Review of Strata Legislation in NSW

Review of Strata Legislation in NSW Submission by the Owners Corporation Network of Australia Limited

Part 2 Improving and Enhancing Strata Legislation

May 2012

Prepared by: Gerald Chia, Ingrid Jackson, John Kaunitz, Karen Stiles, Brian Wood

PO Box Q933, Queen Victoria Building, NSW 1230 ABN 153 981 205 Table of Contents

1. Introduction...... 4 2. Executive Summary...... 5 Selected General Recommendations from Part 1...... 6 3. Establishment of new strata schemes...... 8 3.1 Getting off on the wrong foot?...... 8 3.2 Initial Period...... 8 3.3 The First AGM...... 11 4. Governance...... 13 4.1 General Meeting Quorum, Voting and Proxies...... 13 4.2 General Meeting Conduct...... 14 4.3 Executive Committee Operation...... 16 5. Caretakers and Building Managers...... 17 6. Common Property, Section 65A and Apartment Renovations...... 20 6.1 Common Property...... 20 6.2 Section 65 and Apartment Renovations...... 20 8. Miscellaneous Administrative and Other Matters...... 23 8.1 Chairing of Meetings...... 23 8.2 Sinking funds...... 23 8.3 Strata Roll Information...... 23 8.4 Public Liability Insurance Cover...... 23 8.5 Strata Management and Service Contracts...... 24 8.6 Large and Small Schemes...... 24 9. Conflict resolution, NSW Fair Trading and CTTT...... 26 9.1 Enforcement of by-laws...... 26 9.2 Clarification of the Act - NSW Fair Trading Advice...... 26 9.3 Adjudication and CTTT Rulings...... 27

Part 2 - Improving and Enhancing Strata Legislation 2/37 10. Comments on Other Submissions...... 29 10.1 Clover Moore Submission...... 29 10.2 Dynamic Property Services Submission...... 29 10.4 Makinson & d’Apice Submission...... 29 Summary of Recommendations...... 30 Appendix A – Certificate of Occupancy: Schedule of Required Documents...... 34 Appendix B - Apartment Renovations and s65A...... 35 Appendix B - Apartment Renovations and s65A...... 35

Part 2 - Improving and Enhancing Strata Legislation 3/37 1. Introduction The Owners Corporation Network of Australia Limited (OCN) welcomes the government’s review of the State’s strata and community title laws as a very timely and important opportunity to bring about the transformational improvement in the operation, management and regulation of strata schemes in NSW. This improvement is sorely needed to address the specific issues and problems that have become evident since the last major review of the Act in 1996. The purpose of OCN’s submission is twofold: 1. To identify the overarching issues in strata legislation, governance and support which need to be addressed in order to bring about a qualitative improvement in strata living and strata management in NSW, as well as to reduce disputes and the associated government costs. Some of these are whole-of-government considerations. 2. To provide, as input to the review, a summary of specific issues and proposed changes to the Strata Act, identified by OCN members. This document is Part 2 of OCN’s three part submission, addressing the second of the above objectives. It provides a summary of specific issues and proposed changes relating to the existing Strata Schemes Management Act. Part 1 of our submission Improving Strata Living and Governance in NSW examines overarching issues in legislation, governance and support which need to be addressed in order to bring about a qualitative improvement in strata living and strata management in NSW and to reduce government costs associated with conflict resolution. Part 3 of our submission addresses Strata Renewal and Termination. We understand this issue has been a major driver for the proposed review of the Act. OCN’s submission relates primarily to the Strata Schemes Management Act 1996 and related regulations, touching on other legislation as appropriate.

The following abbreviations are used in this document:

OC Owners Corporation (the term used in NSW) and Body Corporate (the term used in most other states. EC Executive Committee SSMA or The Act Strata Schemes Management Act 1996, Strata Schemes Management Regulation 2010, Strata Schemes Management Amendment (Sinking Funds) Regulation 2006 BCCM Act Queensland Body Corporate and Community Management Act 1997and Regulations. NSWFT New South Wales Fair Trading CTTT Consumer, Trader and Tenancy Tribunal AGM Annual General Meeting

Part 2 - Improving and Enhancing Strata Legislation 4/37 2. Executive Summary The current public consultation process and OCN’s owner surveys have identified a number of weaknesses and problem areas in the current Act and regulations that require urgent attention. Key areas which need to be addressed include:  Establishment of new schemes  Governance of strata schemes  Recognition by the Act of the role of building managers, not only caretakers, as the parties involved in the management of the scheme  Apartment renovations and works affecting the common property  Dispute resolution by NSW Fair Trading and CTTT A brief overview of these issues is provided below. Our specific recommendations to improve the Act are discussed in full detail later in this Part. The establishment of new schemes One of the most significant problems in strata living and management is a lack of effective consumer protection for people who purchase apartments in new strata schemes. The NSW public justifiably expects that when people purchase a new apartment two basic requirements are met: a. The building and the lot are soundly constructed to comply with design standards suitable for multi-dwelling living and are free of defects b. The governance framework for the new scheme is sound, reflects the interests of future owners and is free of unreasonable encumbrances and liabilities. Arguably, the most significant problem of strata ownership and living in NSW today is a systemic and comprehensive failure of relevant legislation to protect the interests of owners in new strata schemes and to ensure the above requirements are met. Although certified as sound, in practice, new buildings often have major defects and newly constituted Owners Corporations, hardly organised or prepared to deal with ensuing problems, have extraordinary difficulty in gaining redress from developers, builders, certifiers and insurers. Further, owners often find that contractual arrangements set up by developers as the original owners of the scheme tie them to strata managers, building managers and service providers for lengthy periods under unfavourable terms. Part 1 Section 5 covers issues for whole-of- government attention and Section 3 below sets out recommendations to provide more effective regulatory protection under the Act. Governance Existing governance arrangements of strata schemes suffer from a number of weaknesses:  Lack of quorums at general meetings due to the apathy of owners  Certain owners or developers controlling large numbers of proxies, exerting undue influence on general meeting proceedings and decision making  ECs made up of volunteers, having insufficient knowledge of the Act or their communal responsibilities, acting inappropriately

Part 2 - Improving and Enhancing Strata Legislation 5/37  Inability for the OC to adjust the timing of Annual General Meetings without CTTT approval.

Our recommendations to address the above deficiencies include:  Absentee voting at general meetings by means of voting papers modelled on the Queensland Body corporate and Community Management Act (QBCCM Act).  A two-stage notice process for general meetings to encourage increased owner participation  Code of conduct by-law for Executive Committees  OC to be able to change AGM timing by special resolution at a general meeting. Discussion of these topics and recommendations are to be found in Section 4.

Apartment renovations and works affecting the common property Section 65A of the Act was introduced in 2004 to provide a mechanism to allow significant changes to common property through approval by special resolution at a general meeting. However, a recent CTTT adjudication decision ruled that this provision should apply to any works affecting common property, including routine apartment renovations that involve for example bathroom re-tiling. Further, the ruling seems to imply that ECs can only approve essential repairs and maintenance without special resolution approval. Although this view is not yet widely known or followed, it has the potential to create highly dysfunctional distortions in the operation of the Act. This issue is covered in more detail in section 5 and the simple remedy of clarifying the intention and application of s65A of the Act is covered in Recommendation 19.

By-law Enforcement, Disputation, NSW Fair Trading, CTTT

Key problem areas under these headings include: . Owners Corporations lack the necessary authority and means to deal with urgent situations involving blatant by-law (e.g. illegal parking, noise, dumping of rubbish etc.) . There is no mechanism for NSW Fair Trading to provide official rulings regarding the interpretation of the Act. Consequently, the only option to gain clarification is by creating a dispute . CTTT rulings lack consistency and do not create a precedent which would be helpful to resolve similar situations. Interpretation of the Act can ignore the intentions of the Act and practical implications and consequences. There seems to be a significant variation in approach and rulings depending on the adjudicator involved. . Whilst CTTT decisions concisely summarise key facts in submissions, perhaps due to time pressures, often little reference is made to arguments presented or why they have been ignored. The purely paper based adjudication process provides no opportunity for clarification of issues before a decision is handed down. Recommendations related to these topics are covered in Section 62.1

Selected General Recommendations from Part 1 Part 1 of our submission deals with the general changes we see as necessary to bring about general improvements in strata ownership, strata living and strata management in NSW. Part 1 presents a relevant backdrop to the proposed legislative changes that are presented here

Part 2 - Improving and Enhancing Strata Legislation 6/37 in Part 2, and hence selected Part 1 recommendations, related to legislative change, are reproduced in the table below.

