Cost recovery by-laws and strata schemes: are they valid?

Whether or not by-laws empowering the owners corporation to recover costs were valid has been asked, and answered, in two recent cases.

The decisions were The Owners – Strata Plan 91684 v Liu; The Owners SP No. 90189 v Liu [2022] NSWCATAP 1 (Liu) and Coscuez International Pty Ltd v The Owners – Strata Plan No. 46433; The Owners – Strata Plan No. 46433 v Coscuez International Pty Ltd v The Owners – Strata Plan No. 46433 [2022] NSWCATCD 16 November 2022 (unreported) (Coscuez).

In both cases the by-laws were held to be invalid.

Diving a little deeper, in Liu, the by-law was in question prohibited short-term letting where the lot was not the principal place of residence. That by-law also contained provisions that de-activated access devices where an owner or occupier was in breach of the by-law and permitted the owners corporation to recover the cost and expenses under the by-law “as a levy debt”.

The original decision maker found that access to a lot was an inherent property right and that denying access could severely impact on the fundamental rights of lot owners and occupiers which outweighed any potential benefit of the by-law restriction. On this basis the by-law was harsh, unconscionable and oppressive under s136(1) of the Strata Schemes Management Act 2015 and declared invalid under s150 of the Act. The Appeal Panel agreed noting evaluative judgement was required and that the administrative convenience provided by a by-law could not justify interference with the ordinary rights of lot owners. Removing access rights without any conditions, details of how the breach was determined or how long the access was to be deactivated removed an important property right. Using the ‘reasonable proportionality’ test the by-law severely impacted owners and occupants which outweighed any benefit sought to be achieved under the by-law.  

The second issue was whether the owners corporation had the power to make a by-law empowering it to recover costs and expenses under the by-law as if they were a levy debt. Both the original decision maker and the Appeal Panel were clear that it did not, confirming that there was no statutory power to make expenses recoverable under the by-law a recoverable as a levy debt.

In Coscuez, three by-laws were in question. The first contained a occupation restriction of two occupants 16 and over per bedroom per lot and required an indemnity by the lot owner for any expenses arising out of legal proceedings for a breach of the by-law. This by-law was invalid as it conflicted with s136(2), the occupation provisions under s137 and the regulations. It was also considered harsh, unconscionable and oppressive as it removed the ability of a lot owner to challenge the amount payable for costs by predetermining that the lot owner was responsible for them regardless of whether the costs were reasonable or reasonably incurred. The second by-law provided that the lot owner or occupier was responsible for indemnifying the owners corporation for any loss caused by damage to the common property and for paying any fines or penalties imposed by failure to comply with the by-law together with any of the owners corporation’s costs.  The third by-law required lot owners and occupants to comply with the by-laws and enabled the owners corporation to recover as a debt its costs for taking action due to that breach.  The second and third by-laws were also held to be harsh, unconscionable and oppressive for predetermining the responsibility for costs. The issue of whether the cost recovery mechanism in the by-law was within power was not determined due to these findings.

Interestingly Coscuez distinguished between costs recovery under common property rights by-laws that were agreed to by lot owners.

The Coscuez decision means that a by-law empowering a fixed charge or an indemnity would be invalid but there is a possibility that a provision for charging a reasonable fee to cover the owners corporation’s expenses may not be invalid. What is needed is the introduction of reasonably incurred costs and costs that are reasonable in nature.

Coscuez reinforced the position in Liu that a by-law cannot seek to recover its costs as a levy debt.

Where does that leave cost recovery by-laws? The simple answer is that they are unlikely to be upheld if challenged unless the recovery clauses relate to common property rights by-laws or, potentially, that they require costs to be reasonably incurred and be reasonable in nature.

For the future, there is a statutory review process underway with an amending Bill expected to be introduced in 2023 that would expressly permit certain costs to be recovered with potential further amendments in the second stage of the review.

This is general information and should not be considered to be legal advice. If you are affected you should obtain legal advice specific to your individual situation.

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