OMB Solicitors

The Appointment Of A Building Manager In A Strata Scheme

In a year dominated by COVID-19, vaccines and lockdowns, do not be surprised if you missed an equally significant headline from New South Wales’ highest court – the appointment of a building manager in a strata scheme!

When the Strata Schemes Management Act 1996 (NSW) was amended by the Strata Schemes Management Act 2002 (NSW), the legislation restricted a building manager from continuously extending an agreement for more than 10 years after the Amendment Act, including any term or option to renew the agreement.

Previously, a building manager could be engaged by an owners corporation indefinitely.

However, it appears that the recent appeal decision of Australia City Properties Management Pty Ltd v The Owners – Strata Plan No 65111 has, for the time being at least, affirmed the legislature’s intention when it introduced a 10 year limit on the appointment of a building manager in a strata scheme.

Australia City Properties Management Pty Ltd

In Australia City Properties Management Pty Ltd v The Owners – Strata Plan No 65111, there was a dispute between the building manager and the owners corporation regarding the term of the management agreement (“Agreement”), which was entered into on 30 March 2001 – before the Amendment Act.

While the Agreement, dated March 2001, was for an initial period of ten years, with an option to renew for three (3) additional terms of five (5) years, the building manager and owners corporation entered into two (2) deeds of variation (“Deeds”) in March 2010 and March 2015 – after the Amendment Act took effect.

The Deeds had the effect of extending the term of the Agreement beyond the 10-year limit, such that it had an expiration date of March 2041.

In August 2019, the owners corporation terminated the Agreement, on the basis that the building manager had been “grossly negligent” in performing its caretaking duties. The manager argued that the Agreement was not validly terminated and as such, was entitled to damages in the amount of $2 million. These damages were calculated on the basis the Agreement was for a (total) term of 40 years.

Supreme Court Appeal

The issue on appeal was whether the Deeds in 2010 and 2015 were considered “caretaker agreements” under the Amendment Act, such that they were limited to a term of 10 years.

In determining whether the Deeds were limited to a term of 10 years, the Supreme Court considered their “text, context and purpose”.

Given the purpose of the Deeds was to grant a further option under the original Caretaking Agreement, the Court held that the Deeds were, in fact, separate “caretaker agreements”, as defined by the legislation.

The effect of this is that the Deeds were “read down” to expire on 29 April 2025, rather than March 2041, such that the Agreement was limited to a term of 10 years.

As a result, any award of damages to the service contractor for unlawful termination of the Agreement would be calculated up to April 2025.

While Australia City Properties Management may ultimately reach the High Court of Australia, for the time being at least, the decision by Chief Justice Bathurst has provided guidance on the term of a management agreement in a strata scheme.

Will Queensland follow?

While the term of appointment for building managers in NSW strata schemes is (currently) capped at a maximum term of 10 years, the same cannot be said of schemes across the border.

In Queensland, bodies corporate which are regulated by the Body Corporate and Community Management (Accommodation Module) Regulation 2020 (“the Accommodation Module”) may appoint a service contractor for a maximum term of 25 years, including any terms of extension.

And if you thought snap lockdowns were long…

Bodies corporate regulated under the Body Corporate and Community Management (Standard Module) Regulation 2020 are currently restricted to a term of ten (10) years.

Given the significance of the decision in Australia City Properties Management, it will be interesting to see if Queensland follows the lead of New South Wales and implements a limit on the term of a caretaking agreement for schemes regulated under the Accommodation Module.

OMB – Specialist Strata Professionals

OMB Solicitors’ specialist strata practitioners have recently seen a number of building managers attempt to circumvent the 10-year limit by requesting owners corporations extend their management agreement beyond this term.

Owners corporations should consult with OMB Solicitors when reviewing (or varying) the terms of its management agreement, to ensure it complies with the legislation.

The sudden collapse of a Miami apartment block on June 24, killing more than 98 people, made headlines around the world and focused attention on the horrific consequences of unaddressed building defects.

Initial findings on the collapse of the Champlain Towers South in the Florida suburb of Surfside suggest long-term degradation of reinforced concrete supports in the underground parking garage caused by water penetration from a leaking pool was a major factor.

In Australia, the increasing popularity of living close to work, retail and transport facilities means ever more high-rise apartments in our major cities and regional centres. As a result, developers rapidly construct new blocks to meet the demand, not always with the rigour required of modern construction and building codes.

High profile local cases of building defects such as the slanting of Sydney’s Opal Tower and the fire at Melbourne’s Lacrosse building have highlighted some of the legal issues involved for owners in such properties, which we’ll look at in this post.

Building defects and strata properties

A building defect can be caused in a number of ways, from faulty workmanship to poor design, use of defective materials, or a failure by a builder to follow standards set out in the National Construction Code.

For a fault caused by any of these means to be considered a defect, it must carry the risk of damage or destruction to the building or make it unable to be used for its intended purpose. This is considered a major defect.

A minor defect, by contrast, is any defect that is not a major defect and will usually be a cosmetic fault.

Common building defects include damage caused by inadequate waterproofing or cracks which appear in walls, ceilings and floors due to issues with a building’s structure.

In Queensland, a building defect is a faulty or unsatisfactory work under the terms of the Queensland Building and Construction Commission Act (‘the Act’).

Under the Act, statutory warranties exist in relation to new buildings, enforced by the QBCC. Within these periods, the builder is responsible for remedying any defects.

Defect liability periods in Queensland

Defect liability periods are the time limits in Queensland within which an owner or body corporate can make a claim against the builder to remedy defects.

Structural, or major, defects such as water leaks, major cracks and structural failure have a defect liability period of six years + six months from the ‘practical completion’ date of the building in Queensland.

Non-structural defects such as frayed carpet, or paint and tiling defects, for example, have a 12-month defect liability period.

Once a defect is detected and known about, it must be reported to the builder within 12 months through lodgment of a defective building work complaint with the Queensland Building & Construction Commission.

Defects found on both individual and common property in strata properties are covered by the statutory warranty. The body corporate may bring an action to have the defect remedied on behalf of a lot owner.

It’s important for a body corporate to act quickly once a building defect is known about as after the expiration of the warranty, responsibility for rectification will generally fall on the body.

It should be noted that a body corporate is not responsible for building defects within lots unless those defects relate to the structure of a building and the building was created in a building format plan.

Strata insurance claims

Strata insurance is taken out by a body corporate to cover public liability, damage to common property and common area contents, theft, recovery after a catastrophe, and legal liability for office bearers.

Many strata insurance policies include excluding any loss or damage arising from an existing defect in the building’s construction and/or design.

Such exclusion may leave a body corporate with limited or no cover in relation to building defects.

Bodies corporate should also check a similar exclusion is not part of the public liability coverage of the policy so that they are covered in the case of personal injury that might result from a building defect.

A body corporate can reduce its exposure by establishing the practical completion date of the building and being aware of the statutory warranty period; commissioning a defect report well before the expiry of the warranty; actioning any defects identified in the report before the liability defection period expires.

Consult specialist legal professionals

OMB Solicitors’ specialist practitioners in this area of the law mean we regularly advise bodies corporate on the complexities of strata insurance policies when building defects arise in buildings.

We will help advise on the fine print of the policy. We will also provide a body corporate with the right advice to enforce rectification of defects through the QBCC, or a separate contractual claim against a developer or builder in relation to defects.

Call us Gold coast Solicitors today if advice is required on any of the issues raised in this article.