Part 1: Rationalising and Reshaping the Act Page A The proposed review of the NSW legislation should be considered as an opportunity to 8 reorganise and re-frame its contents with a view to producing a clearer and more effective governance instrument for NSW strata schemes, thus providing the foundation for transforming strata living and strata management in NSW for the better. In particular, the NSW Strata Schemes Management Act should be reorganised and its contents augmented to make the Act more accessible to lay Executive Committee members and to more clearly define and project the intended organisational and operational model for strata schemes. A complete rewrite is not considered desirable or feasible as concepts, reflected by the current Act, and existing case law would be lost. B Review the Act to identify key terms which should be defined; amend the Act to include such 8 definitions and, where ambiguities exist, clarify. C A revision of the Act should be viewed not only in terms of legislative improvement but as an 10 exercise in organisational and operational design. The aim here is to improve the Act as a governance instrument for strata schemes by articulating a clearer, more definitive and complete organisational and operational blueprint in terms of the roles, functions, responsibilities and rights of the key parties involved. For example it may be helpful to have in place in the Act (following s9): . Summary of the statutory duties of the parties involved in managing the scheme: the Executive Committee (and all office holders), strata managing agents, building managers and caretakers . Description of the mechanism whereby the EC or the OC could assign discretionary duties to the chairperson, to members of the EC or to a subcommittee of the EC, so as to complete and vary the organisational design of a particular OC, in order to address the general operational needs and particular issues faced by the scheme from time to time. E The structuring, style, approach and content of the Queensland Body Corporate and Community 12 Management Act (1997) (QBCCM ACT) and related regulations should be considered as a potential model and source of ideas for improving NSW strata legislation, with particular respect to: . Separating the main Act to cover concepts, principles and policies and using regulations to cover procedures, administrative and implementation details . Providing different sets of tailored regulations for various size and/or types of schemes, with a view to guiding the ECs of those schemes in the context of their particular environment and the associated issues . General meeting voting and other procedures that address issues identified in the NSW Act. L The Local Government Act should be amended to: 19 1. Require that to obtain a Certificate of Occupancy for a strata building, the developer must supply a set of documentation is available for the registration of the strata scheme, including plans, specifications and certification of the building by all relevant authorities. 2. Allow OCs to wheel clamp illegally parked vehicles on common property or, at the request of owners, in lots, and/or to remove such vehicles from the common property into the care of Council on the same basis, as if such vehicles were removed as illegally parked on streets.

Part 2 - Improving and Enhancing Strata Legislation 7/37 3. Establishment of new strata schemes

3.1 Getting off on the wrong foot? It is essential that new strata schemes are established on sound foundations. It is critical that the new strata scheme as well as the individual lots represent fit-for-purpose products. The interests of consumers, that is, members of the public who purchase lots in new schemes, must be protected. Protecting the interests of owners is particularly significant at least until the second general meeting, which is the first general meeting organised and conducted by a committee of new owners, and not only by the original owner. New owners are particularly vulnerable, to manipulation by developers, being a disparate group of inexperienced and poorly informed people lacking any organisation and must be protected. Careful regulation of the initial period of a scheme is therefore warranted. This topic and recommendations for necessary systemic change are also covered in Part 1 of our submission. The following recommendations set out the need for changes in the context of the prevailing environment and legislation.

3.2 Initial Period The Initial Period is currently defined as from establishment of the scheme until 1/3 aggregate unit entitlement is held by new owners, at which point the developer is required to call the first AGM within 2 months. This is a critical period when important decisions with long term impact on the building and its residents are made. However, consumers, namely interested purchasers and early owners, commonly have little knowledge of living in strata schemes, are not familiar with the building, don’t know each other and cannot gather information and knowledge easily. New owners are particularly vulnerable, to manipulation by developers, being a disparate group of inexperienced and poorly informed people lacking any organisation and must be protected. Careful regulation of the initial period of a scheme is therefore warranted. It is essential that new strata schemes are established on sound foundations and that the new strata scheme, as well as the individual lots, represents fit-for-purpose products. The interests of consumers, that is, members of the public who purchase lots in new schemes, must be protected. Protecting the interests of owners is particularly significant at least until the second general meeting, which is the first general meeting organised and conducted by a committee of new owners, and not only by the original owner (the developer). During the Initial Period the OC managed by the original owners (the developer) is subject to various restrictions set out in s113 of the Act , but other owners are effectively excluded from controlling the scheme, including the appointment of service providers to the scheme. The Act’s provisions leave a loophole because there can be a gap of 2 months between the end of the Initial Period and the First AGM, when s113 restrictions no longer apply. This loophole should be closed, but even then the situation would be open to abuse because at the first AGM an independent Executive Committee does not exist and the developer

Part 2 - Improving and Enhancing Strata Legislation 8/37 controls proceedings. This suggests that the Initial Period should be re-defined to end at the second general meeting, which is the first general meeting called by the first elected EC. There will always be differences in objectives between the developer and new owners. The first year passes very quickly for the new owners and it is almost universal that they are not prepared at the first AGM. It is imperative that better and more information is supplied by the developer to the owners as early as possible after occupation commences. It is also important to independently assess the building for potential defects as early in the building’s life as possible, especially in light of the recently introduced and unacceptably short 2 year limit for claims on ‘non- structural’ defects (which includes many life safety defects that are not easily identified. Naïve, uninformed owners are not equipped to assess defects and to negotiate defect rectification and warranty claims without external protection and support. The developer must be held responsible for his builder’s defects - the OC must deal with one party only and that should be the developer not the builder. Rights attached to any contract signed by the developer should automatically transfer to the OC once the building is handed over. The following recommendations address the above needs and considerations. Recommendation 1 Section 113 and other relevant parts of the Act should be amended so that the definition of the Initial Period and the associated restriction and provisions of s113 remain in force until the second general meeting of the Owners Corporation. This is likely to require changes to the Dictionary Definition of “initial period”, Schedule 2 cl.2 (1) S50 of the Act and possibly other parts, following amendments as suggested: a. The Dictionary definition of initial period should be amended to read: “initial period", in relation to an owners corporation, means the period commencing on the day on which that owners corporation is constituted and ending on the day on which there are owners of lots the subject of the strata scheme concerned (other than the original owner) the sum of whose unit entitlements is at least one-third of the aggregate unit entitlement at the commencement of the second general meeting” b. Schedule 2 cl.2 (1) should be amended to read: “(1) The original owner or, in the case of a leasehold strata scheme for which there is no original owner, the lessor of the leasehold strata scheme must convene and hold a meeting of the owners corporation, in accordance with Divisions 1 and 2 of Part 2, within 2 months of the expiration of the Initial Period. from the day on which there are owners of lots of the subject of the strata scheme concerned (other than the original owner) the sum of whose unit entitlements is at least one-third of the aggregate unit entitlement.” c. Section 113 (1) (c) should be amended to read: “(c) appoint a strata managing agent or a caretaker or other person to assist it in the management or control of use of the common property, or the maintenance or repair of the common property, for a period extending beyond

Part 2 - Improving and Enhancing Strata Legislation 9/37 the holding of the first annual second general meeting of the owners corporation,” Recommendation 2 The Act should mandate additional conditions to apply to the management of schemes during the Initial Period, including the following: . Strata managers and building managers/caretakers must be independent of the developer and/or builder and suppliers, and the absence of financial / commercial associations between these parties confirmed by statutory declarations provided to the OC at the first AGM. . Any commercial or financial associations or arrangements between service providers and the developer/builder, other than standard contracts, or the absence of such arrangements, must be declared in writing to the OC. . At the time of registering the scheme, the developer must file and hand over to the OC along with the Certificate of Occupancy the set of documents in Schedule A (three full copies), which describe, specify and certify the building(s) in the scheme. The set of documents must be certified by a suitably qualified professional to be correct and be complete. . Within 2 months after the establishment of the scheme the developer shall commission an independent assessor to prepare a defects report covering common property and all individual lots and this report is to be supplied to the OC, completed or not, at the first general meeting. . The developer is to retain an independent assessor, on behalf of the OC, to: o prepare a 5 year forecast of administration and sinking fund budgets and levies. (The first year’s budget must make provision for the cost of an independent building defects assessment and report (see below)) o set the administration and sinking fund levies for the first year to realistically cover the cost of running the building including all non-warranty maintenance contracts and repairs o certify that the levies for the first year are a reliable guide to purchasers for ongoing levy levels o review and certify the budgets and recommendation for the administration and sinking fund levies for the second year, as preparation for the first AGM. . The developer is to supply to every prospective purchaser the 5 year forecast and the one year forecast and the certificate. . The commissioning of a defects report should be a mandatory motion for the first AGM, so that new owners are alerted to the need to consider and in many cases act quickly to protect their rights. . The developer is to provide all prospective purchasers and new owners a Fact Sheet setting out the DA approved zoning, the approved use of the building, all DA conditions relating to the use of the building, and whether there are any sale and purchase conditions or other disclosures that relate to leasing and usage of units.

