On 24 November 2023, Her Honour Justice Peden gave judgement in The Owners – Strata Plan No 80877 v Lannock Capital 2 Pty Ltd [2023] NSWSC 1401 in the ongoing saga that is well known as Mascot Towers.

The background facts are well known from extensive media coverage. Mascot Towers comprises two towers located in Mascot, Sydney. Construction was completed in July 2009. Extensive defects became apparent between 2011-2018. Significant structural defects were identified during a routine inspection in April 2019. On 14 June 2019, Fire and Rescue NSW issued an evacuation order owing to a risk of collapse of the building and since then the owners corporation has been attempting to deal with the defects and concerns of lot owners who cannot occupy their properties. .

To fund rectification of the building, two loans of $10 million and $22.5 million were entered into with Lannock Capital 2 Pty Ltd. As at the date of the judgement, approximately $15.7 million was owed by the owners corporation to Lannock under the two loans. Projected costs for the rectification of the building however increased from $33.8 million to $45 million.

Having previously considered the possibility of a collective sale, the owners corporation sought an order under section 136 of the Strata Schemes Management Act 2015 to terminate the strata scheme.  Section 136 provides that an order for termination may be made by the Court together with directions including the sale or disposition of the owners corporation’s property, discharge of liabilities and persons liable to contribute amounts required to discharge liabilities and their proportionate liability. The decision to apply for a termination order was resolved at a meeting held on 4 April 2022 however it was not unanimously supported by all owners able to vote at the meeting.

In addition to the owners corporation and Lannock other parties in the proceedings included a commercial tenant, six banks holding registered mortgages over approximately 110 units and one lot owner represented by Kerin Benson Lawyers .

Applications for termination of strata schemes are not unprecedented and had been considered under previous legislation (including section 51, Strata Titles Act 1973) however what made  the application to terminate the scheme novel were the facts that the owners corporation submitted it was insolvent and unable to pay its debts, he application was not brought by all lot owners and there were competing creditors.

Her Honour declined to make a termination order.

Firstly, her Honour did not agree that the owners corporation was insolvent as it was required to raise levies from owners to pay its debts. There was also no evidence that the owners corporation was unable to pay its debts. This highlights a limitation for strata lot owners that is not often considered which is that that lot owners are ultimately responsible for the owners corporations debts.

Her Honour also expressed concern regarding the lack of information available to the owners regarding the accepted evidence that rectification costs (agreed by the parties experts to be $21.5 million) were substantially less than what had been presented in April 2022 ($50 million) and the lack of understanding regarding the ongoing liability of owners to pay outstanding debts even should the scheme be terminated.

Her Honour distinguished the circumstances in this instance from those cases in which termination orders had been made insofar as they had involved termination for particular purposes (such as re-development) and every lot owner has sought such an order. Her Honour considered that a more appropriate course of action would be a collective sale which would potentially yield a greater sum from the sale price ($100 million) and greater protections for owners.

Had her Honour made the termination order, she considered that the banks as registered mortgagees would have priority over Lannock in relation to any sale of the owners corporation’s property.

In so doing, her Honour noted the fundamental concept of indefeasibility of registered interests under the Real Property Act 1900 (NSW).

Furthermore, her Honour did not accept that an owners corporation’s right under section 84 of the SSMA to seek payment of outstanding levies from incoming lot owners and or mortgagees in possession somehow “elevated” Lannock’s unsecured debt above the secured debts of the mortgagee-banks. She held that the mortgagees ought to have their rights before any termination “preserved after termination”.

Finally, her Honour did not accept that such an approach created an “inequity” amongst owners with and without mortgages with the former having to make up the shortfall owing to the funds of the latter being utilised to satisfy secured debts. Owners would be required to pay unsecured debts by one means or another.

Accordingly, had a termination order been made, her Honour held that:

  1. the “pooled fund” from the sale of the property of the owners corporation would be allocated to each lot owner in accordance with their unit entitlement;
  2. the portion of the fund so allocated would be charged by any current registered mortgagees;
  3. any remaining portion would be allocated to the lot owner; and
  4. each lot owner would be liable to contribute in their proportion to the debts of the owners corporation.

Finally, had a termination order been made, her Honour accepted the submission of the only lot owner in the proceedings that any administrator of the termination be appointed with the same duties and obligations and functions of a liquidator under the relevant provision of the Corporations Act 2001.

The decision illustrates that great care ought be taken prior to any application for the termination of a strata scheme being made. The circumstances of this case were clearly distinguishable from earlier decisions in which termination orders had been made insofar as consensus relating to the application was not present and there was not a clear and determinate purpose or benefit for the termination.

In considering any such application, applicants should consider the precise evidence required and whether the owners corporation would benefit from alternate courses of action such as a collective sale.

This is general information and should not be considered to be legal advice. You should obtain legal advice specific to your individual situation.

Author: Tom Waugh & Allison Benson