As a result of the changes to strata law in New South Wales contained in the Strata Schemes Management Act 2015 (NSW), where an Owners Corporation fails to comply with its duty to repair and maintain the common property, it may now be liable to pay damages for loss caused by its breach.
This eBulletin sets out the position regarding property damage and economic loss claims against Owners Corporations six months on from the commencement of the Strata Schemes Management Act 2015 (NSW).
There is a strict statutory duty on Owners Corporations in New South Wales to properly repair and maintain the common property vested in them. Under the Strata Schemes Management Act 1996 (NSW) (1996 Act), a breach of this duty did not give rise to an action in damages against the Owners Corporation and/or its strata manager.
Section 62 of the 1996 Act provided that:
- An owners corporation must properly maintain and keep in a state of good and serviceable repair the common property and any personal property vested in the owners corporation.
- An owners corporation must renew or replace any fixtures or fittings comprised in the common property and any personal property vested in the owners corporation.
This obligation was considered in many judgments, most notably by the NSW Court of Appeal in the Thoo case,1 in which the plaintiff claimed damages for breach of statutory duty. The Court of Appeal held that:
- an Owners Corporation has a duty to maintain and repair the common property, but not to improve or enhance it; and
- a lot owner can obtain an order under section 138 of the 1996 Act to ensure that the Owners Corporation complies with its obligations to repair and maintain the common property. However, the 1996 Act prevents a lot owner obtaining orders to recover damages for loss suffered by reason of the Owners Corporation's breach of its statutory duty to repair and maintain the common property.
Negligence and nuisance claims against Owners Corporations
The decision in Thoo's case left open the possibility of claims in negligence (breach of a common law duty of care owed by the Owners Corporation to the lot owner) and nuisance (an unlawful interference with the lot owner's quiet enjoyment of his/her lot, caused or permitted by the Owners Corporation). Unsurprisingly, after the Thoo judgment, a number of lot owners commenced claims in negligence and nuisance against Owners Corporations.
In James,2 the scope and nature of the alleged duty of care was not clearly articulated. James claimed that the Owners Corporation and the strata manager (together, the Owners Corporation) owed a duty of care in carrying out the functions of the Owners Corporation (ie repairing and maintaining the common property) so as to prevent the infliction of loss and damage to James, including by the completion of unnecessary remedial works. The Supreme Court determined that:
- an Owners Corporation does not owe an independent common law duty of care to lot owners to repair and maintain the common property and that there was no apparent legal authority supporting any such duty; and
- to permit an action of damages for a breach of a common law duty of care would be inconsistent with Thoo as well as the statutory regime for dispute resolution contained in Chapter 5 of the 1996 Act.
In the matter of McElwaine,3 a lot owner suffered losses caused by water penetration from the common property onto his lot. McElwaine claimed that the Owners Corporation failed to carry out its obligation to keep the common property in good repair, which was argued to form the basis for McElwaine's claim in nuisance.
In considering whether the 1996 Act precludes a remedy against the Owners Corporation in common law nuisance, the Supreme Court held that a lot owner could not maintain an action for common law nuisance against an Owners Corporation. This was on the basis that the structure of the 1996 Act requires that strata scheme disputes relating to the functions and duties of the Owners Corporations with respect to repairing and maintaining the common property are to be resolved in a way that does not involve the payment of damages.
The Strata Schemes Management Act 2015 (NSW)
Section 106 of the 2015 Act, preserves the strict duty to maintain and repair the common property and expands upon the 1996 Act by adding the below subsection:
"(5) An owner of a lot in a strata scheme may recover from the owners corporation, as damages for breach of statutory duty, any reasonably foreseeable loss suffered by the owner as a result of a contravention of this section by the owners corporation."
The 2015 Act also removes the prohibition on the making of orders for damages by an adjudicator determining a dispute regarding the failure to comply with section 106. This means that under the 2015 Act, a lot owner who has suffered a reasonably foreseeable loss caused by a failure by the Owners Corporation to repair and maintain the common property can claim damages from the Owners Corporation for breach of its statutory duty.
At the time of writing there have been no reported judgments awarding damages for breach of statutory duty under section 106(5), however, it seems likely that there will be many of these claims in the future.
If we apply the facts of Thoo, James, or McElwaine to the 2015 statutory regime, we consider that these cases would likely have been decided as follows:
- Thoo would not have obtained damages because he sought the improvement and enhancement of the common property, as opposed to its repair and maintenance, so he would fail to establish any breach of section 2016 of the 2015 Act.
- Even though the Court found in James that it was not appropriate to impute a duty of care of the character as alleged by James, in considering the claim pursuant to the 2015 Act, it is arguable that James could establish a duty. However, as the Owners Corporation acted reasonably in carrying out the repair and maintenance of the common property, James would not be able to establish any breach or entitlement to damages in the context of the 2015 Act.
- Damages would have been awarded to McElwaine as it is reasonably foreseeable that water ingress through parts of the common property is likely to cause water ingress and damage to adjacent lot property areas.
The 2015 Act does not expressly provide clarification in relation to claims of nuisance and common law negligence. However, now that the prohibition on an award of damages for breach of the duty to repair and maintain common property has been removed from the 2015 Act, the rationale for not awarding damages for common law negligence and/or nuisance has also been removed as to do so, would no longer be inconsistent with the dispute resolution provisions of Part 12 of the 2015 Act. However, we don't expect to see an increase in these types of claims because section 106 now provides for a payment of damages if breach of the statutory duty can be established.
Overall, by reason of the increase in legal liability on the part of the Owners Corporation with respect to its obligations regarding the repair and maintenance of the common property, Owners Corporations face greater exposure to liability claims for failing to comply with these obligations. For that reason, it is important to ensure that the cover in place is sufficient to protect against the anticipated increase in claims.