A common source of frustration for owners corporations trying to ensure good building management is the long-term building management agreement negotiated by the developer and inherited by the owners corporation. Frequently, this involved sale of building management rights, with little if any regard to the owners corporation’s needs and best interests. However, a recent case suggests that the NSW Civil & Administrative Tribunal may be able and willing to terminate such agreements and that an owners corporation stuck with one should consider taking legal advice to assess whether that is an option for them.

The NCAT decisions in The Owners — Strata Plan No 64807 v Sunaust Properties Pty Ltd (2022) APLC ¶22-002 and The Owners – Strata Plan No. 64807 v Sunaust Properties Pty Ltd [2022] NSWCATCD 20 provide some guidance with this issue:

  • The case involved a large scheme in Ultimo registered on 18 January 2001, but developed in two stages, stage 1 being completed in 2000 and stage 2 being completed in 2009.
  • The Owners — Strata Plan No 64807 and Sunaust Properties Pty Ltd were in dispute in relation to a caretaker agreement (which would now be known as a building management agreement), salient features of which were:

The agreement followed a deed of sale of caretaker rights between the original owner, Meriton and Sunaust, under which Sunaust paid Meriton $310,000 for those rights.

The agreement was executed by the owners corporation on 20 January 2001, shortly after registration of the scheme, by common seal affixed and witnessed by the then strata managing agent.

The agreement had a 10 year term, with 3 x 5 year options to renew, i.e. a total term of 25 years. At the time the dispute came before NCAT, the agreement was in its final option term and due to expire on 15 March 2026.

The agreement also contained a provision, the effect of which was that Sunaust would be required to dispose of two lots (“Caretaker Lots”) held by it in the event of termination of the agreement.

  • The owners corporation had numerous grievances against Sunaust. Although a number of these related to misconduct, mismanagement and alleged breaches of contract, the case was ultimately decided on the basis of whether NCAT should make an order terminating the agreement under Section 72 of the Strata Schemes Management Act 2015 and consequential orders relating to disposal of the Caretaker Lots and costs. Section 72(1) gives NCAT discretion to terminate a building management agreement and Section 72(3) sets out six grounds on which NCAT may do so, three of which were relied on by the owners corporation in this case:

(a)   that the building manager has failed or refused to perform the agreement or has performed it unsatisfactorily.

(b)   that the charges payable under the agreement are unfair.

(c)   that the agreement is harsh, oppressive, unconscionable or unreasonable

  • NCAT held (apparently for the first time) that it should exercise its discretion to make an order terminating the agreement on the basis that it was harsh, oppressive, unconscionable or unreasonable. NCAT considered the meaning of “harsh, oppressive, unconscionable or unreasonable” and found that the relevant agreement met the criteria on various bases, including:

Section 72(3)(a) [failure to perform]:

  • NCAT found that Sunaust had refused to perform the agreement by failing to provide various services (e.g. providing access to CCTV footage), had unsatisfactorily performed the agreement by charging fees to which it was not entitled, by a representative being a strata committee member, by its representatives improperly commencing Supreme Court proceedings on behalf of the owners corporation and by its representatives attempting to prevent an AGM taking place by dishonestly representing that the meeting had been cancelled and misrepresenting the nature of NCAT orders.
  • NCAT noted that these circumstances might also constitute misconduct entitling termination on the basis of breach of contract, but that it was determining whether they constituted a basis for statutory termination under Section 72.

Section 72(3)(b) [unfair charges]. NCAT found the charges under the agreement were unfair, including application of an annual increase which had not been agreed (5% rather than CPI) and unauthorised charges for various services.

Section 72(3)(f) [agreement harsh, oppressive, unconscionable or unreasonable]. NCAT found the agreement to be harsh, oppressive, unconscionable or unreasonable on various grounds, including:

  • disparity of termination rights between the parties.
  • lack of preclusion of the caretaker or its shareholders/directors/employees being strata committee members.
  • lack of requirement that the caretaker comply with the strata management legislation.
  • lack of provisions preventing appointment of Sunaust representatives as point of contact for the strata committee.

NCAT considered some additional points:

The price paid by Sunaust to the original owner for the building management rights. NCAT did not see that as a basis for declining to exercise its discretion to order termination. NCAT did not consider if and when payment of such a price would indicate that discretion should not be exercised, but noted that in this case the building manager had enjoyed its rights for many years and received amounts considerably more than contemplated by the agreement.

NCAT held that it had jurisdiction to make an order under Section 72, notwithstanding submissions on behalf of Sunaust to the effect that:

  • This was prevented by concurrent Supreme Court proceedings pursuant to Clause 5 (7) of schedule 4 of the Civil and Administrative Tribunal Act 2013. Essentially, NCAT differentiated the two sets of proceedings on the basis that the NCAT proceedings concerned termination and consequential orders, while the Supreme Court proceedings concerned monetary matters.
  • The particular caretaker agreement was not a building management agreement to which Section 72 applied, on the basis of a fairly esoteric argument (which NCAT rejected) concerning the effect of transitional provisions. Essentially, NCAT held that caretaker agreements commencing on or after 30 November 2016 are vulnerable to a termination order under Section 72, regardless of whether the caretaker has exclusive possession of a lot.

NCAT subsequently partially stayed its orders concerning disposal of the Caretaker Lots, pending appeal, without disturbing the core orders or the reasoning for them.

Prepared by Bannermans Lawyers

Author: Bannermans Lawyers