The Importance of Section 80D Resolutions v6

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Suite 603, Level 6, 541 Kent Street Sydney NSW 2000

(P). 02 8272 1999

The Importance of Section 80D Resolutions

Presented by Pierrette KhourySenior Lawyer

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A recent decision in the Supreme Court, The Owners – Strata Plan No. 70798 v Bakkante, sets out the critical importance of Executive Committee members keeping lot owners informed and passing an accurately worded resolution at a general meeting prior to commencing legal proceedings.

___________________________________________________________________________________________________________The Importance of Section 80D Resolutions | Presentation by Turnbull Bowles Lawyers | May 2014

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The Importance of Section 80D Resolutions | Presentation by Turnbull Bowles Lawyers | May 2014

Background of the CaseIn this matter, building defects, principally waterproofing defects, were discovered in the common property of the building owned by the Owners – Strata Plan 70798 (“Owners”).

In the middle of 2008, the Owners passed a resolution in a general meeting to engage specialist building experts to advise on the Owners as to the state of the defects and other matters.

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In late 2008, lawyers were engaged to undertake stage 1 work. At that stage a cost estimate was provided of between $5,000 and $6,000. These costs were below the threshold to require a section 80D resolution, pursuant to the Strata Schemes Management Act 1996 (“Act”). The threshold is over $12,500, or an equal amount to the sum of $1,000 for each lot in the strata scheme concerned.

In late 2008 a lot owner commenced proceedings against the Owners seeking rectification of damage to their unit as a result of water penetration. The Chairman of the Executive Committee instructed the then lawyers to seek compensation on the part of the Owners Corporation for all losses/costs to which it is entitled.

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At this time, the chairman was acting outside of the authority granted by earlier motions which had not specifically authorised that legal action be commenced.

By February 2009, the invoices rendered by the lawyers had exceeded the relevant threshold which necessitated the need for the Owners to pass a section 80D resolution. By this time the proceedings had been commenced against the builder in the (then) Consumer, Trader and Tenancy Tribunal.

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At the time the proceedings were commenced there was a notice of a 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.

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 section 80D resolution.

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The Strata Manager had advised the Executive Committee in March 2009 that the legal proceedings were unsupported by resolutions then passed.

In May 2009 the Executive Committee decided to amend its claim significantly to include defects set out in another expert report. This had an estimated cost of repairs of $1.4 million. This placed the matter well above the jurisdiction of the Tribunal and required that the matter be transferred to the Supreme Court.

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It should be noted that the NSW Civil and Administrative Tribunal, formerly known as the Consumer, Trader and Tenancy Tribunal, has jurisdiction to hear claims up to $500,000.

Thereafter Turnbull Bowles Lawyers acting on behalf of the builder became aware that the proceedings had not been the subject of a section 80D resolution. As a result we were instructed to challenge the proceedings and to seek the determination of a separate question, being whether the proceedings had been properly commenced.

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In 2013 the court considered that question and determined that no section 80D resolution had been passed. The court noted that the Executive Committee’s argument that it 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 as set out in the case of Madden v Owners SP 64970 [2013] NSWSC 469 at [56]. In that case the Owners were ordered to pay the builder’s costs of the proceedings as well as for the lot owner who was then joined as a Second Defendant (who was a representative of the builder).

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Despite the fact that the Executive Committee had authorised the legal action, section 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”, his Honour determined at paragraph 83.

After the above reasons were published in 2013, the Owners appointed a new Strata Manager under section 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.

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The Owners then brought a further application before the Supreme Court asking the court to rule on whether that ratification could cure the Owners’ contravention of section 80D of the Act. This application faced problems as the Owners Corporation had already run its case. His Honour dismissed the application, criticising the Owners Corporation.

As a result of the decision a significant building defects claim was subsequently dismissed. The Owners Corporation then appealed to the Court of Australia. This appeal was dismissed on 12 May 2014.

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The LegislationSection 80D of the Act provides:

“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.”

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FindingsHis Honour Justice Pembroke remained unmoved by the Owners’ arguments and held:

• That “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

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• Despite Justice Hammerschlag’s 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 the Owners to pass the section 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.

___________________________________________________________________________________________________________The Importance of Section 80D Resolutions | Presentation by Turnbull Bowles Lawyers | May 2014

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• 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.

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ConclusionThis case highlights the significant 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.

We refer to the decision of Hammerschlag J in the matter of Owners Strata Plan 73943 v 2 Elizabeth Bay Road Pty Ltd (2013) NSWSC 1769. This decision is also the subject of an Appeal which has yet to be heard.

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In that matter, his Honour found a breach of the Act but went on to hold that a failure to comply with section 80D of the Strata Schemes Management Act at the start of the proceedings can be cured by a subsequent ratification assuming it is brought in a timely manner.

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Accordingly, going forward 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 updated cost estimates are provided 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.

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An Owners Corporation should take steps to ensure it complies with section 80D of the Act, and take immediate steps to examine the records of the strata scheme which authorise the commencement of legal proceedings and authorise or confirm acceptance of the cost disclosure and agreement.

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The Importance of Section 80D Resolutions v6