NSW Fair Trading proposes to force strata schemes to maintain and repair the common property

A Review has found that many strata schemes fail to properly maintain and repair the common property because the capital works fund has no money and/or are unwilling to raise Special Levies. Anecdotally, strata schemes with a high proportion of investors or retirees are more likely to neglect to maintain and repair than schemes with a high proportion of owner-occupiers.

Strata owners corporations are under a statutory duty to maintain and repair the common property under section 106 of the Strata Schemes Management Act 2015 (NSW):

s 106 (1) An owners corporation for a strata scheme must properly maintain
              and keep in a state of good and serviceable repair the common property …

But if a majority of owners does not decide that the repairs are needed, the only way that an owner can force the owners corporation to repair is to make an application to NCAT (the New South Wales Civil and Administrative Tribunal) to recover compensation for their loss:

s 106 (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.

Unfortunately, this can be an expensive and uncertain process.

If the building is new, that is, less than six years old, the new NSW Building Commissioner has the power to order the builder/developer to carry out repairs.

But about 90% of the 83,000 strata schemes in NSW are more than six years old, which means that there is no equivalent to the NSW Building Commissioner who can order repairs.

The NSW Government has decided to come to the rescue. In a recent Statutory Review of the Strata Schemes Development Act 2015 & Strata Schemes Management Act 2015, prepared as a 5 year review of the Acts, it is proposed that NSW Fair Trading be able to order an owners corporation to carry out repairs, and where appropriate, impose a financial penalty.

NSW Government Review on the Strata Schemes Development & Management Acts

The Review was tabled on 29 November 2021.

We examine the findings and recommendations in Part 5.3 in this article.

The object of this Part was to: help ensure building defects are identified and rectified earlier for the safety and amenity of the building. The current situation was described as unsatisfactory:

Public consultation overwhelmingly confirmed that there is widespread frustration in the strata sector about owners corporations’ alleged failure to properly maintain and repair the common property. Particular lot owners face damage and a loss of amenity in their lot while in dispute over their owners corporation’s failure to maintain and repair the common property, for example due to water ingress from a compromised waterproofing membrane. In addition, all lot owners are burdened with escalating costs due to rising insurance premiums and the imposition of special levies to fund remedial works that could have been dealt with in a more cost-effective manner, if they were addressed earlier or proper planning prevented their emergence at all.

NSW Fair Trading is recommending it play the role of a building regulator in enforcing compliance with owners corporations’ statutory duty under section 106 to maintain and repair the common property of older buildings, as an extension of the successes of the Construct NSW strategy for new buildings led by the NSW Building Commissioner, to ensure the safety and amenity of older buildings over the long term.

NSW Fair Trading gives two reasons in the Review:

1. Currently, enforcement “relies on litigation by lot owners after harms have occurred”. Under section 106, the lot owner needs to first suffer a loss and then seek an order from the Tribunal for damages. “However, the experience of many lot owners who successfully apply to the Tribunal on multiple occasions for orders, only to have the owners corporation effectively ignore or delay compliance, which results in further damage and loss of amenity.”
2. The “NSW Building Commissioner has found that the poor condition of many strata buildings that are not new builds (that is, outside of their six year statutory warranty period) is often due to the failure of the owners corporations to properly maintain and repair the building over time, rather than defective building work”. In most cases, “the failure is due to a lack of funds in the capital works account and a reluctance to raise Special Levies”.

The recommendations are:

104.   Amend the Management Act to inset RAB Act*-like powers to order rectification and enter into enforceable undertakings with owners corporations.

105.   Introduce into section 106 of the Management Act an offence provision for an owners corporation’s breach of its statutory duty to maintain and repair common property, with an appropriate penalty to be set following further consultation.

*Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW)

A recommendation is made to allow an owners corporation to defer a maintenance and repair obligation in dispute only where both safety and amenity are preserved:

107.   Amend section 106(4) of the Management Act to insert preservation of the amenity of the common property, as well as its safety, as a condition for allowing owners corporations to defer compliance with their statutory duty to maintain and repair common property.

These recommendations go hand in hand with the 10-year capital works fund plan, which provides the program for maintenance and repair. The review found that some strata schemes had good quality plans, while others treated them as ‘tick the box’ exercises. Here the recommendation is:

111.   Prescribe greater detail on minimum requirements for capital works fund plans and consider mandating an approved form of plan.

Comments

The Review recognises and addresses that the major defect in the current law dealing with maintenance and repair of defects in strata schemes is enforcement.

NSW Fair Trading has promised legislation to implement the recommendations will be prepared in 2022.

The 10-Year Capital Works Fund Plan is the key

Every strata scheme must have a 10-year capital works fund plan (the 10-year plan), which must be reviewed at least once every 5 years.

Sections 79 and 80 of the Strata Schemes Management Act 2015 (NSW) provide that at each annual general meeting, the owners must estimate the contributions to the capital works fund, taking into account the expenses for major repairs or improvements identified in the 10-year plan.

The 10-year plan must include details of the proposed work or maintenance, the timing and anticipated costs of any proposed work, the source of funding for any proposed work.

The work might be painting, roofing and guttering, balconies, driveways, stairs, fences and retaining walls, and window replacement.

If NSW Fair Trading is granted new powers, it will consider whether the 10-year plan of the strata scheme is satisfactory and whether adequate funds are available.

The recent NCAT decision of Maple v The Owners – Strata Plan No. 8950 [2021] NSWCATCD 108 (19 November 2021) illustrates how an owners corporation can successfully demonstrate compliance with a 10-year plan.

In Maple’s case, a strata owner was dissatisfied with the management of the strata scheme (it was self-managed) and applied for the appointment of a compulsory strata manager.

One of the grounds put forward was that special levies raised for the likely cost of rectification of the retaining walls were “grossly inadequate”. The Tribunal rejected this ground, accepting that estimates and ongoing revisions of the cost in the 10-year plan were appropriate. The Tribunal said:

In respect of review of the Capital Works Fund, the Minutes of the Annual General Meeting of the owners corporation dated 24 August 2021 state that the current 10 year Capital Works Fund was reviewed, and it was resolved that “the plan be updated upon completion of the remedial works project relating to the retaining wall”. There is nothing inappropriate about the owners corporation adopting this approach.

The Tribunal is not satisfied that there are inadequate funds in the Administrative Fund or Capital Works Fund for the owners corporation to meet its obligations.

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