No 61618 [2023] NSWCA 125 highlights the importance of ensuring Strata Management Statements (SMS) are in accordance with the Strata Schemes Management Act 2015 (NSW) (SSMA) and the Strata Schemes Development Act 2015 (NSW) (SSDA). A clause in a SMS that acts to extinguish the rights of the owners corporation to appoint a strata managing agent or to terminate that agent’s services will likely be considered inconsistent with the SSMA and the SSDA and therefore invalid.
 

Background

The Finger Wharf development at Woolloomooloo is divided into eight lots, seven of which are further subdivided by way of a registered strata plan and the eighth was referred to as the “stratum lot” in the Supreme Court proceedings.
The SMS created a Building Management Committee (BMC) for the administration of the development and required the entire development to use the same strata manager.

Three strata schemes passed resolutions, by which the relevant three owners corporations terminated the appointment of the existing strata managing agent, McCormacks NSW Pty Ltd (McCormacks), and appointed Strata Choice Pty Ltd (Strata Choice). 

The applicant, Walker Corporation Pty Ltd (Walker), who owns two lots, brought proceedings on the grounds that the three owners corporations breached clause 8.11 of the SMS for the Wharf, which required the owners corporation of each strata lot in the Wharf to appoint and retain the same strata managing agent as the BMC. Further, that two owners corporations had breached a provision of their by-laws, which was of similar terms to clause 8.11.

The three owners corporations and the Chairperson of one of the owners corporations brought separate cross-claims. There was some variation between them, but they primarily sought to challenge the validity of clause 8.11 and the equivalent by-laws in accordance with the SSMA and the SSDA.

At the Supreme Court before Justice Parker J

By-laws 

By-law 28 of the Residential South scheme is identical to by-law 24 of the Carpark Wharf OC: 

"Agreement with the Strata Manager: The Owners Corporation must … appoint and retain under section 27 of the [1996] Management Act the same strata manager that the Building Management Committee appoints under the Strata Management Statement." 

The respondents submitted that the challenged by-laws did not specify the functions which were to be delegated to the strata managing agent or stipulate the terms of the appointment required under section 49(1) and 52(1) of the SSMA. The applicant submitted that the scope of the delegation to “appoint and retain” was a “constructional choice.” 

The primary judge highlighted the unworkability of the by-law as it would force owners corporations to agree to the terms nominated by the appointed managing agent which was considered an “absurd consequence”. The primary judge determined that the by-laws were void for uncertainty.

Further, the primary judge considered inconsistency between the terms of the by-law and the SSMA [for completeness] to invalidate the by-law. Pursuant to section 49(2) of the SSMA, an ordinary resolution of the owners corporation is required to appoint a managing agent. However, the by-law purported “to impose the obligation on the owners corporation to make the appointment, not on the lot owners to attend a meeting and vote for it". 

Clause 8.11 of the SMS

Clause 8.11 prescribed that members that are Owners Corporations "must, after the expiry of the initial period for their Strata Schemes, appoint and retain under section 28 of the [Strata Schemes Management Act 1996 (NSW)] the same Strata Manager the Committee (BMC) appoints under this clause." 

The primary judge adopted the same reasoning on uncertainty applied to the challenged by-laws to conclude that clause 8.11 was uncertain according to the SSDA.

On the question of ultra vires, his Honour observed that the clause was outside the scope of section 99 of the SSDA, which describes an SMS as a “management” statement for “the building and its site” leading to a complete takeover of management of all the functions which may be delegated by an owners corporation to a strata managing agent. 

In the circumstance of applying for review of an appointment pursuant to section 72 of the SSMA, even if the Tribunal considered that the appropriate relief was for termination of the agent, that would “for practical purposes” be nullified by clause 8.11. 

On the other hand, his Honour found that the tribunal pursuant to section 337 of the SSMA is limited to interfere with the appointment of the strata managing agent by lot owners to circumstances where there is no practical alternative if the scheme is to function. Further, when this power is exercised the maximum period of appointment is two years. Therefore, leading his Honour to find that clause 8.11 was inconsistent with the SSMA and therefore being inconsistent with section 105(5) of the SSDA. 

The primary judge concluded that clause 8.11 of the SMS and the impugned by-laws were invalid.

At the NSW Court of Appeal before Leeming JA; Mitchelmore JA and Kirk JA 

The Court of Appeal dismissed the application and held that the Judge at first instance was correct. 

The Court in confirming the earlier decision extended their reasoning for inconsistency to include the following: 

1. The principal responsibility for the management of a strata scheme is vested in the owners corporation under section 8 of the SSMA. The responsibility imposed on the owners corporation is “for the benefit of the owners of lots in the strata scheme”, and includes management and control of the use of the common property (section 9(2)(a)), and the administration of the scheme (section 9(2)(b)). The delegation of functions must also be so authorised as per section 51(1) of the SSMA. 

2. The SSMA also includes provisions by which the strata managing agent is to report to the owners corporation on the performance of its functions (sections 55 and 58-61). 

3. Sections 49(2), 50(2) and 50(3) of the SSMA provide that the appointment, reappointment or termination of a strata managing agent must be effected by way of a resolution at a general meeting of the owners corporation. 

These requirements collectively reflect the importance to lot owners of the appointment of a strata managing agent, of the agent’s performance of the functions that an owners corporation delegates to it, and of ensuring the ongoing accountability of the agent to lot owners through the owners corporation. 

Relevance 

Owners of a lot in a building that is subject to a strata management statement, if dissatisfied with the manager, may be able to remove the manager at a general meeting of the owners corporation or building management committee despite express provisions that otherwise prohibit the appointment of an alternative manager. 

The case shows courts are not prepared to enforce all provisions incorporated in strata management statements and will limit the operation of covenants in statements that go beyond the powers granted by the enabling legislation.

Although not raised by Walker, the case may also provoke further analysis of a strata manager's duty to act in the best interests of each "Member" (i.e. each owners corporation and/or the building management committee) that appointed it, particularly where there is disagreement amongst Members on strategies for the building (for example, whether to approve an application for development consent to a change of use). There is potential for claims to be made against strata managers who favour one Member's interests over another.

Conclusion

Owners Corporations and Strata Managers should carefully review their strata management statements to check for potential inconsistencies with the SSMA or SSDA and consider amending the SMS and the scheme by-laws accordingly. 
The decision affirms the significance of the SSMA to establish, maintain and protect the rights of the owners corporation and individual lot owners in the management of strata schemes.