Part 2 - Improving and Enhancing Strata Legislation 10/37 S109 of the Act should be modified to ensure the S109 certificate includes this information or has such a Fact Sheet attached.

3.3 The First AGM This first general meeting of the new owners is extremely important. It is not uncommon for the developer to try to minimise the impact of owners on discussions and decisions. Yet this is the meeting at which owners need to be supplied with sufficient information to successfully elect a competent, independent Executive Committee and establish the operational framework for running the building for the next several years. Recommendation 3 The following procedure should be followed to call the first AGM: . A notice shall be sent to all owners (and known prospective purchasers), notifying them of the preliminary agenda and the time and place of the meeting two calendar months before the date of the meeting. The meeting is to be held at a time and place suitable for the majority of owners. The purpose behind this is to allow owners the opportunity to place items on the agenda. . A second notice is to be sent at least 7 days before the date of the meeting, within the normal required period, and be accompanied by the following particular items in addition to items currently in Schedule 2 cl.4: o A report from the developer, based on the principle of full disclosure, describing the scheme, its history, current state, any issues or any other information owners should be aware of in making suitable arrangements for the future management of the scheme o The list of service providers used to date, whether they have ongoing contracts, and their current contact details at the date of the AGM o The common property asset register and depreciation schedule o A maintenance schedule for common property assets o The defects report for common property and for individual lots, including details of investigations to date, repairs to date and a schedule of repair items planned and in progress . The sinking fund schedule for the first 10 years.

Recommendation 4 The agenda for the first AGM should include the following items in addition to those already listed in Schedule 2 cl.3 of the Act: “(j) to decide whether the defects report is accepted or whether a further inspection report should be obtained for the purpose of assessing the quality of building and need for warranty claims (k) to accept the documentation received from the developer/builder and to task the new EC to confirm that all required documentation has been received.

Part 2 - Improving and Enhancing Strata Legislation 11/37 (l) to decide whether legal assistance is required to provide assurance to the owners corporation regarding legal compliance and that involved parties have complied with legal requirements and that the interests of the owners corporation are protected.”

Part 2 - Improving and Enhancing Strata Legislation 12/37 4. Governance

4.1 General Meeting Quorum, Voting and Proxies. The current requirements for attendance and proxies at general meetings are problematic and open to abuse. The following are common risks and problems: . A general meeting quorum is one quarter of lot owners. Frequently a quorum is not achieved and, in this case, the meeting must be deferred for at least 7 days. . An owner may collect proxies and control a meeting with half of the votes present. With a minimal quorum, a proxy holder representing just over 12.5% of ownership would be able to control a general meeting or AGM and may gain absolute control of the scheme, for example, by voting that the number of members on the EC is to be one, and electing a single person. . When a general meeting is adjourned, those present at the time of the adjourned meeting will automatically represent a valid quorum, even though not all those present at the original meeting may be able to attend. The votes of and proxies held by those unable to attend the adjourned meeting will not be represented and, again, one or a few people with minimal ownership entitlements may gain complete control of the scheme. These risks and deficiencies are unacceptable and the provisions of the NSW Strata Act are lagging behind the QBCCM ACT and the Corporations Act which allow for absentee voting by voting papers sent by mail or electronically and thereby alleviate these problems. Allowing voting papers to be counted for the quorum will likely result in requirements being met and obviate the need for adjournment. Voting papers, as well as limiting the number of proxies any one person can hold, also alleviate the problem of “proxy farming”. The one restriction flowing from a voting system based on voting papers is that it either the introduction of amendments during the meeting is not allowed, or as per QBCCM ACT, it is allowed but makes their passage onerous and unlikely to pass. However, this is not an altogether undesirable consequence because reformulating motions on the spot may not provide sufficient time for proper consideration and does not give non-attending owners a say. This constraint of paper voting could be counteracted by providing opportunities for owner participation in finalising the agenda. See recommendations below - General Meetings Conduct. It is also important to limit the number of proxies that may be held by any one person at a meeting. Recommendation 5 The Act should be enhanced to formalise voting at general meetings through the use of voting papers, allowing for absentee voting. The QBCCM ACT 1997 provides a proven model.

Part 2 - Improving and Enhancing Strata Legislation 13/37 Recommendation 6 For schemes with 20 or more lots, a person must not hold proxies greater in number than 5% of the lots or proxies representing more than 5% of total entitlements. For schemes with fewer than 20 lots included in the scheme—more than 1 proxy.

Recommendation 7 When a General Meeting is adjourned, the adjourned meeting should be regarded as a continuation of the original meeting with voting papers and proxy forms, held by a person in attendance, counted for the quorum as well as for motions.

4.2 General Meeting Conduct Frequent criticisms of the administrative details relating to the conduct of general meetings are: a. Schedule 2 cl. 31 of the Act requires AGMs to be held within one month either side of the anniversary of the first AGM. The date of the first annual general meeting is arbitrary; it is determined by the date when new ownership reached 1/3 of unit entitlements. It is unreasonable that owners should be obliged to have AGMs at that same time of the year in perpetuity, when they may prefer to align with the financial year to simplify financial accounting. There is no reasonably simple provision for Owners Corporations to vary this. b. The 7 day notice period for a general meeting (Schedule 2 cl 32) is too short for owners to properly consider agenda items and explore implications. Owners may have no advance knowledge of the timing of the proposed meeting or a draft agenda which would allow them to propose amendments or to put their own motions to the meeting. The notice and the motions it contains on the attached agenda represent a fait accompli and the current system encourages developers and ECs to manipulate the system to ensure centralised control rather than to encourage collegiate agenda setting. c. Even though the Act requires the minutes of EC meetings to be circulated within seven days, minutes of general meetings are not required to be circulated until the notice of the next general meeting. This is not satisfactory, especially for schemes that may hold only one general meeting each year, and is not in the spirit of full disclosure to the owners. d. In cases of extreme apathy a situation may come about where an AGM quorum is not achieved. There should be a default provision to ensure that levies are raised.

Recommendation 8 An Owners Corporation should be allowed to change the “anniversary date” of AGM’s; this would require amending Schedule 2 cl. 31. The anniversary date would best to be tied to the end of the financial year, which could be varied by a special resolution at a general meeting. The QBCCM ACT provides a suitable model.

Part 2 - Improving and Enhancing Strata Legislation 14/37 Recommendation 9 Owners should be notified of Annual General Meetings through two notices as follows: . A first notification is to be sent to owners at least 21 days before the date of the meeting, together with a draft agenda containing all motions proposed by the EC and previously submitted by owners. Owners should be invited to submit additional motions to be received no later than 14 days before the AGM. . A second, final notice is to be sent at least 7 days before the date of the meeting, within the terms of Schedule 2, cl. 32 of the Act including the Agenda in final form, including alternative motions (as per QBCCM ACT) and voting papers (as per Recommendation 5).

Recommendation 10 Each AGM Notice should include an Annual Report of the EC, to be presented at the AGM by the Chairperson before the election of office bearers. The report is to be additional to the financial report etc. as set out in the current Act. The Annual Report is to describe: . achievements in the past year . plans and commitments for the up-coming year / 5 years . any other relevant information.

Recommendation 11 Within 21 days of a general meeting the minutes should be made available to owners via: a. email to all owners who have supplied an email address for the distribution of notices b. post to other owners c. posting on the Owners Corporation’s notice board or on the OC/OC nominated website, if one is required under bylaws.

Recommendation 12 Should a motion to set levies for the next 12 months not be passed at an AGM the levies for the following periods should be set as follows: . at the level recommended by the Treasurer, OR if none made or rejected . at the level of the existing levies plus CPI.

