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Subdivision – Owners corporation repairs

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Owners corporations often face an inherent conflict of interests when determining responsibility for repairs and maintenance undertaken by the OC.

Part 3 of the Owners Corporations Act (Vic.) 2006 (the Act) is headed ‘Financial management’. Division 5 of that part has specific provisions relating to asset management and s 46 obliges the OC to repair and maintain common property. Section 47(1) obliges the OC to repair and maintain services that affect more than one lot and the common property and s 47(2) anticipates that the OC may, as a matter of practicalities, be required to repair and maintain a service that relates to a lot, rather than to the common property. Even at this simple level the OC may be faced with deciding how the cost of any such work should be apportioned, first between the OC and lot owners and then between individual lot owners.

However the issue becomes more complicated with s 48 establishing a regime whereby the OC can require a lot owner to repair and maintain the lot and undertake those repairs if the lot owner fails to do so and then recover those costs from the lot owner. Here the OC is clearly being put into a position of conflict with an individual lot owner, who is a member of the OC and entitled to expect the OC to carry out its functions in the interest of all lot owners, including the individual lot owner. Disputes about the need for the OC to perform the work and the level of benefit (and consequent liability) for the individual lot owner are clearly capable of leading to disputation. Section 49(2) adopts the policy ‘that the lot owner of the lot that benefits more pays more’. This appears to be an entirely acceptable policy from an objective point of view but involves an assessment of ‘benefit’, and this may well be in dispute in many situations. Section 28(3) concerning lot owner liability also raises this question of ‘benefit’.

These issues are not new to strata living. Simons v Body Corporate Strata Plan No 5181 [1980] VicRp 12 concerned apportionment of responsibility between an individual lot owner and the OC in respect of a defective exterior wall, which was common property. The OC argued that the repairs would be for the benefit only of the lot owner (who should therefore bear the cost) but the court determined that it was in the interests of all lot owners for the repairs to be effected and that it was therefore appropriate for the OC to bear the cost. Seiwa P/L v Owners Strata Plan 35042 [2006] NSWSC 1157 took the issue further and concluded that, when the failure of the OC to maintain the common property caused damage to a lot, that lot owner had a cause of action in negligence against the OC for damages to the lot. Seiwa concerned water penetration via a balcony – a not unusual occurrence. The court concluded that the balcony was common property and had not been adequately maintained, so the issue was not ‘who should be responsible for the repairs’ but rather ‘who was responsible for damage flowing from lack of repairs’. More recently, Liu & Anor v Owner Corporation No PS 501391P (Owners Corporation) [2010] VCAT 1441 found an OC responsible for damages suffered by a lot owner as a result of the OC’s failure to repair and maintain common air conditioning but in Circle Developments P/L v Owners Corporation PS1897 (Owners Corporation) [2012] VCAT 1941 a lot owner who sought to replace air conditioning at the cost of the OC was unsuccessful and suffered an adverse costs award.

Two 2013 Victorian cases have also considered the relationship between the OC and an individual lot owner in the context of repair and maintenance. Owners Corporation PS326519P v May (Owners Corporations) [2013] VCAT 933 also concerned air conditioning, with the lot owner replacing air conditioning in the unit, but intruding into common property in doing so. The OC successfully sought an order requiring the lot owner to remove the air conditioning and reinstate the common property.

Mashane P/L v Owners Corporation RN 328577 [2013] VSC 417 specifically considered the responsibility of a lot owner to pay a levy to partly pay for certain repairs and maintenance and whether it was appropriate for the OC to fund the balance of those works from funds held in a maintenance fund. The property consisted of 39 apartments, 5 of which did not have a balcony. The lot owner of one of those apartments argued that those 5 lots should not have to bear the cost of repairs and maintenance to the balustrades on the balconies of the other apartments as those 5 lot owner derived no benefit from the work, returning full circle to the question raised 33 years before in Simons.

