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Are Body Corporate Powers Enough


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Michael Teys' paper presented at recent ACCAL conference

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Are Body Corporate Powers Enough

  1. 1. Are Body Corporate PowersEnough – the case for theaffirmativeACCAL, 16 March 2012Michael Teys7th Annual ACCAL Conference 2012 – 15 -16 March 2012
  2. 2. BackgroundThis is the case for the affirmative in a debate ‘Are Body Corporate Powers Enough’ for the7th Annual ACCAL conference, Sydney 15 & 16 March 2012. Neville Allen and CarolynChudleigh, Holding Redlich, NSW will argue the case for the negative.The purpose of the session is to examine ways strata schemes are now expected toparticipate in technologies or assume responsibilities that are arguably beyond their statutorypowers, functions, and capabilities. Examples include; entering into care and maintenanceagreements for land outside their parcel, participating in sustainable energy waste and waterrecycling programs (either as agent for their member consumers or as part owner (oroperator) and providing bus and meal services for their (retiree) residents).Today’s consumers expect many of these opportunities and consent authorities and theirgovernment agencies increasingly require others.Main Points for the Affirmative1. The powers of strata entities are sufficient for the purpose for which these entities exist; to control manage and administer common property.2. Legislative reform is not required to enlarge powers if required and appropriate to meet changing market and urban planning demands because the by-law making powers serve this purpose.3. Extending statutory powers, functions and capabilities further, as has happened for example in Queensland, unnecessarily risks the preservation of collective property.IntroductionThe historian and moralist, Lord Acton expressed this opinion in a letter to his bishop in1887, ‘Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men.’Acton was referring to absolute monarchies as a form of government. Examples of absolutepowers corrupting are Roman Emperors (who declared themselves Gods) and NapoleonBonaparte (who declared himself Emperor).Regarding the form of government we are concerned with at this conference, ownerscorporations and bodies corporate, absolute power to engage in a range of commercial andlifestyle services, whether demanded by the community and government agencies or not, willcorrupt the preservation of collectively owned common property title.The powers of strata entities are sufficient and have embedded a mechanism for self-determination of incidental powers in the form of bylaws and rules that makes the enlarging© Copyright TEYS Lawyers 2012 2
  3. 3. of statutory powers not only dangerous, as we have seen already in Queensland, but alsounnecessary.The Present PowersThe primary powers for owners corporations in New South Wales are typical of the powers ofthe majority of strata laws in Australia.In New South Wales these powers come from two pieces of legislation; the Strata Schemes(Freehold Development) Act 1973 (the Freehold Act) and the Strata Scheme ManagementAct 1996 (the Management Act). There are no fewer than 38 heads of power in these twostatutes.The Development Act is the source of power for what might be described as the fundamentalproperty rights for an owners corporation: • To hold common property ss.18 and 20; • To acquire additional common property s.19; • To transfer or lease common property s.25; • To create or vary easements, restrictions and positive covenants s.26; • To consent to the dedication of common property for public purposes s.27; • To vary a strata plan s.50; and • To apply for termination of a strata scheme s.51.The Management Act contains a more extensive and broader range of powers that are bothadministrative and proprietorial in nature including these: • To employ persons to assist in exercising its functions s.13; • To appoint an executive committee s.16; • To pay the executive committee for their work s.25; • To appoint a strata managing agent s.26; • To delegate functions to a strata managing agent s.28; • To appoint a caretaker s.40 B; • To make, revoke or amend by-laws ss.43 and 47; • To issue notices for breach of by-laws s.45; • To grant exclusive use and special privileges of common property s.52; • To determine what it renews, replaces and repairs s.62 (3); • To carry out work that is the duty of an owner or occupier s.63; • To carry out work necessary to remedy defects within a lot that affects another lot or common property s.64; • To enter property and to carry out work s.65; • To authorise or make changes to common property s.65 A; • To grant a licence to use property s.65 B;© Copyright TEYS Lawyers 2012 3
