In brief - NSW Supreme Court declares obligation in strata management statement and by-laws to appoint the same managing agent to all building components inconsistent with NSW strata legislation. Managing agents and their insurers, and owners in mixed use buildings should consider the lessons of the recent "Finger Wharf" case.
In September 2022 the NSW Supreme Court considered in Walker Corporation v The Owners - Strata Plan 61618 [2022] NSWSC 1246 the strata management statement (SMS) and by laws for a mixed use building known as the "Finger Wharf" at Woolloomooloo.
The Court held as uncertain, beyond power (ultra vires) and inconsistent with NSW strata legislation a "Challenged Article" from the SMS and related "Challenged By-Laws" of the constituent strata schemes. The challenge was made to provisions that require constituent owners' corporations (OCs) to appoint, as the strata managing agent for the strata scheme, the same managing agent appointed to the whole building by a building management committee (BMC) established under the SMS.
This requirement is often a source of dispute amongst owners in mixed use buildings.
Main takeaways
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Managing agents: Consider whether it is appropriate to continue in both roles. Doing so may give rise to claims of a conflict of interest arising from a failure to properly perform your functions in the best interests of all owners you represent.
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Insurers: Consider premiums and claims that may be brought against managing agents who are engaged by both the building manager and owners' corporation(s) in the building.
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Owners: Consider an update to the building SMS and by-laws to remove any requirement that the agent for the building and the schemes must be the same.
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Others: Anyone else concerned by the exercise of powers bestowed on a "joint" managing agent, whether in relation to a building or a strata scheme, might consider the validity of the relevant covenants.
Background of the Finger Wharf
The Finger Wharf is subdivided into eight three dimensional leasehold lots, each subject to a 99-year lease from Transport for NSW (TfNSW). TfNSW remains the owner and landlord of the land (and water) upon which the wharf is located.
Of the eight leasehold lots, one lot is used for a hotel. The other seven lots are further subdivided into strata schemes, each of which is comprised of registered leases to:
The BMC is established by the SMS for the wharf. Its nine members are TfNSW as the owner of the land, the leasehold owner of the hotel lot and the seven leasehold OCs.
The BMC at the Finger Wharf appointed McCormacks as the building's "managing agent".
The Challenged Article and Challenged By-Laws
Challenged Article
The SMS provides:
Members which are owners corporations must … appoint and retain under section 28 of the [1996] Management Act the same Strata Manager [managing agent] the Committee appoints under this clause (Article 8.11).
The SMS also provides that the OCs must ensure that their by-laws conform with the SMS.
Challenged By-Laws
The by-laws of two of the three OCs that challenged the SMS include a by-law that provides:
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.
Dispute arises over appointment of strata managing agent
In about June 2022, three of the OCs passed resolutions in a general meeting appointing Strata Choice as the OCs' strata managing agent (not McCormacks).
When disputed by another owner, the three OCs contended that the Challenged Article was "not binding on them" or should be set aside, and that the Challenged By-Laws were "invalid or unenforceable".
The 2015 Amendments to NSW Strata Legislation
The judgment provides a detailed analysis of the statutory context of the strata scheme legislation in NSW, particularly in relation to its application to mixed use strata schemes. Since 2015 that legislation has provided:
A strata management statement may include particulars relating to … :
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(b) the appointment of a managing agent" (clause 2 of schedule 4) [emphasis added]; and
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that "by-laws may be made in relation to the management, administration, control, use or enjoyment of the lots or the common property and lots of a strata scheme" (section 136(1) of the Strata Schemes Management Act 2015 (NSW) (Management Act)).
The Challenged By-Laws
Uncertainty
The Challenged By-Laws were held to be uncertain because, whilst providing for the appointment of a strata managing agent (ie, the managing agent appointed by the BMC), they did not:
The Court referred to:
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the 2015 Management Act that requires an agreement with the agent (section 72); and
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the power of the Tribunal to appoint an agent, in relation to which Parliament "was careful" to give the Tribunal power to specify the terms of that agreement including remuneration.
The Court was critical of the Challenged By-Laws as once the managing agent was appointed by the BMC, each OC would have no alternative but to agree to whatever terms the managing agent may nominate, including "most obviously" the agent's rate of remuneration.