Part 2 - Improving and Enhancing Strata Legislation 15/37 4.3 Executive Committee Operation ECs consist of volunteers of varying experience and qualifications, often with minimal knowledge of the Strata Act or the scheme’s current management arrangements. The Act defines the duties of Secretaries and Treasurers, simply states that the Chairpersons are to chair meetings at which they are present, and sets out numerous specific provisions that apply to the operation of schemes. However this still leaves ECs with a great deal of flexibility in addressing the day to day business of the scheme and to carry out executive and representative roles and duties not spelled out by the Act. Recommendations below are intended to provide the needed further guidance. Some EC member abuse the provision to appoint another person to act in their place as member of the EC. A member may regularly appoint another to act in his/her place without attending any meetings thus, in effect, giving another member two votes. Such abuse must be prevented by limiting the appointment of acting members.

Recommendation 13 Include in the Act or in the Regulations a Code of Conduct for Executive Committee Members that includes the following: . To act honestly and fairly . To act in the best interests of the Owners Corporation . To attend at least 75% of meetings of the committee . To disclose to the committee, at the start of each meeting, any conflict of interest in a matter before the committee . To comply with committee process and procedure . To respect fellow members’ opinions and differences and foster a spirit of teamwork and co-operation.

Recommendation 14 The Act should make it clear that in addition to the office holders duties set out in the Act, the EC can, by passing formal motions, assign duties, responsibilities and the necessary discretionary spending authorisation to certain office holders, EC members or to a subcommittee of the EC. In doing so this does not diminish the responsibility of the whole EC.

Recommendation 15 The Schedule 3 Cl. 3 (1) of the Act should be amended to limit the appointment of acting members as follows: “(1) A member of the executive committee may, with the consent of the executive committee, appoint an owner or company nominee of a corporation which is an owner to act in his or her place as a member at any meeting of the executive committee but only twice between consecutive AGMs .”

Part 2 - Improving and Enhancing Strata Legislation 16/37 5. Caretakers and Building Managers Section 9 of the SSMA Who else may be involved in managing a strata scheme? formally recognises three such parties: the Executive Committee, strata managing agents and caretakers. Section 40A defines the term caretaker as follows: “40A Who is a caretaker? (1) A caretaker is a person who is entitled to exclusive possession (whether or not jointly with another person or other persons) of a lot or common property and assists in exercising any one or more of the following functions of the owners corporation for the strata scheme concerned: (a) managing common property, (b) controlling the use of common property by persons other than the owners and occupiers of lots, (c) maintaining and repairing common property. (2) However, a person is not a caretaker if the person exercises those functions only on a voluntary or casual basis or as a member of the executive committee. (3) A person may be both a caretaker and an on-site residential property manager. (4) For the purposes of this Act, a person is taken to be a caretaker for a strata scheme if the person meets the description of a caretaker set out in this section, regardless of whether the title given to the person’s position is caretaker, building manager, resident manager or any other title.” The above definition of the term caretaker thus encompasses three concepts; a. entitlement to a lot or common property in the scheme b. responsibility for building management and maintenance functions c. the opportunity to act as on-site property manager, a function usually representing commercial value that is enabled by access to the lot or common property in a). It would seem that the caretaker function was originally defined with a relatively small scheme in mind where a single person or family may carry out caretaking and residential letting functions as a single multi-faceted small business. The consequence is that the Act does not formally recognise or regulate the role of a building manager who does not have exclusive rights to common property or a lot in the scheme. This is unsatisfactory since in large buildings, building managers clearly play a significant role and, in conjunction with strata managing agents, cover the day-to-day management functions and can provide the workforce of the scheme in the form of concierge and maintenance staff. Therefore the s9 of the Act should, in the first instance, recognise building managers (in addition to caretakers) on the basis of their responsibilities as per s40 (1) (a), (b) and (c) as the party involved in the management of the scheme.

Part 2 - Improving and Enhancing Strata Legislation 17/37 Building management agreements are significant for a strata scheme, even if they do not involve on-site letting rights or exclusive access to common property or a lot. Legislation should therefore regulate the role of building managers in a similar way that strata managing agents are regulated. Building managers should be suitably qualified according to the size (value) of the building involved and the functions for which they are responsible. Secondly, the Act should further distinguish caretakers as building managers who have exclusive access to a lot or common property in the scheme. The resultant implied commercial interest associated with this aspect may justify recognition and further regulation by the Act, although requirements in this respect are not yet clear, with the exception of an extended tenure period. Even so, the present 10 year maximum duration for caretaker agreements is too long and should be reduced to maximum 5 years. The roles of building managers and caretakers encompass a range of very diverse situations, including for example: . A block of say 16 units where a resident caretaker is responsible for cleaning and light maintenance and at the same time acts as a letting agent for some apartments which are let to long term tenants . A 30 storey residential complex of 150 apartments where the building manager is responsible for building maintenance, the management and rectification of building problems on behalf of the Owners Corporation and also runs a serviced apartment operation for 100 of the apartments . A 60 storey residential tower with 250 apartments and a shopping complex where a full time professional building manager assists the Owners Corporation on a full time basis with all aspects of building management and maintenance, whilst providing a 24 hrs concierge service. Building managers and caretakers in these situations will have widely differing skills and require widely differing qualifications. The type of building management and caretaker agreements and the regulations required will similarly vary and requirements in this respect need further analysis. For example, in large buildings building managers have responsibility for significant capital assets of common property, and for understanding and administering increased complexities in such matters as WH&S. They often have the most frequent liaison contact with owners. They need technical skills and knowledge, project management skills, knowledge of relevant legislation (eg. the definition of common property_, and people management skills. It would assist owners if building managers would be required to demonstrate a standard of competence commensurate with the functions they have been retained to exercise. Legislative requirements in this area need further analysis. It is clear however that the current definition and treatment of the caretaker function in Section 9 and Chapter 2 Part 4a is inappropriate and insufficient and should be changed.

Part 2 - Improving and Enhancing Strata Legislation 18/37 Recommendation 16 Section 9 and Chapter 2 Part 4A of the Act should be amended to: Firstly recognise the building manager is the party involved in the management of the scheme on the basis of the functions the OC has engaged them to assist with, namely, those mentioned in s40A (1): (a) managing common property, (b) controlling the use of common property by persons other than the owners and occupiers of lots, (c) maintaining and repairing common property. Secondly, a caretaker should be defined as a building manager who has exclusive possession of a lot or common property in the scheme.

Recommendation 17 The following restrictions and conditions should apply to the building manager and caretaker functions; . The maximum duration of any Building Management/Caretaker agreement to be entered into before the second general meeting of the scheme is to be limited to the date of the second general meeting or 2 years whichever comes first. . The maximum duration of any other Building management/Caretaker agreements is to be limited to 5 years. . The Building Manager and/or Caretaker should be required to act in the interests of the Owners Corporation and prohibited from accepting commissions and/or rebates from suppliers. In case of breach, severe penalty should apply, and immediate cancellation of contract.

Part 2 - Improving and Enhancing Strata Legislation 19/37 6. Common Property, Section 65A and Apartment Renovations

6.1 Common Property There is considerable confusion about the precise definition of common property in a scheme, the boundary between common property and the lot, and the responsibility for maintaining various parts of strata buildings. In the first instance the boundary is defined by the strata plan, but this does not contain sufficient detail to resolve disputes that frequently arise. NSW Fair Trading and Land Property Information circulars provide such information but in different forms. This situation needs to be addressed so that Executive Committees can turn to a single authoritative source to determine a. what is common property and what is part of the lot AND/OR b. the procedure and rules for adopting such definition for the scheme through a by-law.

Recommendation 18 The Act should be amended to include a model by-law that schemes may adopt, possibly with modifications, which specifies what is common property and what is part of the lot.

6.2 Section 65 and Apartment Renovations Key terms in the Act are not defined and this can lead to significant confusion and misinterpretation. For example s65A “Owners Corporation may make or authorise changes to common property” is a 2004 amendment aimed at allowing OCs to “add to” or “alter the common property” or “erect new structures on the common property” but only if this is approved by a special resolution at a general meeting. Section 65A was clearly intended to provide a mechanism whereby OCs may implement significant changes or modification to common property that result in demonstrable departures from the architectural plans or other specifications whereby common property is currently defined. However, there is no definition or explanation in the Act of the term “alter” or the complementary term “repair and maintain” to distinguish works which require s65A approval from the type of works which may be approved by the OC or EC, as a routine matter under s62 of the Act. Sections 8 and 61 of the Act make it clear that the OC is the principal responsibility for management of the scheme and that maintaining and repairing the common property is one of its key responsibilities. It is also clear that the intent of introducing s65A of the Act was not to constrain the activities of the OC to “maintain and keep in good and serviceable repair the common property” as required under s62, or to complicate the approval of routine apartment renovations by owners. Nevertheless there is a danger of exactly this happening as the Act is currently being interpreted by leading strata lawyers and the CTTT.