  4. 4. • To pay money from its administrative fund s.68; • To pay money from its sinking fund s.71; • To distribute surplus funds to owners s.72; • To levy contributions s.76; • To waive interest or and allow discounts for early payment contributions s.79; • To recover contributions as a debt with interest and expenses s.80; • To pay for emergencies s.80 C; • To seek legal advice and take proceedings s.80 B; • To effect insurance ss.83, 87 and 88; • To apply for exemption from unnecessary or impractical insurance s.86; • To make or amend entries on the strata roll s.99; • To borrow money and secure interest s.110; • To dispose or deal with a lot or lease s.110; • To provide services and amenities by agreement to a lot owner s.111; • To transfer or lease common property s.112; and • To represent owners in proceedings relating to common property s.227.It is the way of strata statutes for these powers to be tempered by various caveats andrestrictions on their use. These are, as you would expect, of graduating severity in proportionto the gravity of their consequences for members of the scheme. The fetters on stratapowers are conditional or procedural.Conditional powers are ones where the power is granted on certain conditions expressed inthe empowering legislation. For example, s.62 (3) the Management Act, empowers anowners corporation to determine what common property it renews, repairs and replaces.This might be exercised when members of the community determine that the gym is of nouse to them or a fountain is an indulgent use of water and energy. However, this power mayonly be exercised on the three conditions expressed in the legislative provision; that it isinappropriate to maintain, repair or replace the particular item of property, and the decisionwill not affect safety or detract from appearances.Our example of the power to decide what will be renewed, repaired and replaced alsocontains a procedural condition; that the determination be made by special resolution. InNew South Wales this is a resolution passed at a general meeting where the votes againstthe motion are not more than one-quarter of all the unit entitlements of those entitled to voteat the meeting (whether or not those people actually vote): Cl. 18, Sch. 2 Management Act.The hurdle rate for special resolutions differs around the country. For present purposes whatis material is that there is a procedural hurdle on the exercise of the power.The conditional powers and procedural terms upon which powers are granted help strataentities walk that fine line between respecting the rights of the individual on the one hand andthe will of the majority on the other, while not being hamstrung by the apathy of the© Copyright TEYS Lawyers 2012 4
  5. 5. disengaged. The NSW legislation for expending funds on legal advice and commencing legalproceedings makes the point. On matters legal various enactments: • Grant an owners corporation the power to sue (s 50(1)(c) Interpretation Act 1987 (NSW) 1987); • Require an ordinary resolution at a general meeting to expend funds on legal advice and to start proceedings (s 80D); • Exempt by regulation expenditure on legal advice and the taking of legal proceedings if the reasonably estimated costs will not exceed a prescribed sum (Reg.15 Strata Schemes Management Regulation 2010); and • Further exempt absolutely from restrictions on expenditure and lawsuit, the recovery of unpaid contributions and interest (Reg.15).This is as it should be on an important issue like taking legal advice and commencing legalproceedings. Such action might alter rights and responsibilities of members and lead to thembecoming personally liable for costs for their lawyers and their opponents in the event thatthe owners corporation fails in its action.The regime of powers on this issue is as workable as it is appropriate. Firstly, the committeeis absolutely free to turn on its own and commence proceedings to recover contributions andinterest, as it must if it is to fund its statutory undertakings. Secondly, the committee is free toseek advice without reference to the general assembly in going about the day-to-daybusiness of the scheme. This expenditure is capped in much the same way as expendituremight be capped in any business or undertaking according to the rights and responsibilitiesof the operatives seeking the advice.Beyond this spending limit for advice and before committing the entity to legal proceedings, amandate is required at a general meeting. In New South Wales the mandate is by ordinaryresolution. A simple majority at a general meeting is usually not hard to get. Most strataowners are disengaged in the affairs of the strata entity most of the time so their positiondoes not compromise the will of the engaged majority who will vote for or against the legalexpenditure in excess of a particular sum on the merits of the case put to them. It might, ofcourse be otherwise if the procedural hurdle for suing and expending funds with lawyersrequired a higher order resolution as it does for example in Victoria. A special resolution isrequired in Victoria to commence proceedings which in that jurisdiction means at least a 50%vote for the resolution if it ultimately passes first as an interim special resolution and thenbecomes final by surviving the subsequent 29 day period for reversing the decision. Highhurdles favour wrongdoers because proponents of legal action must mobilise those who areusually disengaged and don’t vote to get the required majority to access the justice system.The underlying purpose of strata entities must inform our thinking on the necessity for thissomewhat complicated but nevertheless extensive array of powers. These entities have themanagement, control and administration of common property and the schemes that serve© Copyright TEYS Lawyers 2012 5
