Did the resident caretaker’s behaviour amount to gross misconduct to the extent that the Owners Corporation was entitled to terminate the Caretaker’s Agreement? If it did, were there provisions in their Agreement which could reserve the caretaker’s rights upon termination?

This was the crux of considerations facing the NSW Court of Appeal in Australia City Properties Management Pty Ltd v The Owners – Strata Plan No 65111 [2021] NSWCA 162.

The Agreement was entered into in March 2001 for 10 years with two renewal options for five years each. There were two subsequent deeds of variation purportedly extending the Agreement until 2041. However, the Owners Corporation terminated the Agreement in 2019, 22 years short of its alleged expiry.

The Owners Corporation claimed it could do so under the Agreement, because the caretaker, Australian City Property Management Pty Ltd (ACPM) had been guilty of either gross misconduct or gross negligence in performing its responsibilities.

The benefits of the Agreement were significant, including an annual remuneration of around $400,000. In the original proceedings the caretaker had sought loss of bargain damages in the realm of $2 million. ACPM had also become proprietor of Lot 179 in the scheme which upon termination under the Agreement, it was obliged to sell, along with its associated caretaker-management rights to the Owners Corporation or its nominee.

The Owners Corporation’s termination claim under the Agreement was based on an allegation of the caretaker’s gross misconduct or gross negligence on a number of grounds including unauthorised usage of electricity; failure to report defects in fire safety systems; offering its own directors for election as strata committee office bearers; and, overcharging for tasks related to the caretaker’s duties. Interestingly, of all the misconduct allegations in this case, the usage of electricity was found to be the clearest example of gross misconduct.

ACPM claimed it was not clear under the Agreement that it should pay for its electricity usage. However, it was found that although there was nothing in the Agreement to suggest that ACPM should pay for electricity used to provide services under the Agreement, there was also nothing in the Agreement that suggested that the Owners Corporation should have to pay for the electricity consumed within the caretaker’s lot owned by ACPM, from which it also ran a leasing and sales agency business.

In allowing the Owners Corporation to pay for electricity used by the caretaker’s lot without reimbursement, it was found that ACPM had used its position to obtain an unauthorised benefit from the Owners Corporation, which amounted to misconduct within the terms of the Agreement. This left the question as to whether this action amounted to gross misconduct, allowing for termination of the Agreement.

The misconduct had to be considered in the context of the ACPM’s deception of the Owners Corporation. Although ACPM were not required to pay for the air conditioning and other amenities used in the course of caretaking activities, the amount of electricity consumed in its other business ventures on the caretaker’s lot over 18 years would have been considerable. However, the seriousness of this extended usage was compounded by the fact that the caretaker had misled the Owners Corporation as to who was in fact paying for the electricity over the last three years of the Agreement. This was found to demonstrate a flagrant disregard of the essential conditions under which the Caretaker was engaged such as to constitute gross misconduct. Essentially, ACPM was taking a benefit which was not only unauthorised but known by ACPM to be unauthorised.

The right to terminate under the Agreement was not an open and shut case because although the Owners Corporation had the right to terminate on the grounds of gross misconduct, it could only do so under specific conditions.

While the Owners Corporation validly terminated the Agreement, ACPM was entitled to damages for the failure by the Owners Corporation to comply with its obligations under the Agreement. Whilst it remained able to sell the caretaker’s lot, the conduct of the Owners Corporation in installing a temporary caretaker meant that ACPM had lost the value of the management rights and the opportunity to assign them. Therefore, ACPM was entitled to damages for this loss.

Ultimately, ACPM was awarded damages amounting to around $1 million and, subsequently, 80 percent of its costs.

Gross misconduct or not, this case stands as a caution for Owners Corporation’s to carefully check what obligations are reserved before executing the termination of a Caretaker’s Agreement.

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

Authors: Suzanne Bancroft & Allison Benson