Part 2 - Improving and Enhancing Strata Legislation 20/37 Model By-law 5 (Damage to Common Property) was until recently the generally accepted mechanism whereby routine apartment renovations, which involve only repair, renewal or restoration of the lot and associated internal common property, such as bathroom tiles, were approved by ECs. Relying on By-law 5, ECs have accepted and approved that the replacement of those bathroom tiles that were in fact common property represented unavoidable collateral damage and repair of common property during apartment renovations, which owners are entitled to undertake with relative ease, provided quality controls imposed by the OC are met. NSW Fair Trading confirmed this in advice provided to an owner on 20 May 2010 (see Appendix B).1 However, leading strata lawyers have taken the view that s65A covers ALL apartment works that involve common property and therefore cannot be approved using By- law 5 but that even the simplest bathroom renovations must be approved using the onerous provisions of 65A, namely a special resolution at a general meeting. A recent adjudication order 2 (under appeal at the time of writing) confirmed this and further implied that in fact only essential maintenance and repair can be approved under s62: “ It is not in dispute in this matter that laundry tiles and the waterproofing membrane constitute common property. In my view removing these items and replacing them with different tiles and a new waterproofing membrane constitutes altering the common property, unless such work is done by the Owners Corporation for the purpose of maintenance or to repair defects.” The implication of the above paragraph is that exactly the same works should under some circumstances be considered to “alter” and “change” common property for the purpose of s65A of the Act but not under other circumstances. This seems to defy the common meaning of the word “alter”, which usually refers only to the resulting impact of the works. This broad interpretation of s65A (see Appendix B for further details) is clearly not the intent of s65A. Should the above interpretation of s65A prevail, it entails a number of adverse consequences for owners and for strata management which represent a distortion of the Act’s intentions:  Whereas, according to NSW Fair Trading, routine apartment renovations can be approved by the EC under Model By-law 5, according to the CTTT ruling, owners would either have to wait for the next general meeting to gain approval or try to arrange an extraordinary general meeting to gain approval for even the most routine apartment renovations involving retiling of floors or boundary walls in bathrooms and kitchens. In large schemes this would involve considerable cost and no guarantee of a quorum. Thus in practice owners would have considerable difficulty in gaining approval for such routine renovations.  The ruling implies that anything that is considered “enhancement or improvement” rather than essential “repairs and maintenance” requires s65A approval. However, these terms are not defined and, in the normal course of events, repairs and maintenance can involve a wide variety of works. Works are carried out by OC according to what owners consider appropriate to maintain the common property “in good and serviceable repair”. Without being specific, the ruling implies that

1 Letter from NSW Fair Trading to J Kaunitz, 20 May 2010 Ref. 5264616 2 J Kaunitz v Owners Corporation SP17972, January 2012, NSW CTTT SCS 11/43100

Part 2 - Improving and Enhancing Strata Legislation 21/37 without a s65A resolution, OCs are restricted in carrying out renovations, replacement or renewal of common property because such works may be considered “enhancements” rather than “repair and maintenance” and therefore subject to s65A. This is contrary to the commonly accepted rights associated with property ownership.  The ruling calls for treating exactly the same works as “repair and maintenance” under some circumstances but as “alterations” under other circumstances, and to justify works as essential maintenance rather than enhancements of common property before the EC can authorise such works. Strata management which depends on such distinctions, without agreed definition of any of these terms, is a recipe for disputes to arise. The number of cases presented for CTTT adjudication is likely to skyrocket. It is clear that s65A was not intended to complicate the approval of routine apartment renovations or to limit the freedom of ECs to act in line with the collective wishes of owners as they best see fit to maintain the common property in what the owners consider to be “good and serviceable repair”. It is important to address the ambiguity and confusion which is now institutionalising the inappropriate interpretation of s65A. The intentions and application of s65A needs to be clarified through amendments to s65A of the Act.

Recommendation 19 Section 65A(1) should be modified to make clear that it refers to works that change or modify common property, as it is defined for the scheme, and not to works that simply repair, replace, renew or restore the condition of common property as it is currently defined. The following change in wording of s65A is a possible solution: “65A Owners corporation may make or authorise changes to common property (1) For the purpose of improving or enhancing the common property, an owners corporation or an owner of a lot may take any of the following action, but only if a special resolution has first been passed at a general meeting of the owners corporation that specifically authorises the taking of the particular action proposed: (a) add to the common property, (b) alter modify the common property (c) erect a new structure on the common property.” AND adding a new clause: “(7) The provisions of this section do not apply to works and renovations which merely repair, renew, restore common property or replace parts of common property without changing the nature of the common property involved.” AND adding a new definition to the Dictionary “modify means works, other than additions, that result in departure from currently applicable architectural drawings or other specifications of a building forming part of the scheme”.

Part 2 - Improving and Enhancing Strata Legislation 22/37 8. Miscellaneous Administrative and Other Matters

8.1 Chairing of Meetings The Act currently requires for the chairperson to chair meetings at which he/she is present. There is no provision for the chairperson to pass the chair to a substitute, with the approval of the meeting, should this be considered desirable due to circumstances or the personal preference of the chairperson.

Recommendation 20 The Act should be amended to make provision for the chairperson to pass the chair, for all or part of the meeting to a substitute, with the approval of the meeting.

8.2 Sinking funds

All schemes must have sinking fund for capital works, yet it is currently not possible, when raising special levies for capital repair or upgrade, to have these contributions paid directly into the Sinking Fund. They must instead be paid into the Administrative Fund and later a book transfer is carried out to locate these funds correctly for expenditure from the Sinking Fund. This is a convoluted and illogical process which adds to fees charged by Strata Managers.

Recommendation 21 Schemes should be able to pay special levies raised for capital purposes directly into their sinking fund.

8.3 Strata Roll Information

Recommendation 22 The Act should be amended to require the following information to be recorded on the strata roll:

. licences granted by the OC for use of common property,

. plans and approvals for building work on common property and other property in the strata scheme,

. details of loans made to the OC,

. copies of special resolutions passed for additions and alterations or the erection of new structures on or impinging upon common property, and

. an index of all attached documents.

8.4 Public Liability Insurance Cover

Recommendation 23 The minimum Public Liability Insurance Cover should be increased to $20M.

Part 2 - Improving and Enhancing Strata Legislation 23/37 8.5 Strata Management and Service Contracts

Recommendation 24 All strata management and service contracts, other than building management and caretaker agreements, are to have 3-year maximum term with provision of continuation and 3-months termination notice period thereafter.

8.6 Large and Small Schemes The Act currently defines large strata schemes as schemes comprising more than 100 non- utility lots. Such “large” schemes are obliged to adhere to extra requirements not required of schemes with 100 lots or less. This definition of “large” appears arbitrary and most of the requisite obligations could well apply to all schemes. We note that less than 1% of strata schemes in NSW consist of more than 100 lots. So, by in effect exempting most schemes, the current legislation fails to give the same protection to most strata owners. Arguably, schemes of 80 or even 60 lots can be considered “large” as they involve buildings and OC assets of substantial value, and the number of owners involved would require administrative procedures and secretarial services provided by strata agents. It is hard to see why schemes of such size should b treated differently form a scheme of 100 lots. In line with OCN’s intention to protect owner interests by improving strata governance (including transparency and financial prudence), we propose the following clauses in the Act should apply, not only to large schemes over 100 lots, but to all strata schemes:  Section 75 (5) - Estimates of forecast expenditure by item to be included in Admin and Sinking Fund budgets  Section 80B - Two quotations required to be obtained where expenditure on any item is to exceed a specified amount (currently $30,000)3  Section 107 (2) - Accounts and financial statements of the Owners Corporation to be audited before presentation to the annual general meeting. [With a provision that this requirement may be removed by owners for each successive period through an AGM resolution].  Schedule 3, Section 6 - Notice of Executive Committee meetings to be given in writing at least 72 hours in advance to each owner (may be done by electronic means) and on notice board (where relevant)  Schedule 3, Section 16 - Executive Committee Minutes to be given within 7 days of executive committee meeting to each owner (may be done by electronic means) and notice board (where relevant) 4

3 Regarding the threshold for requiring two quotations under Section 80B, it is relevant to refer to the QBCCM ACT Regulations, under which the upper limit applied in all strata schemes is calculated by multiplying $200 (or an amount resolved at general meeting) by the number of lots. The underlying assumption is that funding increases with size of scheme, which obviates risk. 4 OCN submits that EC minutes (and general meeting minutes) should be circulated within 21 days of the meeting.