  6. 6. the individual lot owners. They are custodial rather than commercial in nature. They servethe micro built environment of their members rather than the broader community. They areabout the preservation of property rather than the pursuit of a higher purpose. And so theirwings are clipped.The Power to Enlarge Incidental PowersDespite the narrow focus of strata entities, the legislation from which they spring does notdeny them some measure of flexibility and growth. Wherever they are located, strata entitiesenjoy the delegated power to make new laws for themselves. These take the form of by-laws, rules or articles as they are variously called in our different states and territories.The by-law making powers are wide. Some strata laws simply provide for the power andleave the law of ultra vires to do the work of constraining the power, most prescribe a list ofcategories about the subject matter of these rules. Even then, in New South Wales, thecategories are broad and come with a catch-all provision that by-laws are permissible onmatters appropriate to the type of strata scheme concerned. By this power, a by-law for aserviced apartment scheme in New South Wales operating as a health retreat might providered meat must not be eaten on site.In Queensland, the same result could be achieved. There, by-laws may regulate the use andenjoyment of lots and common property (s 169 Body Corporate and CommunityManagement Act 1997). The limitation on these delegated law making powers include that aby-law must not be oppressive or unreasonable, having regard to the interests of all ownersand occupiers of lots in the scheme and the use of the common property for the scheme (s180 (7) BCCMA). Where a scheme is described at the outset in its Community ManagementStatement as being of a particular character, in this case a health retreat, and having regardto secondary objects of the Act set out in section 4 including to promote economicdevelopment by allowing flexible management arrangements, the encouragement of tourismpotential (health and well being tourism in this case), to provide bodies corporate with theflexibility they need to accommodate changing circumstances and future trends, baring massoutbreaks of iron deficiency, red meat eating restrictions could be upheld.In Victoria a different approach is taken. There the list of matters about which a rule may bemade is set out in a more expansive way but there is no catch-all and the rules must fit underthe general confines of a rule for the purpose of the control, management and administration,use or enjoyment of the common property or a lot: s 138 & Schedule 1 Owners CorporationsAct 2006 (VIC). Our health retreat and red meat eating by-law here will almost certainly fail. Itmight be pressed under the use of common property head of power for making rules or moreextremely under the behavior of owners, occupiers and invitees on common property but thatwould leave them to retreat to their lots for a feed.The absurdity of this by-law making example illustrates the very wide scope for self-determination and regulation by the making of by-laws and rules under our present strata© Copyright TEYS Lawyers 2012 6
  7. 7. laws to assist people to live, work and play as they might in their strata and community titledproperty.The powers of strata entities, including the by-law making power specifically, are enough todo the increasing range of things required of entities for the control management andadministration of common property, by market demand and the aspirations of our urbanplanners. By these delegated powers strata entities can already, and indeed are, engaging inthe care of land outside their schemes that might be used for recreational or environmentalpurposes, to engage in sustainable energy initiatives and undertakings and to provide arange of services to meet the needs and wants of specific classes of people living in stratacommunity. The question for the future of strata, the theme of this conference, is not one ofadequacy of the powers but rather the extent of the undertakings power and the effect ofunbridled, or absolute power to extend the scope and nature of the humble strata entity.The wide scope of powers already existed and embedded in the strata laws through the by-law making powers survives, indeed is permitted by the ring fencing of powers by theprovisions of the statutes themselves and the law of ultra vires, taking its lead, as it mustfrom the terms of the empowering legislation and the very purpose of the entities creation.The Risk to the preservation of Property of Absolute PowerThe point to the doctrine of ultra vires is to preserve the assets of an entity with limitedpowers: Re K L Tractors Ltd [1961] HCA 8 per Fullagar J at [5]- ‘The so called doctrine of ultra vires was evolved for the protection of corporations of limited capacity… it is because of this that persons who deal with such a corporation are said to be put upon inquiry as to the powers of the corporation. The concern of the law is that the monies or the property of a corporation shall not be transferred into other hands by an unauthorised act of the corporation, and that, if such an unauthorised transfer does take place, the corporation shall, so far as possible, be saved from incurring loss thereby.’This principle was applied in Humphries v The Proprietors ‘Surfers Palms North’ Group TitlesPlan 1955 (1994) 179 CLR 597 to prevent the expenditure of common funds on a service, anindivisible part of which was for letting services for such of the owners who required thatservice. One section of the relevant law empowered a body corporate to ‘enter into anagreement, upon such terms and conditions (including terms for the payment ofconsideration) as may be agreed upon by the parties thereto, with a proprietor or occupier ofa lot for the provision of amenities or services by it to the lot or to the proprietor or occupierthereof’. The other relevant section of the law provided a body corporate was prohibited fromdisbursing its funds other than for the purpose of carrying out its powers and duties under theAct. It was held the body corporate had no power to enter into the contract to procure theprovision of that letting service and that, as the letting provision was not severable, thecontract was wholly void.© Copyright TEYS Lawyers 2012 7
  8. 8. The powers of bodies corporate in Queensland were enlarged by the BCCMA and the effectof this on the doctrine of ultra vires was recently examined in the case of Henderson v TheBody Corporate for Merrimac Heights CTS 19563 [2011] QSC 336. This case concerned theability of a resident caretaker to provide additional mowing service to the owners of some lotsand be paid for this from the common funds of the body corporate without agreements or anyefforts at all to recover the costs of the mowing of lots from those owners who had accessiblelawns and received these services. The Plaintiff’s case hinged on the doctrine of ultra vires topreserve the funds of the scheme and relied on Humphries. At the relevant time inHumphries, the power of a body corporate to engage a person to provide services existedonly by implication, as incidental to the express power to agree with persons to whom theservices were to be provided. But s.167 of the Body Corporate and Community ManagementAccommodation Module, applicable at the relevant time for Henderson expressly authoriseda body corporate to engage the service provider and merely, to ensure ‘to the greatestpracticable extent’ that the user pays.His Honour Justice McMurdo’s reasons at [20] seem, with respect, at odds with the rationalefor the doctrine of ultra vires as stated by the High Court in KL Tractors and as applied inHumphries when he said, ‘The defendant’s argument, if accepted, would cause considerable difficulty in practice. The validity of an agreement between a body corporate and the service provider would depend, in many cases, upon facts and circumstances of which the latter could be unaware. In particular, it would depend upon whether the body corporate had made an agreement, with each and every relevant lot owner, upon terms by which the costs of servicing a certain lot would be assured of recovery from its owners.’While Henderson remains good law in Queensland (and the decision was not appealed) thedoctrine of ultra vires has been made redundant and bodies corporate are free to supply anyand all of the following services to lot owners and occupiers under section 167Accommodation Module: • Maintenance services which may include cleaning, repair, painting, pest prevention or extermination or mowing; • Communication services, which may include the installation and supply of telephone, intercom, computer data or television; and • Domestic services, which may include electricity, gas, water, garbage removal, air- conditioning or heating.The risk to the preservation of assets is this: s.167(3) provides the body corporates duties torecover the costs of these services from users of the services to lots is merely to ensure ‘tothe greatest extent practicable’ that the user pays; per McMurdo J in Henderson at [22].© Copyright TEYS Lawyers 2012 8
  9. 9. ConclusionThis enlarging of powers as upheld in Henderson changes the fundamental nature of bodiescorporate in Queensland.In the hands of a developer with control of the body corporate (absent initial periodrestrictions as is the case in Queensland) or an over zealous entrepreneurial committeeintent on deriving some income to defray rising levies and falling investment return andcapital gains, the humble body corporate morphs into a multi-faceted property servicesprovider.What could possibly go wrong! When contemplating the increase of powers for strata entitiesto meet the changing needs of the market and our planning authorities, we should be carefulwhat we wish for.© Copyright TEYS Lawyers 2012 9