On 17 July 2014 we are hosting a forum to discuss the amendments to the Owners Corporation Act which came into effect on 17 December 2014.
What follows is a brief summary of the changes and the case that instigated them - Mashane Pty ltd v Owners Corporation RN328577  VSC 417 to provide some background prior to the forum.
Owners Corporation Amendment Bill 2013
During the second reading of the Owners Corporation Amendment Bill 2013, Ms Heidi Victoria, the Minister for Consumer Affairs noted that:
- The bill seeks to confirm the intention of the Owners Corporation Act 2006, namely that the annual fees of an owners corporation should be set according to each member’s lot liability, as set out in the plan of subdivision, and to overcome the effect of the Supreme Court case of Mashane Pty Ltd v Owners Corporation RN328577  VSC 417
- Mashane’s case held that the benefit principle must be applied to levies of annual or special fees that are for repairs, maintenance or other works.
- There is no objection to the benefit principle applying to levies of special fees for extraordinary works.
- However as Mashane’s case sets out, the application of the benefit principle for levies of annual fees will require owners corporations, when setting fees, to identify prospective works, allocate an appropriate proportion of the annual fee to those works, identify who will benefit more by those works and by how much, and issue different fee notice to each member based on those estimates.
- The changes to the act ensure there is no ambiguity about the way the benefit principle should be applied in owners corporations.
Amendments to the Act
The main amendments to the Act are to:
- Section 23 – to clarify that the benefit principle does not apply to annual fees
- Section 24 – to clarify that the benefit principle must be applied to extraordinary fees if the works only benefit some lot owners
- Section 49 – to confirm that the benefit principle is to be applied when costs for repairs are recovered after the works have been undertaken
- Section 53 – amended to note that the benefit principle can be applied when setting levies for upgrading of the common property.
Let’s now look at the case of Mashane to see why these amendments were deemed necessary.
Mashane Pty Ltd brought an application in VCAT for orders to be made that it not be required to contribute towards the costs of balcony works because it is one of 5 lot owners in the 39 apartment building that did not own a balcony.
Repairs were required to the balustrades on the balconies which were in a poor condition with parts of the balustrade at risk of being dislodged if pressure was applied.
At a special general meeting on 29 April 2010, the owners corporation resolved to fund the works ($242,000) partly by a special levy of $65,000 and the rest from the maintenance fund.
The owners corporation’s maintenance plan provided for the balcony balustrade works but listed them to be done in 2028/2029.
On 8 July 2010 Mashane issued proceedings for orders that it should not have to contribute on the ground that the works did not relate to common property and it (Mashane) did not benefit from the works.
On September 2011, the owners corporation at its annual general meeting looked at the question of funding again and agreed to change the scheme so that the $65,000 would be levied 50% on a lot liability basis and 50% from the owners of lots with balconies.
Decision at VCAT
Member Buchanan held:
- On the question as to whether the works were works to common property – while the works may have involved attaching part of the metal sheet inside the lot, the works themselves were clearly done to common property, the balustrades, to rectify defects in the balustrades.
- The maintenance fund - An owners corporation may pay for things not covered by a maintenance plan if payment is approved by special resolution. The Owners Corporation did pass such a resolution.
- The Act does not prevent the maintenance fund from being used for works which confer a differential benefit. The scheme contained in sections 28(3) and 49(2) does impose the principle of “who benefits more pays more” but only in relation to collecting funds, not in relation to how existing funds are spent.
- Benefit – Did the works confer more benefit on a balcony owner than on the applicant? “Such apportionments are of necessity, matters of judgment, not of science”. The owners corporation had clearly turned its attention to the matter and after a long period of debate the owners corporation made an apportionment. “On the evidence... the allocation of benefit in the ultimate funding resolutions was one which was within the range of what would be reasonable”.
Supreme Court proceedings
Justice Macaulay in para 21 of his judgment set out the rules the Act “appears to establish”. He then goes on to discuss the fee levying principle.
He disagreed with Senior Member Vassie’s distinction (in McCarthy v Dandenong Region body Corporate Services (Aust) Pty Ltd) between fees and charges, levied prospectively, and contributions and other amounts recovered retrospectively as constituting the criteria for the application of the benefit principle.
In his opinion “the better view is that the benefit principle in sections 28(3) and 49(2) is intended to modify or qualify the apparently absolute requirement in s23(3) and s24(2) in limited circumstances” because otherwise ss28(3) and 49(2) would otherwise have little or no work to do.
It is this part of his judgment that was cited as the basis for the amendments to the Act.
His Honour went on to answer the following questions of law:
- Does the benefit principle in ss28(3) and 49(2) of the Act operate at the point of paying funds held by the owners corporation, rather than at the point of collecting them?
Macaulay J agreed with the Tribunal member’s view that to the extent the benefit principle applies in the Act it applies at the point of levying and collecting monies from lot owners rather than at the point of payment.
In his opinion, there is accordingly no need to strain to find a mechanism to achieve a benefit adjustment at the point of payment when it is clear that the benefit consideration is applied at the point of levying fees.
- Can a maintenance fund be used to pay for works of repair if the works benefit some owners but not all, or if the works are not strictly in accordance with the maintenance plan so long as payment is approved by special resolution of the owners corporation?
Macaulay J answered that question in the affirmative.
So long as the use of the funds is not in breach of the owners corporation’s duty of good faith, he determined there is no limitation on the owners corporation being able to resolve by special resolution to use the fund.
- Was it wrong for the Tribunal member to find that the benefit principle was in fact applied by treating the two resolutions as a single funding regime?
His Honour was of the opinion that that was entirely reasonable and a practical approach to adopt.
Provided that obligations of honesty and good faith are observed, and appropriate resolutions are obtained, His Honour noted that there is “nothing inherently wrong with an owners corporation using a mixture of sources of funding to meet particular repair and maintenance expenditure”.
What do these changes mean for owners corporations?
- Does this mean that every time extraordinary fees are levied, owners corporations are required to consider the benefit to the various lot owners?
- Similarly, does the owners corporation have to consider the benefit principle if a levy is raised to upgrade common property?
- How about maintenance funds? Do owners corporations now have to apply the benefit principle when setting levies for the maintenance funds?
- How is the benefit principle to be applied?