Part 2 - Improving and Enhancing Strata Legislation 24/37 This would leave only the following two obligations under the Act to continue to apply only to large schemes over 100:

 Section 80A - General meeting resolution required to spend more than 10% extra on any expenditure item estimated in Admin and Sinking Fund budget 4

 Schedule 3, Section 11 - Proxy form for general meetings to be given to Secretary 24 hours in advance

OCN proposes that the concept of a “large scheme” in the Act should be removed as it serves no useful purpose. ALL of the above provisions which now apply only to large schemes should apply to all schemes but with provision for owners to remove the s107 (2) audit requirement for any given period. If any procedural distinctions are to be made on the basis of scheme size, it would seem that there is a stronger case for distinguishing and developing provisions or regulations based on simplified administrative procedures for “small” schemes which may possibly opt for self- administration. Should a suitable simplified regulatory regime be developed for small schemes, a further option would be to have schemes up to a certain size (say 10 non-utility lots) opt, by a special resolution at a general meeting, to operate based on such a simplified “small scheme” provisions rather than the “standard” regulatory provisions. We note that the QBCCM ACT mostly differentiates schemes by their purpose (residential, resort, commercial), and to a lesser extent by size. When it comes to size, most schemes are covered by the same regulations. Size-based regulations exist for 2 lot schemes and another for schemes up to 6 lots.

Recommendation 25 . The concept of a “large scheme” in the Act should be eliminated and provisions currently listed for large schemes should be made to apply to all schemes with the option in some cases to have the relevant requirement removed by the owners through a motion passed at the most recent AGM. . The procedural matters that necessitate differentiation between schemes should be reviewed, with a view to clarifying the rationale and relevance of differentiating by scheme size or by other characteristic such as scheme purpose, and if this is found warranted, specialised sets of regulations should be developed along the lines of the QBCCM ACT.

4 Regarding the threshold for expenditure requiring general meeting resolution under Section 80A, it is relevant to refer to the QBCCM ACT Regulations, under which the upper limit applied in all strata schemes is calculated by multiply $1100 (or lesser amount resolved at general meeting) by the number of lots. The underlying assumption is that funding increases with size of scheme, which obviates risk.

Part 2 - Improving and Enhancing Strata Legislation 25/37 9. Conflict resolution, NSW Fair Trading and CTTT

9.1 Enforcement of by-laws Options currently available to OCs to enforce (code of conduct type) by-laws, such as Noise, Parking, apartment renovations (Damage to Common Property) etc, are far too cumbersome and ineffective to deal with pressing day-to day situations involving transgressions of such by-laws. One of the most frustrating issues for ECs is dealing with an owner who flouts the by-laws, is simply obstructionist, or uses the CTTT system to buy time. Examples are repeat offenders parking cars in other owners’ spaces and owners refusing to remove storage units or air- conditioners erected without permission, even though owners of adjoining property are inconvenienced. OC costs in trying to resolve issues have in some cases amounted to tens of thousands of dollars. Mediation and, if unsuccessful, adjudication are too slow, time consuming and possibly expensive when dealing with blatant transgressions that impinge on the rights of other owners and the OC on a daily basis. Even when adjudication orders are issued against transgressors, it is often difficult for the OC to enforce them. OCs need direct enforcement powers to deal with repeat offenders who flaunt parking restrictions and other by-laws and interfere with the rights of others to enjoy their lots, without having to resort to CTTT processes. Part 1 Recommendation L suggests amendments to the Local Government Act to allow OCs to deal with illegal parking. The Act should be amended to provide OCs with appropriate direct powers to enforce by-laws.

Recommendation 26 Owners Corporations should have the right to enforce by-laws, for example to remove illegally parked cars or rubbish from common property or, at the request of owners, from lots and to deal with unapproved renovation works and noise problems. OCs should have the right to charge costs involved in dealing with breaches (including for behaviour of their tenants) against the levy accounts of offending owners. (See also Recommendation L, Part 1)

9.2 Clarification of the Act - NSW Fair Trading Advice There is no mechanism whereby provisions of the Act can be authoritatively clarified. NSW Fair Trading does not provide official rulings regarding the interpretation of the Act, in a similar fashion to the Australian Tax Office. Currently, the only option to gain authoritative clarification is by creating a dispute in order to gain CTTT adjudication. Even that is an ineffective solution since an adjudication decision is not considered a legal precedent. As an example, NSW Fair Trading provided the following explanation when an owner and an Owners Corporation disagreed regarding the interpretation of the word “alter” in s65A of the Act5: “The role of Fair Trading is to provide information regarding the provisions of the Act. This Office is not in a position to provide legal advice. Parties in disagreement are free to

5 Letter from NSW Fair Trading to F M Starr, 13 August 2010 Ref. 5136476

Part 2 - Improving and Enhancing Strata Legislation 26/37 take a different view. However, if a dispute takes place and cannot be resolved within the scheme, the Act provides a dispute resolution process to settle the matter”. In this case Fair Trading supported the owner’s interpretation of s65A and the OC sought a legal review of Fair Trading advice but this was refused 6: “NSW Fair Trading cannot accede to your request for a legal review. ….Fair Trading’s role under the Act is to provide information about the strata legislation and offer a mediation service to settle unresolved disputes. This role does not extend to providing legal interpretations of the Act.” The EC refused to accept the interpretation provided by Fair Trading and sought and obtained contrary legal advice, which amongst other things says: “The letter received from Fair Trading does not take into account section 65A and the letter in the advice is misinformed and in my view incorrect for the reasons stated above.” Even though Fair Trading advice clearly referred to s65A and the OC’s legal advisors could not provide legal support for their differing interpretation of “alter” in s65A on which this advice depended, the EC considered NSW Fair Trading erroneous, and followed its own legal advice and attempted to implement complex apartment renovation procedures even though, by the EC’s own account, this was not in the interest of the scheme and which the owners eventually rejected. This is a totally unsatisfactory situation. Fair Trading as the administrator of the Act should be able to provide authoritative and legally recognised advice that could be challenged at the CTTT. It should not be necessary to create a dispute and even then not be able to get a decision that has legal standing or acts as a precedent. A mechanism, similar to the rulings provided by the ATO in tax matters, should be implemented whereby NSW Fair Trading provides a legally recognised ruling on the interpretation of the Act.

Recommendation 27 The duties and powers of NSW Fair Trading should be extended to provide authoritative rulings that parties must comply with until such time that the ruling is overturned by a judicial decision of the CTTT.

9.3 Adjudication and CTTT Rulings CTTT decisions lack consistency and do not create precedents for resolving similar cases. Interpretation of the Act appears at times to ignore the intentions of the Act, practical implications and consequences. Whilst CTTT decisions concisely summarise key facts in submissions, often little reference is made to arguments presented or why they have been ignored. The purely paper based adjudication process provides no opportunity for clarification of issues before an order is handed down. For example, in a recent case an owner who applied for an apartment renovation did not receive a response from the Owners Corporation. A vote was taken by paper meeting on the matter and the motion to approve the application failed. There was no discussion, no reason was given and the only response to the owner was the minutes of the paper meeting. The matter went to adjudication and the application for an order to allow the simple renovation was rejected, as was an application for an order for the EC to respond to a written request and if refused to give a reason.7

6 Letter from NSW Fair Trading to F Starr, 24 August 2010 Ref. 5403425 7 J Kaunitz v Owners Corporation SP17972, January 2012, NSW CTTT SCS 11/43100

Part 2 - Improving and Enhancing Strata Legislation 27/37 There seems to be a significant variation in approach depending on the adjudicator involved. Apparently unreasonable outcomes, as in the above example, happen from time to time. The mode of operation of the CTTT and some unsatisfactory decisions appear to reflect  lack of training, experience and qualifications  lack of precedents  time pressures due to the increased level of disputations and workloads and the apparent inclination of Adjudicators to deal with matters in a summary fashion.