This "absurd consequence" demonstrated the "unworkability" of the Challenged By-Laws that were declared "void for uncertainty".
Ultra vires
The ultra vires question is whether the Challenged By-Laws were made "in relation to the management, administration, control, use or enjoyment of the lots or the common property and lots" (section 136(1) of the Management Act).
The judgement provides that this language "focusses on the [physical activity which takes place on the] lots and the common property" and that it is difficult to see how the appointment of a strata managing agent to administer the whole of the … scheme would fit within this language". However, it was not necessary to make a "final decision" on this issue.
Inconsistency with Statute
The appointment of a strata managing agent by an OC requires an ordinary resolution of the OC in a general meeting. The parties agreed that an OC is unable to accept a corporate obligation (eg, a contractual undertaking) to make an appointment, as it "would be necessary for there [also] to be obligations enforceable on the individual lot owners to attend and vote".
The Court considered there to be nothing in the by-laws which "suggests that they impose any such voting obligation". Further, if they did, for reasons set out in relation to the Challenged Article (below) they would be "inconsistent" with the other provisions of the 2015 Management Act.
The Challenged Article
Uncertainty
The Court held that its "reasoning on the uncertainty point of the challenged by-laws applies equally to" the Challenged Article which is "void for uncertainty".
Ultra vires
Under section 99 of the 2015 Management Act, "a strata management statement for the building and its site" must be registered (unless a waiver from the Registrar General is obtained).
The question that arose for the Court is whether:
… requiring the appointment of a particular person as strata managing agent by a constituent OC is part of the 'management … of the building and the site'.
The Court determined that the terms of the Development Act were not "wide enough" to require the OCs to appoint the BMC's managing agent as their strata managing agent, with two features standing out:
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The allocation of "shared expenses" for "shared facilities or services" that imply that where facilities or services are not shared they fall outside the purview of the BMC. Not all expenditure by an OC is treated as expenditure of managing the building as a whole, such that 'management … of the building and the site' does not extend to a "complete takeover of management of all of the function which may be delegated by an OC to a strata managing agent under the 2015 Management Act".
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In considering the "particulars" (a natural instance which illustrates a wider principle) referred to in clause 2 of schedule 4, it is "natural" to consider the term "managing agent" to refer to a person who is to discharge functions of the BMC under the SMS, rather than a strata managing agent who is to discharge functions of the OC under a strata scheme.
The reference to "managing agent" in clause 2 of schedule 4 was read as a reference to an agent of the BMC.
The Court also considered the BMC's power to make "service contracts" (clause 4 of schedule 4). It was held that this phrase must be confined to services provided to the BMC and does not include acting as a strata managing agent for an OC.
Inconsistency with Statute
Section 105(5) of the Development Act provides:
A strata management statement has no effect to the extent that it is inconsistent with … another Act or law.
There was common ground between the parties that the concept of inconsistency "extends to indirect conflicts between a right and an obligation which results in one practically negating the other".
The Court held that the Challenged Article was "indeed inconsistent with the 2015 Management Act".
The OCs arguments were summarised in three points:
1. The transfer of choice of a "strata managing agent" for the OC (distinguished from a "managing agent" for the BMC) infringed the Management Act that provides:
An owners corporation must not delegate any of its functions to a person unless the delegation is specifically authorised by this Act (Section 10(2)).
2. The Challenged Article is inconsistent with the Management Act that provides:
… appointment is to be made by instrument in writing authorised by a resolution at a general meeting of the owners corporation (Section 49).
3. The Challenged Article overrides the right of lot owners at a general meeting to vote as they chose in deciding whether and whom to select as the agent, by imposing an obligation that is also inconsistent with section 49 and that interferes with "lot-owner democracy", which Parliament has been reluctant to interfere with (as any compulsory appointment of a strata managing agent is limited to a period of two years).
Ramifications of the NSW Supreme Court's conclusion
The Court held that both the Challenged Article and the Challenged By-Laws are invalid.
Any strata management statement or by-laws that include an obligation on an OC to appoint the same managing agent as the BMC or any other OC is likely to be inconsistent with NSW strata legislation and invalid.