Mashane was an appeal from a VCAT decision rejecting the lot owner’s objection to payment. The judge was not satisfied that the VCAT decision was wrong in law and the lot owner’s appeal was therefore dismissed, resulting in a similar conclusion to Simons that the expense was to be met from common funds. Macaulay J. did undertake a useful analysis of the machinations of OC levies and use of a maintenance fund by the OC.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Subdivision – Off the plan sales – Best endeavours – Part 2

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The April 2011 column considered the case of Joseph Street Pty Ltd v Tan, a decision at first instance reported at [2010] VSC 586. The case has now been reversed on appeal, reported at [2012] VSCA 113.

The effect of the Court of Appeal decision would appear to make the entering into of a s 173 Planning and Environment Act 1987 Agreement compulsory for developers in all circumstances where the municipal council is prepared to enter into such an Agreement.

The case involved a ‘villa unit’ style development of 6 single storey units in Box Hill. Units were sold off the plan with settlement to be after registration of the plan in accordance with common practice. The builder that the developer had contracted to undertake construction failed to do so and the developer was forced to find another builder. As a result, construction was not completed within the time allowed by the contract for registration of the plan (the sunset period) and the developer rescinded the contract.

The purchaser refused to accept rescission and sued for specific performance of the contract on the basis that the vendor had failed to use ‘best endeavours’ to have the plan registered. It had been established at first instance that this obligation consisted of both an express contractual obligation and also as an implied obligation.

The Full Court identified that registration of the plan could only be achieved when the council had issued a Certificate of Compliance, but that there were two methods by which the developer could obtain that Certificate and thus fulfil the contractual obligation to secure registration of the plan:

  1. the developer could complete all the building works to the satisfaction of all relevant service authorities; or
  2. the developer could enter into a s 173 Agreement with Council after entering into agreements with service providers.

Evidence given on behalf of the developer suggested that the s 173 Agreement option was limited to ‘greenfield’ developments and had not been contemplated by the developer as an option. However evidence from the council suggested that s 173 Agreements were common in ‘smaller’ developments and indeed the planning permit issued in respect of the development had referred to the possibility of just such an Agreement.

The effect of the s 173 Agreement is to give the council the ability to register on the ‘parent’ title (the title to the unsubdivided land) the requirement that the development be constructed in accordance with the planning permit issued in respect of the development. If council has the benefit of such an Agreement then, subject to the satisfaction of other relevant authorities, council is able to be satisfied that the development will be built in accordance with the permit and council’s planning responsibility in relation to supervision of construction is thereby satisfied. If construction is not in accordance with the permit, council is entitled to enforce the s 173 Agreement against the developer and all subsequent registered owners.

The s 173 Agreement process appears to be a shortcut to registration of the plan, as a certificate of compliance may be issued by council well in advance of completion of all construction and infrastructure works. The requirement that the developer enter into satisfactory agreements with infrastructure providers is a pre-condition to a s 173 Agreement and such arrangements may be tedious to negotiate, but once achieved registration of the plan can quickly follow.

This might cause concern for a purchaser if the only requirement on the vendor is registration of the plan. As can be seen from the above, this could be achieved well before construction is complete, but no purchaser is going to want to pay for a half finished property. Thus a purchaser needs to be satisfied that settlement will only be due after both registration of the plan and issue of a certificate of occupancy. Whilst there is much to be said against a certificate of occupancy being a true reflection that all works have been completed, it is at least an objective confirmation that most works have been completed. A better test is a satisfactory report from the purchaser’s building consultant, but few developers are prepared to countenance such a hurdle.

Whilst the Court of Appeal in Joseph Street may have identified a shortcut that was open to the developer, it is interesting to note that the developer was not aware of that possibility and there is no suggestion that the purchaser ever suggested to the developer that such a process was available, let alone that the developer refused to follow that course. Apparently, the mere fact that the option was available and not taken was enough to satisfy the Court that the developer had failed to use his best endeavours. A true case of ignorance is no excuse.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Subdivision – Off the plan sales – Best endeavours – Part 1

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The sale of land ‘off the plan’ is a common occurrence in the property market. Its principal virtue is that it provides certainty to both vendor (as to the sale) and purchaser (as to the eventual purchase) of the subject property. Whilst there may be some delay in relation to the eventual settlement, which cannot occur until the proposed plan of subdivision is registered at the Land Titles Office, both parties can be confident that, upon registration, the contract will proceed to settlement on the agreed terms.