Recommendation 28 It is recommended that an analysis of CTTT cases be carried out with a view to: . identifying amendments to the legislation that may serve to clarify the Act and reduce the level of disputations . identifying and eliminating inconsistencies in approaches and judgements by different adjudicators . ensuring that decisions are not only legally correct but reflect reasonable and fair practices and are practical common sense.

Part 2 - Improving and Enhancing Strata Legislation 28/37 10. Comments on Other Submissions

10.1 Clover Moore Submission OCN endorses the changes introduced by the Hon. Clover Moore’s Strata Legislation Amendments Bill 2011.

10.2 Dynamic Property Services Submission OCN agrees in principle with the improvements identified in this submission.

10.3 Ray Dowsett Submission OCN agrees in principle with improvements identified in the two submissions on the Strata Schemes Management Act and to the Strata Schemes (Leasehold Development) Act and Strata Schemes (Freehold Development) Act) unless inconsistent with this submission.

10.4 Makinson & d’Apice Submission OCN agrees in principle with the improvements identified in this submission.

Part 2 - Improving and Enhancing Strata Legislation 29/37 Summary of Recommendations

Recommendations marked by * are in abbreviated form here. Please see referenced section for the full text of recommendations. Establishment of new strata schemes Page 1 Section 113 and other relevant parts of the Act should be amended so that the definition of the 9 Initial Period and the associated restriction and provisions of s113 remain in force until the second general meeting of the Owners Corporation.* 2 The Act should mandate requirements and conditions to apply to the management of schemes 10 during the Initial Period, including the following: . Strata managers and building managers/caretakers must be independent of the developer and/or builder and suppliers, and the absence of financial / commercial associations between these parties confirmed by statutory declarations provided to the OC at the first AGM. . Any commercial or financial associations or arrangements between service providers and the developer/builder, other than standard contracts, or the absence of such arrangements, must be declared in writing to the OC. . At the time of registering the scheme, the developer must file and hand over to the Owners Corporation the set of documents in Schedule A (three full copies), along with the Certificate of Occupancy, which describe, specify and certify the building(s) in the scheme. The set of documents must be certified by a suitably qualified professional to be correct and complete. . Within 2 months after the establishment of the scheme the developer provide a defects report covering common property and all individual lots and is to retain an independent assessor, on behalf of the OC to: o prepare a 5 year forecast of administration and sinking fund budgets and levies. (The first year’s budget must make provision for the cost of an independent building defects assessment and report (see below)) o set the administration and sinking fund levies for the first year to realistically cover the cost of running the building including all non-warranty repairs o certify that the levies for the first year are a reliable guide to purchasers for ongoing levy levels o review and certify the budgets and recommendation for the administration and sinking fund levies for the second year, as preparation for the first AGM. . The developer is to supply to every prospective purchaser the 5 year budget and the one year levy forecast and the certificate. . The commissioning of a defects report should be a mandatory motion for the first AGM, so that new owners are alerted to the need to consider and in many cases act quickly to protect their rights. . The developer is to provide to all prospective purchasers and new owners a Fact Sheet setting out the DA approved zoning, the approved use of the building, all DA conditions relating to the use of the building, and whether there are any sale and purchase conditions or other disclosures to other purchasers that relate to leasing and usage of units. . S109 of the Act should be modified to ensure the S109 certificate includes this information or has such a Fact Sheet attached.

Part 2 - Improving and Enhancing Strata Legislation 30/37 First Annual General Meeting Page 3 The following procedure should be followed to call the first AGM 11 . A notice shall be sent to all owners (and known prospective purchasers), notifying them of the preliminary agenda and the time and place of the meeting two calendar months before the date of the meeting. The meeting is to be held at a time and place suitable for the majority of owners.

. A second notice is to be sent at least 7 days before the date of the meeting, within the normal required period, and be accompanied by the particular items listed (see referenced section) in addition to items currently in Schedule 2 cl.4.* 4 The agenda for the first AGM should include items in addition to those already listed in Schedule 11 2 cl. 3 of the Act covering building inspection report, documentation provided by the builder and the need for legal assistance.* General Meeting Quorum, Voting and Proxies 5 The Act should be enhanced to formalise voting at general meetings through the use of voting 14 papers, allowing for absentee voting. The QBCCM ACT provides a proven model. 6 A person must not hold— 14 . if there are 20 or more lots included in the scheme - proxies greater in number than 5% of the lots or representing more than 5% of total entitlements; or . if there are fewer than 20 lots included in the scheme - more than 1 proxy. 7 When a General Meeting is adjourned, the adjourned meeting should be regarded as a 14 continuation of the original meeting with voting papers and proxy forms, held by a person in attendance, counted for the quorum as well as for motions. General Meeting Conduct 8 An Owners Corporation should be allowed to change the “anniversary date” of AGMs; this would 14 require amending Schedule 2 cl. 31. The anniversary date would best be tied to the end of the financial year which could be varied by a special resolution at a general meeting. The QBCCM ACT provides a suitable model. 9 Owners should be notified of Annual General Meetings through two notices: an advanced 15 notification 21 days before the meeting and a second notice as per Schedule 2 cl. 32.* 10 Each AGM Notice should include an Annual Report of the EC, to be presented by the 15 Chairperson before the election of office bearers.* 11 Within 21 days of a general meeting the minutes should be finalised and made available to 15 owners.* 12 Should a motion to set levies for the next 12 months not be passed at an AGM the levies for the 15 following periods should be set automatically.* 13 Include in the Act or Regulations a Code of Conduct for Executive Committee Members.* 16

Part 2 - Improving and Enhancing Strata Legislation 31/37 General Meeting Conduct (cont’d) Page 14 The Act should make it clear that in addition to the office holders’ duties set out in the Act, the 16 EC can, by passing formal motions, assign duties, responsibilities and the necessary discretionary spending authorisation to certain office holders, EC members or to a subcommittee of the EC. In doing so this does not diminish the responsibility of the whole EC. 15 The Schedule 3 Cl. 3 (1) of the Act should be amended to limit the appointment of acting 16 members as follows: “(1) A member of the executive committee may, with the consent of the executive committee, appoint an owner or company nominee of a corporation which is an owner to act in his or her place as a member at any meeting of the executive committee but only twice between consecutive AGMs.” Building Managers and Caretakers 16 Section 9 and Chapter 2 Part 4A of the Act should be amended to recognise the role of building 19 manager as a party involved in the management of the scheme on the basis of functions the OC has engaged them to carry out, namely those mentioned in s40A (1)* 17 The following restrictions and conditions should apply to the building manager / caretaker 19 functions: . The maximum duration of any Building Management/Caretaker agreement to be entered into before the second general meeting of the scheme is to be limited to the date of the second general meeting or 2 years whichever comes first. . The maximum duration of any other Building management/Caretaker agreements is to be limited to 5 years. . The Building Manager and/or Caretaker should be required to act in the interests of the Owners Corporation and prohibited from accepting commissions and/or rebates from suppliers. In case of breach, severe penalty should apply, and immediate cancellation of contract. Common Property and Apartment Works and Renovations 18 The Act should be amended to include a model by-law that schemes may adopt, possibly with 20 modifications to suit the scheme, which specifies what is common property and what is part of the lot. 19 Section 65A(1) should be modified to make clear that it refers to works that change or modify 22 common property as it is defined for the scheme and not to works that simply repair, replace, renew, repair or restore the condition of common property as it is currently defined by prevailing architectural plans and specifications.*

Part 2 - Improving and Enhancing Strata Legislation 32/37 Miscellaneous Administrative and Other Matters Page 20 The Act should be amended to make provision for the chairperson to pass the chair, for all or 22 part of a meeting to a substitute, with the approval of the meeting. 21 Schemes should be able to pay special levies raised for capital purposes directly into their 23 sinking fund 22 The Act should be amended to require the following information to be recorded on the strata roll: 23 . licences granted by the Owners Corporation for use of common property, . plans and approvals for building work on common property and other property in the strata scheme, . details of loans made to the Owners Corporation, . copies of special resolutions passed for additions and alterations or the erection of new structures on common property, and . an index of all attached documents. 23 The minimum Public Liability Insurance Cover should be increased to $20M. 23 24 All strata management and service contracts, other than building management and caretaker 24 agreements, are to have 3-year maximum term with automatic continuation and 3-months termination notice period thereafter. 25 . The concept of a “large scheme” in the Act should be eliminated and provisions 25 currently listed for large schemes should be made to apply to all schemes with the option in some cases to have the relevant requirement removed by the owners through a motion passed at the most recent AGM.

