By-laws review: Beware the rusty ratchet effect

Tucked away near the end of the new strata laws that came into force in NSW almost a year ago is a requirement which is being widely ignored but should be a call to action for every apartment resident in Australia.

The 2015 Act requires every strata scheme in NSW to review their by-laws.  What does “review” mean?  It doesn’t say.  What are the penalties for failure to do so?  There are none.

So why is it even there?  Because it’s a good idea, would be one answer.  That said, reviewing your by-laws (or rules, as they are called in Victoria) is one thing, changing them is another matter entirely.

In fact you need to beware of the “rusty ratchet” effect where in can be a struggle to change by-laws but near impossible to undo them once change has been pushed through.

How would that happen?  Easier than you night think.  A motivated minority organises itself and a few proxy votes, keeps discussion to a minimum and might even wrap it’s controversial proposal in a whole bundle of  changes that seem innocuous.

By the time anyone realises what has happened, the change is locked in and even if half the people who supported it change their minds, it only takes 25 percent of owners to block its reversal.

But let’s look first at how hard it is to get a by-law changed in the first place. The last compulsory by-laws update in NSW was in 1996 where all schemes registered prior to that were given the same basic by-laws.

In Victoria, the law was changed in 2007 so that where schemes didn’t have a specific rule, then the model rule would apply by default.

One common factor in all the Eastern states is that to pass a strata by-law you need a special resolution at a general meeting. And that’s where they all go their different ways.

In NSW you need 75 percent of the voting power of those voting at a general meeting (based on unit entitlements which are based, very roughly, on the value of the units).

In Victoria you also need 75 percent of those voting at the meeting to be in favour.  However, if more than 50 percent of voters but less than 75 per cent agree, it is deemed a provisional approval.  It becomes a by-law unless a petition by 25 percent of owners objecting to it is submitted within 29 days.

And, just to be different, in Queensland a special resolution is passed if at least two-thirds of the votes cast are in favour, provided the number of votes against the motion aren’t more than 25% of the total number of lots.

Finally, the total “contribution schedule lot entitlements” of the votes against the motion must not be more than 25% of the total of those entitlements for the whole scheme.

What are contribution schedule lot entitlements? In Queensland, levies (or fees) have two components, one based on your unit’s share of the running costs of the building while the latter is calculated on your unit’s share of the value of the building.

Regardless of where you live, if your by-laws have been trundling along, oblivious to changes in society, for the past couple of decades, it’s probably time to compare them with the contemporary norms.

But be wary of the rusty ratchet effect.  A motivated minority can take advantage of apathy to push through changes, then effectively block reform when everyone else wakes up to what has happened.

A version of this column appeared in the Australian Financial Review where you can read Flat Chat in the Smart Investor section every weekend.