Off the plan sales are common in a variety of circumstances, but the two principal scenarios are:

  1. sales of vacant land; and
  2. sales of homes.

Land sales

These sales generally fall into one of two categories:

  1. small-scale subdivisions, perhaps only creating as few as two lots; or
  2. large-scale subdivisions, including ‘greenfield’ sites, creating multiple lots.

Whilst projects in these two categories can have enormous differences in scale – from 2 lots to 1000 or more lots – the same legislative framework guides the subdivisional process (Subdivision Act 1988 (Vic)) and the same legislative framework regulates the vendor’s obligations, and purchaser’s rights, on sale (Sale of Land Act 1962 (Vic)).

Pursuant to the Subdivision Act, the vendor is required to satisfy the local council, acting in a supervisory capacity, that the proposed plan satisfies all of the subdivisional requirements of council and service authorities; and, when satisfied, council will seal the plan and provide a statement of compliance. These documents are then lodged with the Land Titles Office and, in the normal course of events, the plan is registered and settlement may take place.

The Sale of Land Act prohibits completion of the sale until registration of the plan, imposes pre-contract requirements and creates during-contract rights, which are essentially designed to protect purchasers.

The 2008 contract of sale, widely used for sales generally, adopts these broad guidelines; and it is possible to create a contract for an off the plan sale relying on the particulars of sale and general conditions alone, without the need for any special conditions or annexures. This is particularly so for small-scale developments, although larger-scale subdivisions involving substantial earthworks may require the inclusion of a plan showing ‘works affecting the natural surface level’: s 9AB Sale of Land Act.

Home sales

Again, these sales generally fall into one of two categories:

  1. small-scale subdivisions, creating just a few lots for sale; or
  2. multi-unit subdivisions, including high-rise developments.

The same subdivisional and registration processes apply to these developments, with the added complication that councils generally will not issue a statement of compliance until construction of the development is complete.

Such contracts envisage the construction of improvements on the land during the contract, and a special condition will usually be added to the effect that the contract is not a major domestic building contract and that the vendor will enter into a major domestic building contract with a registered builder. The extent of detail provided to the purchaser in respect of the improvements to be erected is not regulated and may vary from reliance by the purchaser on a glossy brochure provided by the vendor (which is not included in the contract) to a full copy of the major domestic building contract (including specification) that the vendor has or will enter into. It is fair to say that purchasers ‘take on faith’ that the vendor will ultimately deliver to the purchaser at the expiration of the contract the product, in all its glory, that was touted as being sold when the purchaser entered into the contract.

Once the contract has been signed and the project is underway, the purchaser enters purgatory – a state of perpetual waiting. Even if the project is a mere land subdivision, ages can pass before the plan is registered. If a home is being constructed, long periods of inactivity cause concern. The default period between contract and settlement (14 days after notification of registration of the plan) is 18 months, but contracts can adopt another period and contracts spanning 60 months are common.

A recent case has considered the vendor’s obligations in terms of completion of the project within the required period: Joseph Street Pty Ltd & Ors v Tan & Anor [2010] VSC 586. The project was a relatively small development by the vendor of six units. The contract completion, or sunset, period was 15 months, and the vendor had entered into a contract with a registered builder for construction of the units. Regrettably, the builder ‘went broke’ and the project was substantially delayed while the vendor put other construction arrangements in place. The sunset period expired, the vendor rescinded the contract and the purchaser sought specific performance. No doubt, given the rising housing market, the property had appreciated and both parties sought to take advantage of that situation.