. The procedural matters that necessitate differentiation between schemes should be reviewed, with a view to clarifying the rationale and relevance of differentiating by scheme size or by other characteristic such as scheme purpose, and if this is found warranted, specialised sets of regulations should be developed along the lines of the QBCCM ACT. Conflict resolution, NSW Fair Trading and CTTT 26 Owners Corporations should have the right to enforce by-laws, for example to remove illegally 26 parked cars or rubbish from common property or, at the request of owners, from lots and to deal with unapproved renovation works, noise and other problems. OCs should have the right to charge costs involved in dealing with breaches (including for behaviour of their tenants) against the levy accounts of offending owners. 27 The duties and powers of NSW Fair Trading should be extended to provide authoritative rulings 27 that parties must comply with until such times that the ruling is overturned by a judicial decision of the CTTT. 28 It is recommended that an analysis of CTTT cases be carried out with a view to: 28 . identifying amendments to the legislation that may serve to clarify the Act and reduce the level of disputations . identifying and eliminating inconsistencies in approaches and judgements by different adjudicators . ensuring that decisions are not only legally correct but reflect reasonable and fair practices and are practical common sense.

Part 2 - Improving and Enhancing Strata Legislation 33/37 Appendix A – Certificate of Occupancy: Schedule of Required Documents “StrataPlus – Handover Document Requirements” follows, a valuable guide. OCN Acknowledges StrataPlus as the author of this document.

Part 2 - Improving and Enhancing Strata Legislation 34/37 Appendix B - Apartment Renovations and s65A The detrimental consequences of the prevailing confusion and misinterpretation of s65A of the Act are summarised in Section 6 of this submission. A case currently under appeal at the CTTT Kaunitz v Owners Corporation of 17972 (SCS 11/43100 and SCS 12/04979) serves to illustrate the underlying cause of this confusion, which centres the interpretation of the term “alter” in s 65A (1) (b) of the Act. One aspect of this dispute concerns the EC’s refusal to approve the Applicant’s application to retile his laundry. Another aspect of the dispute concerns the EC’s refusal, at the prompting of the strata managing agent, to accept NSWFT interpretation of the Act and to rely on contradictory legal advice. . As a member of the EC the Applicant, an engineer, sought clarification from NSWFT regarding the simplest way for the EC to approve bathroom renovations, following claims by the strata agent that bathroom renovations cannot be approved under by-law 5 because replacing bathroom floor and wall tiles on common walls constitutes work that “alters the common property” and therefore must be approved by a special resolution at a general meeting as per s65A . The Applicant considered this view incorrect, believing that s65A was intended to cover works that demonstrably altered the common property, as it was currently defined by the relevant architectural plans and building specifications and therefore s65A is not relevant for routine apartment renovations which cane be approved by the EC (under by- law 5) as has been the case for about 100 renovations in the scheme over the past 25 years without problems . NSW Fair Trading confirmed this in advice8 “ An owner would need to request in writing to the Secretary or the managing agent before commencing a bathroom renovation where common property is involved. The simplest and quickest option for the Owners Corporation is to give consent under by-law 5. Decisions of this nature can be made at an executive committee meeting or general meeting by a majority vote”. . The EC was reluctant to accept this advice and sought clarification. NSW Fair Trading further advised:9 “Each owners corporation under the Strata Schemes Management Act 1996 has the responsibility to administer common property in the interest and benefit of all owners. It is a matter for the owners corporation to decide whether to do so under by-law 5 or create an exclusive use by-law under section 52 of the Act” and further: “ A resolution under section 65a of the Act is only required where an owners corporation or an owner proposes to add, alter, or erect a new structure on common property for the purpose of improving or enhancing the common property of the scheme. Consequently this provision is not applicable to the renovation of bathrooms by owners to their individual lots”.

8 Letter from NSW Fair Trading to J Kaunitz, 20 May 2010 Ref. 5264616 9 Letter from NSW Fair Trading to F M Starr, 13 August 2010 Ref. 5136476

Part 2 - Improving and Enhancing Strata Legislation 35/37 . However, the OC sought and received legal advice contradicting the NSWFT advice: “Renovations to replace bathroom tiles and waterproofing are clearly ‘alteration’ to the common property for which a special resolution of the owners corporation is required” AND “ In answer to the question: an executive committee or an owners corporation cannot approve the removal and replacement of common property tiles and the waterproofing membrane underneath those tiles as part of renovations under Schemes by-law 5” AND intimidatingly: “..as it is not within the power of the executive committee’s authority to approve the works, the executive committee authorising such works may lead to personal exposure to claims for costs and damages, which may or may not be covered by the office bearer’s liability insurance”. The applicant did not disagree with the EC’s legal adviser’s interpretation of s65A but only with the unsupported contention in the first of the above quoted paragraphs those bathroom renovations “are clearly ‘alteration’ to the common property for which a special resolution of the owners corporation is required” . A motion to approve the laundry renovation was subsequently defeated at a paper meeting of the EC. However, the EC did not respond to the application but later asserted that the minutes of the meeting, which provided no reason, was a sufficient response. . The Applicant then applied for adjudication orders: o THAT the EC consent to the laundry renovation o THAT the EC to respond to apartment renovation applications in writing and give reasons for its decisions o THAT the EC conducts its business on the basis that the replacement of common property tiles in apartments, and the renewal of waterproofing, by themselves do not “alter the common property” for the purpose of s65A of the Act and can be approved under by-law 5 o That the EC conducts its business according to the NSWFT advice and exercises its available powers to approve applications to carry out routine apartment renovations in a timely fashion. . Adjudication arising from this disagreement resulted in the Adjudicator dismissing the Application and ruling in agreement with the OC’s lawyers but with even more disturbing consequences: “It is not in dispute in this matter that laundry tiles and the waterproofing membrane constitute common property. In my view removing these items and replacing them with different tiles and a new waterproofing membrane constitutes altering the common property, unless such work is done by the Owners Corporation for the purpose of maintenance or to repair defects.”

Part 2 - Improving and Enhancing Strata Legislation 36/37 This ruling suggests that exactly the same works should be considered to change and alter the common property but not under other circumstances. This seems to defy common sense, the common use of the English language and the intentions and provisions of s62 and s65 of the Act. At the time of writing this decision is under appeal. The adjudication decision relies on a 2009 Supreme Court case, Stolfa v Owners Strata Plan 4366 & ors [2009] NSWSC 589. The appeal argues that paragraphs from Stolfa have been misinterpreted out of context10. “The Decision critically relies on parts of the judgement of Stolfa v Owners Strata Plan 4366 & ors [2009] NSWSC 589 Stolfa [Stolfa]. However the quoted paragraphs have been misinterpreted out of context. The actual wording of the quoted paragraphs from Stolfa, and the correct interpretation in context, makes it clear that these paragraphs deal with the approval of works which are recognised as alterations and additions for the purposes of s65A and not with the approval of works which repair, renew or replace parts of common property but are not additions or alterations, such as the laundry renovation which is subject of this Adjudication and Appeal. There is nothing in Stolfa which indic- ates that routine apartment renovations involving such works cannot or should not be approved under by-law 5 or that such works should be considered alterations and additions” The works under consideration in Stolfa are clearly major modifications to the building that require Development Approvals. Stolfa uses the terms “additions and alterations” to refer to such major modifications without defining these terms. The context of Stolfa is consistent with the narrow interpretation of the term “alterations and additions” and when read using this interpretation Stolfa actually effectively illustrates all the nuances of s65A: . It rules that alterations and additions that represent major and demonstrable changes to common property that would normally require s65A, may be nevertheless approved by the EC under its s62 duties, as “repairs and maintenance”, if such works are essential to maintain or restore the integrity or serviceability of the building. . However Stolfa then rules, referring to another part of the work involved, that alterations to common property require s65A special resolution approval, even if the works to common property (outside the lot) serve to benefit only a particular lot and not the common property as such. However, these Stolfa rulings, and the paragraphs quoted in the adjudication decision, take on a different meaning if it the term “alterations and additions” is used in a broad colloquial way to cover all building works, including works which only involve repair, restoration, renewal or replacement of parts of common property. The controversial adjudication decision arises from this difference in interpretation.

10 Application to the Tribunal concerning 5 York Street Sydney NSW 2000 SP 17972 NSW CTTTT file No: SCS 12/04979

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