In brief - Upgrading exhaust ventilation system beyond duty to "renew or replace"
In owners Strata Plan v Thoo, the NSW Court of Appeal overturned the first instance decision that the owners corporation was obliged to undertake a significant upgrade of a functioning mechanical exhaust ventilation system at the request of an owner of lots in the strata plan.
No damages for breach of section 62 of Strata Schemes Management Act
In the decision of The Owners Strata Plan 50276 v Thoo [2013] NSWCA 270, the NSW Supreme Court of Appeal extensively considered a owners corporation's statutory duty under the Strata Schemes Management Act 1996 (NSW) ("the Act") and found that a breach of section 62 does not give rise to an action for damages.
In overturning the first instance decision, the court also held that a duty to maintain and repair does not extend to alterations for the purposes of improving or enhancing property.
Owner of lots seeks to subdivide single lot into three retail tenancies
The appellant, Owners Strata Plan 50276, is the owners corporation of a retail shops strata scheme known as the Hunter Connection shopping centre, located near the corner of Hunter and George Streets, Sydney.
The first respondent, Dr Thoo, is the registered proprietor of several lots in the Strata Plan, including Lot 17, which he sought to subdivide into three separate retail tenancies for commercial cooking and selling of hot food.
For the subdivision to be approved however, the council required each of the lots to be provided with an adequate exhaust ventilation system.
Owners corporation asked to guarantee additional exhaust ventilation capacity
In December 2007, Dr Thoo requested the owners corporation to guarantee Lot 17 with an exhaust capacity of 3,600 litres per second, which would require an upgrade to the existing mechanical exhaust ventilation system (MEVS), being part of the common property.
Although the owners corporation accepted that Lot 17 could be physically connected to the MEVS, the system was already fully utilised by the existing lots and thus could not guarantee the exhaust capacity that Dr Thoo requested.
Owners corporation passes resolution not to upgrade exhaust ventilation system
The owners corporation had also previously considered expert evidence as to whether it was feasible to install a supplementary MEVS, but found that installing an additional system would involve significant costs and would interfere with existing retail operations in the building.
Accordingly, the owners corporation unanimously passed Special Resolution 7 ("the Resolution"), resolving that it was inappropriate to renew or replace the MEVS of the common property.
Lot owner claims that owners corporation breached duty to maintain and repair common property
Dr Thoo brought proceedings seeking a mandatory injunction that the owners corporation repair and/or replace the MEVS so as to allocate to him the 3,600 litres per second exhaust capacity to service Lot 17 on the following grounds:
· the Resolution was invalid, null and void
· the owners corporation breached its statutory duty to maintain and repair common property under section 62
Section 62 of the Strata Schemes Management Act
Section 62 of the Strata Schemes Management Act 1996 (NSW) states that:
(1) An owners corporation must properly maintain and keep in a state of good and serviceable repair the common property and any personal property vested in the owners corporation.
(2) An owners corporation must renew or replace any fixtures or fittings comprised in the common property and any personal property vested in the owners corporation.
(3) This clause does not apply to a particular item of property if the owners corporation determines by special resolution that:
(a) it is inappropriate to maintain, renew, replace or repair the property, and
(b) its decision will not affect the safety of any building, structure or common property in the strata scheme or detract from the appearance of any property in the strata scheme.
Did the owners corporation breach its duty to maintain and repair common property?
At first instance, Slattery J declared that the owners corporation breached its statutory duty to renew or replace the MEVS so as to provide a reasonable level of exhaust ventilation capacity to Lot 17. In finding in favour of Dr Thoo, the owners corporation was ordered to modify, add to or replace the MEVS and to pay damages.
On appeal, the court extensively considered the statutory regime and in particular, the scope of an owners corporation’s duty under section 62(2).
Interpretation of the duty to "renew or replace" fixtures and fittings of the common property
Upon extensive consideration of the statutory regime, the Court of Appeal unanimously held that Slattery J erred in the interpretation of the obligation to "renew or replace" and had misplaced reliance on existing authorities.
This court enunciated that the obligation under section 62(2) is directed at keeping the common property operational and thus, will only arise in circumstances where the common property is no longer operating effectively or has fallen into disrepair to the point where it is no longer in a state of good and serviceable repair pursuant to section 62(1).
On this interpretation, the obligation to replace requires no more than the installation of one thing in the place of another to achieve performance and functional significance. Where an alteration is sought for the purposes of improving or enhancing, it is beyond the scope of s 62(2) and thus, requires a special resolution under section 65A.
Owners corporation has no duty to increase capacity of ventilation system
In this case, the fact that the MEVS was operating according to its original design capacity meant that there could be no breach of section 62(2) by the failure of the owners corporation to replace the system with one that could sustain the additional ventilation capacity as requested.
The duty to "replace and repair" did not extend to the addition or replacement of a system that could serve each and every lot within the basement of the building upon the assumption that the owner of each such lot may at some point wish to use their lot for the retailing of cooked food.
Therefore, the owners corporation did not breach section 62(2) by reason of its refusal to alter or replace the exhaust ventilation system.
Does a breach of section 62(2) give rise to damages?
Although there is no statutory express right to damages for a breach of section 62(2), preceding decisions of the Supreme Court have not disputed that a duty of the owners corporation is owed to each lot owner and that its breach empowers the court to award damages.
In challenging the view of the previous decisions, the Court of Appeal sought to ascertain the legislative intent of the Act and in particular, favoured the obiter of McColl JA in Ridis v Proprietors of Strata Plan 10308 [2005] NSWCA 246. At [115] McColl JA observed that the Act is concerned with the allocation of responsibilities for a strata scheme and establishes a system of adjudication under Chapter 5 to be the vehicle through which the owners corporation discharges its section 62 duties.
As section 62 does not create a liability for damages, as opposed to other sections (including section 65), the court was of the opinion that the legislature did not intend a breach of section 62 to sound in damages or constitute an offence under the Act.
Strata scheme disputes generally not intended to be resolved by payment of damages
The Court of Appeal also considered section 138 and section 207 in supporting that a breach of section 62 does not give rise to damages. Under section 138(1) of the Act, an Adjudicator is empowered to make orders to settle disputes concerning the failure of an owners corporation to perform its section 62(2) duties, whereby an order is to have effect as a decision of the owners corporation (section 207).
Further, section 138(3)(d) expressly states that an Adjudicator cannot order the payment of damages in settling a dispute under subsection (1). Therefore on this construction, the court held that disputes as to strata schemes generally are not intended to be resolved in a manner which involves the payment of damages.
Notwithstanding that the primary judge held that Dr Thoo could claim damages for the breach of section 62(2), the Court of Appeal declined to follow the first instance decision and found first, that there had been no breach of section 62; and secondly, in light of the above reasoning, even if there had been such a breach by the owners corporation, the lot owner would not automatically be entitled to damages.
Decision has implications for both strata lot owners and owners corporations
The decision of this case has significant ramifications for lot owners in clarifying and reducing the obligations of an owners corporation, coupled with the removal of a lot owner's private right to damages for breaches of an owners corporation's statutory duty.
Therefore, lot owners should be adequately aware of their rights and the new limits imposed on owners corporations and their statutory duty to renew or replace fixtures or fittings on common property.