This case note has been taken from the recently published second-edition of a Guide to ACT Strata Law. A physical copy of the full text can be purchased here.
The applicants are the owners of three units in a block of six. The respondents are the owners corporation and the owners of three other units with a combined voting entitlement of 50.5%.
The applicants sought the repeal or amendment of an ordinary resolution which amended the Sinking Fund Plan to enable a list of proposed works to be undertaken. The works were to be funded by contributions to the sinking fund totalling $300,000 to be levied against its owners over three years. The applicants agreed that some of the proposed works were warranted but opposed the remainder based on the fact that they did not constitute maintenance but rather an upgrade.
The Tribunal noted that the process of merits review requires one to stand in the shoes of the decision maker and make the ‘correct or preferable’ decision (see Brudenall & Ors v Owners Corporation Units Plan No. 202 (Unit Titles) [2016] ACAT 101).
Section 82 of the UTMA provides that an owners corporation must establish a sinking fund and that sinking fund must state the expected sinking fund expenditure for at least the 10 year period of the plan.
Section 83 of the UTMA defines expected sinking fund expenditure as expenditure necessary to maintain in good condition the common property and other property it holds.
The applicants submitted that the disputed works were ‘improvements’ and therefore fell outside the purposes of section 83(1) of the UTMA.
The respondents argued that the disputed works could be characterised as ‘renewal’ under section 83 of the UTMA.
They contended that the term ‘renewal’ in both 83(1)(c) and (d) connoted a broader purpose than simply repair.104 The Tribunal agreed with that to some extent but noted that the meaning of section 83 is not obvious. In determining the meaning of section 83, the Tribunal looked at Justice Parker’s approach in the NSW Supreme Court decision in Glenquarry Park Investments Pty Ltd v Hegyesi [2019] NSWSC 425. Justice Parker observed that the repair and maintenance obligation under section 62 of the Strata Schemes Management Act 1996 (SSMA) was broadly equivalent to section 24 of the UTMA.
Justice Parker then noted that section 65A of the SSMA provided that “an owners corporation may, for the purposes of improving or enhancing the common property, add to or alter it; or erect structures upon it”, provided such action is authorised by a special resolution. Justice Parker then described section 62 as looking back and section 65A as looking forward.
Most importantly, Senior Member Ferguson then observed that the “UTMA has no equivalent provision to section 65A but at section 74 allows an owners corporation to: by special resolution, to establish funds for particular purposes (a special purpose fund). The purposes for which a special purpose fund may be used may only be changed by special resolution of the owners corporation.”
In short, Senior Member Ferguson concluded that money in sinking funds may not be used to upgrade or add or enhance or improve common property. Rather, special purpose funds must be established to fund such works.
This is an important conclusion given it runs counter to the practice of the vast majority of strata managers in the ACT.
The decision then reviewed each of the disputed work items and held that the replacement of the roof, windows, carports and rendering of external walls were all improvements rather than maintenance and therefore could not be funded from the sinking fund.
The applicants also sought an order to the effect that, either everyone is to be on the executive committee, or in the alternative, that one of the respondents is not on it. In response, Senior Member Ferguson made the following observations at paragraphs 121 to 123:
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- Generally it is not preferable to override the process for self-determination established by the UTMA unless there is a good reason to do so. I concluded from the applicant’s comments at the hearing that their primary concern was the imbalance of power which has arisen since Mr Erskine and Mr Kercheval bought their third unit in 2017 and, in doing so, acquired a majority of the voting entitlements. The applicants felt that having all the owners, or alternatively fewer of the respondents, on the executive committee would help redress that imbalance. As Ms Mack said, “So each – we all have some equal say.”
- The scheme of the UTMA is not premised on the principle of all owners having an equal say. The respondents are entitled to use their voting power, both in the general meeting, and the executive committee, as they wish, so long as any decisions made are in accordance with the UTMA and do not unfairly prejudice the other owners. The legislation safeguards the interests of individual owners by providing that decisions of the both the general meeting and the executive committee are subject to review by the tribunal.
- I concluded that the applicants had failed to establish a good reason to override a decision of the corporation made in accordance with the legislation and so decided to uphold the resolution to appoint Mr Kercheval, Mr Erskine and Mr Olsen to the executive committee.
This is general information and should not be considered to be legal advice. You should obtain legal advice specific to your individual situation.
Authors: Christopher Kerin