To succeed, the purchaser had to establish that the vendor was in breach and thus not entitled to rescind. The purchaser sought to do so on the basis of a breach by the vendor of an express contractual obligation to use ‘best endeavours’ to complete the contract within the sunset period. It was also agreed that such an obligation was an implied term of the contract. The court concluded that the true cause of the delay was the collapse of the builder, an occurrence that was beyond the control of the vendor. The vendor had therefore fulfilled its contractual obligations to use best endeavours and was entitled to rescind, thereby retaining the (more valuable) property.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Subdivision – Owners corporation certificates

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

An owners corporation is a legal entity established by statute to represent the owners of property. It is a body corporate and it may come into existence (is incorporated) cert as a consequence of the registration of a plan of subdivision pursuant to the Subdivision Act.

Owners corporation can be huge, or tiny. They can apply to a skyscraper development of hundreds of units, or to a simple two lot subdivision. The policy of treating all developments, whether large or small, in the same way creates difficulties for property lawyers and the determination of the legislators to demand compliance with the strict letter of the law creates unnecessary difficulties for clients.

Multi-unit apartment blocks are big business. Hundreds of owners can pay thousands of dollars of fees per year and government supervision of the managers of such owners corporations is welcome. But this is a million miles away from the affairs of the humble two or three unit development in the ‘burbs. Imposing compliance with an Act spanning 224 sections in those circumstances is overkill and leads to avoidable expense in the conveyancing process.

Whilst accepting that the statutory regime works in the large scale environment, one problem does stand out. A vendor is obliged to include an owners corporation certificate in the Vendors Statement required on the sale of a property affected by an owners corporation. A fee of $150 is payable to the owners corporation for this certificate, which must be provided within 10 business days – both acceptable, if generous, requirements. However many large developments have more than one owners corporation (3 are common and 5 not uncommon) and a charge of $150 for each certificate seems excessive. Like all repetitive processes, the cost of subsequent certificates rarely equals the cost of the first and a fee of $100 for the second and $75 for subsequent certificates would be reasonable. Charges for updating certificates should also be reduced to, say $75.

However the biggest problems arise in the application of the certificate requirements in small scale developments. Large developments have professional managers who generate certificates with ease and are paid to do so. Most small owners corporations are managed by a volunteer member, or not managed at all. The ‘inoperative’ owners corporation is the bane of the conveyancing practitioner’s life. Having to explain to the proverbial ‘little old lady’ (or executor) that the property cannot be sold until the mythical owners corporation certificate is produced smacks of farce when, in the client’s view, the owners corporation does not exist, so how can it provide a certificate?

Faced with this conundrum, the practical solution has been to produce a ‘lite’ certificate – a document following the form of the certificate but revealing that there are no meetings, no levies and, effectively, no owners corporation and to have that ‘certificate’ signed by the client. In terms of disclosure, it provides the prospective purchaser with a perfect perspective of the situation, one which the purchaser, if so minded, can activate in the future.

But practical solutions are anathema to desk-bound bureaucrats who demand compliance with one-size-fits-all regulations and requirements have been introduced (although not as yet operative) that require all owners corporation certificates to be sealed with the common seal of the owners corporation, and existing regulations require the use of the seal to be witnessed by two owners. Now we must tell our clients that before they can sell they have to buy an owners corporation seal and affix the seal to a mythical certificate in the presence of another owner. Alice in Wonderland is alive and well.

The sense of unreality is magnified where the plan of subdivision does not create common property but does create an owners corporation. Where all lots have road access, common property may not be necessary but nevertheless the surveyor may create an owners corporation because service authorities require one entity to be responsible for service facilities. Explaining to a client in such circumstances that there is an owners corporation and that an owners corporation certificate, with seal and witnesses, is required before the sale can proceed makes the adviser look silly.

