The importance of s.80D resolutions under the Strata Schemes Management Act in building defect claims

The recent decision in The Owners – Strata Plan No. 70798 v Bakkante underscores the critical importance of Executive Committee members keeping lot owners informed and passing a correctly worded resolution at a general meeting prior to commencing legal proceedings.  As a result of the decision a serious building defects claim has been dismissed, the owners are seriously out of pocket and even if they succeed in holding their former lawyers, strata manager and chairman responsible, they will still have wasted a huge amount of time and money in this sorry saga.

The law

Section 80D of the Strata Schemes Management Act 1996 (NSW) states:-

An owners corporation or executive committee of an owners corporation must not seek legal advice or the provision of any other legal services, or initiate legal action, for which any payment may be required unless a resolution is passed at a general meeting of the owners corporation approving the seeking of the advice or services or the taking of that action.

Regulation 15 of the Strata Schemes Management Regulation 2010 (NSW)- stated (at the time):-

The seeking of legal advice…is exempt from the operation of section 80D of the Act if the reasonably estimated cost of … the legal advice…would not exceed [the lesser of]…$750 for each lot in the strata scheme, or … $10,000.

It is worth noting the current Regulations provide for a minimum threshold of the lesser of $1,000 for each lot or $12,500.

The facts

The history of this matter is well summarised in the 2013 decision of The Owners – Strata Plan No 70798 v Bakkante Constructions Pty Ltd [2013] NSWSC 848 as follows:-

1. Building defects, principally waterproofing defects, were discovered in the common property of the building owned by the Owners – Strata Plan 70798 (“Owners”).
2. In mid-2008, the Owners passed a resolution in a general meeting to engage specialist building experts to advise the Owners as to the state of the defects and other matters.
3. In late 2008, lawyers were engaged to undertake “stage 1” work for an estimate of between $5,000 and $6,000.  These costs were below the threshold to require a s.80D resolution.
4. In late 2008 a lot owner commenced proceedings against the Owners seeking rectification of damage to their unit from water penetration. The Chairman of the EC instructed the then lawyers to “seek compensation on the part of the owners corporation for all losses/costs to which it is entitled.”
5. At this time the Chairman was acting outside of the authority granted by the earlier motions which had not specifically authorised legal action being commenced.  The court noted (at para. 25) that the Chairman:-“Commenced to embark on a wider and more expensive path; a path without authority, without a cost estimate and without the financial safeguards to which the lot owners were entitled… any further material step, such as the commencement of proceedings, required separate consideration by the executive committee.”
6. By February 2009, the invoices rendered by the lawyers had exceeded the relevant figure triggering the need for the Owners to pass a s.80D resolution.  By this time proceedings had been commenced against the builder in the (then) Consumer, Trader and Tenancy Tribunal (“Tribunal”).  The Owners continued that action without any s.80D resolution in place.
7. It should be said that at the time the above proceedings were commenced there was a notice of meeting issued which indicated a motion would be considered to appoint the lawyers then acting to continue to act, but the proceedings were commenced without waiting for that meeting to take place.  The court heavily criticised the Chairman again saying:-“Quite why [the Chairman] thought he was authorised to take this step on behalf of the owners corporation is unclear… The chairman of the executive committee of an owners corporation is not a law unto himself.”
8. At the annual general meeting, the resolution to appoint the existing lawyers was amended to defer the appointment of a lawyer, leaving the Tribunal proceedings at risk of being dismissed for want of a s.80D resolution.
9. The strata manager sensibly advised the executive committee in March 2009 that the legal proceedings were unsupported by resolutions then passed.
10. In May 2009 the Executive Committee decided to expand the proceedings significantly to include defects set out in another expert report with an estimate cost of repairs of $1.4 million, about 10 times larger than the original claim.  This placed the matter well above the jurisdiction of the Tribunal and required that the matter be transferred to the Supreme Court.
11. The builder became aware, possibly via a lot owner connected to the builder, that the proceedings had not been the subject of a s.80D resolution. As a result the builder challenged the proceedings and sought the determination of a separate question, being whether the proceedings had been properly commenced.
12. In 2013 the court considered that question and found that no s.80D resolution had been passed.  The court noted an argument that the Executive Committee could authorise amounts below the required threshold repeatedly for ongoing litigation was inadequate.  It is clear an estimate should have been obtained for running the whole of the proceedings (see Madden v Owners SP 64970 [2013] NSWSC 469 at [56]).  The Owners were ordered to pay the builder’s costs of the proceedings as well as for the lot owner then joined as Second Defendant (who was a representative of the builder).

Despite the fact that the executive committee had authorised the legal action, s.21(4) of the Act provides that decisions of the Owners override decisions of the Executive Committee where they conflict.  As such, the original proceedings were flawed and had to be treated as “invalid and unauthorised” (to use his Honour’s words at [83]).

After the above reasons were published in 2013, the Owners appointed a new strata manager under s.162 of the Act due to the management structure of the Owners not functioning and on 13 August 2013 a ratification motion of sorts was passed, which appeared to seek to ratify the legal proceedings.

The Owners brought a further application before the Supreme Court asking the court to rule on whether that ratification could cure the Owners’ contravention of s.80D of the Act and Regulation 15 in a kind of appeal from the earlier decision.

His Honour Pembroke J remained unswayed by the Owners arguments and:-

1. Was clearly concerned by what he called “the supposed ratification resolution passed on 15 August 2013” which was “highly contentious” in part because of questions over the loss of the Owners ‘self-management’ and of the conduct of the 13 August 2013 meeting;
2. Despite Justice Hammerschlag finding, since the earlier decision in this case, in The Owners Strata Plan No.73943 v 2 Elizabeth Bay Road Pty Ltd [2013] NSWSC 1769 that a failure by Owners to pass the s.80D resolution could be cured by a subsequent ratification, determined that this decision was distinguished from SP73943 as the Owners in that earlier case had quickly ratified the problem when it was discovered.  His Honour highlighted the litany of choices the Owners in this case followed in choosing not to ratify the decision to commence proceedings before the 2013 decision; and
3. Found there was no authority at all to the effect that ratification could occur after a judgment had been made in proceedings.

His Honour further noted that the Executive Committee did not, prior to the earlier hearing seek “absolution and forgiveness” from lot owners by seeking ratification and did not seem to wish to make “full disclosure of all material circumstances” to the lot owners.  His Honour noted:

“The irony is that it was the unwillingness of an earlier executive committee in 2009 to be full and frank with lot owners in connection with the commencement of the proceedings that was the initial cause of the problem on which I was asked to rule.  A common factor in both decisions was [the Chairman].”

In closing, his Honour was particularly harsh, saying:-

“Like Pelion piling on Ossa, one mistake has followed another in this sorry litigation.  I should not allow these proceedings to expand by the introduction of greater complexity, more reasons for lining the pockets of lawyers and more grounds to occupy the time of the Court of Appeal.  The members of the executive committee only have themselves to blame.”

Conclusions

The delays, vast expense and unhappy outcome that the lot owners have been put to in this decision serves as a valuable reminder of the critical importance of doing things right in the first place, ensuring that lot owners are given full disclosure of costs information and that the processes set out in the Strata Schemes Management Act and Regulation are followed.

Strata managers should ensure that:-

1. An estimate is obtained for the full conduct of any proposed litigation;
2. Owners are informed that estimates are not quotations or a fixed price;
3. Costs are tracked against that estimate and update estimates sought when earlier estimates are exceeded; and
4. If Owners insist on acting in contravention of the Act, consideration is given to whether the strata manager should tender his or her resignation.