Regulation of large owners corporations is welcome, but the imposition of those regulations on ‘small’ owners corporations is overkill. Although somewhat arbitrary, a plan of subdivision creating 6 or less lots ought to be exempt from complying with most of the requirements of the Act, although they could choose to do so.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

Subdivision – Off the plan sales – Not so solid

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The case of Clifford v Solid Investments Aust P/L (Solid) has thrown a scare into Victorian developers. Off the plan sales are an important tool for a land or apartment developers. Such sales allow a developer to undertake a development sure in the knowledge that buyers are waiting to complete settlement of some (or all) of the lots being developed upon completion of the project. Indeed, for most developers, a percentage of off the plan sales is a pre-condition for approval of finance in respect of the project.

Until 1985 off the plan sales were prohibited. The Sale of Land Act required plans of subdivision to be registered at the Land Titles Office before a contract of sale could be entered into. Developers argued that this acted as a brake on development and pointed to the ‘pre-sale’ boom in places like Queensland as proof that presales encouraged development. This industry pressure secured amendments that permitted pre-sales in 1985, subject to the requirement that the plan be registered within 12 months of the contract. This was extended in 1989 to 18 months (the present default period) and in 1991 greater flexibility was granted by allowing the contract to set “another period” in lieu of the default period of 18 months.

Since those amendments pre-sales have indeed boomed and the legislation has found a compromise between protecting off the plan purchasers (particularly in respect of the deposit) and encouraging development. However, as is their want, developers have tended to ‘push the envelope’ and Solid is a timely reminder that statutory rights of purchasers cannot be whittled away by contractual terms.

The contract in Solid sought to give the developer the best of both worlds. It allowed for pre-sale by purporting to comply with s 9AE, but rather than being satisfied with the default period of 18 months, the contract nominated a period of 30 months for registration. Certainly that was authorised by the section, which allows for “another period” and theoretically that period could be any period, for instance 10 years. Market resistance might militate against such an extended period, but 5 year construction period contracts do exist.

However the contract included an additional clause purporting to give to the vendor the ability to extend the date for registration beyond 30 months if the project was subject to any of a variety of delaying factors, including inclement weather. Such clauses are indeed prevalent in pre-sale contracts and it was this clause that the purchasers attacked when the project did go beyond the specified period and the vendor sought to extend for delay.

Bongiorno J. concluded that s 9AE was designed to trade off the developer’s desire for flexibility with the purchaser’s need for certainty. The developer carries the risk of the project but pre-sales allow for risk minimisation. In return the purchaser has a degree of certainty in respect of completion and deposit protection in the meantime. As consumer protection legislation, the contract could not remove or reduce the purchaser’s right to avoid and Bongiorno J. held that the additional condition was in conflict with the fundamental purpose of the section and therefore unenforceable. The condition purported to ‘transfer the risk’ of the project to the purchaser and undermined the certainty that the section was designed to provide for the purchaser. The consequence was that the purchaser was entitled to terminate the contract when the 30 month period expired and to demand a refund of the deposit (or return of the bank guarantee), notwithstanding that the vendor had purported to extend the date for registration of the plan beyond the 30 month period.

The Solid contract altered the ‘default’ registration period from 18 months to 30 months. Most contracts adopt the default period, either by not adopting any other period or (unnecessarily) by confirming the 18 month period within the contract. The very interesting question is whether the decision applies not just to contracts that vary the default period, but also to contracts that adopt the default period (either specifically or by default).

The Solid decision was based on principle. That consumer protection principle had recently been affirmed and may, in respect of s 9AE, be described as entitling the purchaser to ‘certainty’ in respect of the completion date. A condition in a contract that allows the vendor to unilaterally extend that date destroys that certainty and offends s 14, whether the construction period is the statutory default period of 18 months or a period other than the 18 months default period (as in Solid). Otherwise a contract that was silent and thereby adopted the 18 months construction period by default could have an extension condition, but a contract that specifically adopted an 18 months construction period, could not. The offence is not what construction period has been adopted (18 months or some other period) or how it has been adopted (specifically or by statutory default) but rather whether the vendor has the ability to unilaterally extend that period, thereby destroying the purchaser’s right to certainty. Such conditions are offensive, irrespective of the construction period and irrespective of how that period was chosen.

The case was confirmed on Appeal.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

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