Rogue developer out of control

First and foremost, I have to say that the advice I am giving below is just my personal opinion and is not professional legal advice.  I am just explaining the possible grounds for a response but I urge you to seek proper legal advice from a specialist strata lawyer as soon as possible.

There are certain fundamentals related to all this, not least that you can’t be charged levies calculated on any other basis than your Unit Entitlements, so I believe the bills that you have been presented with are invalid because they have not been calculated in accordance with the law.

If you haven’t already done so, send the owner a letter (or letters) telling them that their bills breach of Section 78(2) of the Strata Schemes Management Act 1996

78   Manner of levying contributions

(1)  An owners corporation levies a contribution required to be paid to the administrative fund or sinking fund by an owner of a lot by serving on the owner a written notice of the contribution payable.

(2)  Contributions levied by an owners corporation must be levied in respect of each lot and are payable … by the owners in shares proportional to the unit entitlements of their respective lots.

If the original owner proceeds with the meeting and prevents you from voting, there are also processes at NCAT whereby you can get orders to invalidate decisions made at meetings that were not held in accordance with the Act.

You can also apply for financial assistance in pursuing legal claims.

So my first step in your shoes would be to approach an experienced strata lawyer and get them to write a letter to the developer explaining what he can and can’t do and why.  

This is important because if at some time you need to overturn decisions made at the meeting and extract the costs of doing so, you want to be able to prove that the owner was aware that he was breaching the law.

So find a reliable strata lawyer (one of our sponsors is a leader in this field) and get them to send the letter and do whatever you need done, including getting the owner to pay for your legal advice.

If you don’t have time to organise that, then send the owner a letter telling them that they are in breach of the Strata Schemes Management Act and you will be challenging the validity of any meeting under sections 153 and 154 of the Act (see below) and that you will pursue orders under section 162 of the Act for the statutory appointment of a strata manager until such times as a properly constituted first AGM can be held.

Having said that, this is very tricky and you really need to get a strata lawyer on board as soon as possible because I can’t give you professional advice on this.  

A good strata lawyer will be able to sort this out with a letter and find a way of making your developer pay for it.

153   Order invalidating resolution of owners corporation

(1)  An Adjudicator may make an order invalidating any resolution of, or election held by, the persons present at a meeting of an owners corporation if the Adjudicator considers that the provisions of this Act have not been complied with in relation to the meeting.

(2)  An Adjudicator may refuse to make an order under this section but only if the Adjudicator considers:

(a)  that the failure to comply with the provisions of this Act did not adversely affect any person, and

(b)  that compliance with the provisions of this Act would not have resulted in a failure to pass the resolution or have affected the result of the election.

(3)  An application for an order under this section may be made only by an owner or first mortgagee of a lot.

154   Order where voting rights denied or due notice of item of business not given

(1)  An Adjudicator may order that a resolution passed at a general meeting of an owners corporation be treated as a nullity on and from the date of the order if satisfied that the resolution would not have been passed but for the fact that the applicant for the order:

(a)  was improperly denied a vote on the motion for the resolution, or

(b)  was not given due notice of the item of business in relation to which the resolution was passed.

(2)  An application for an order under this section may not be made after 28 days after the date of the meeting at which the resolution was passed.

(3)  If an order under this section is made in relation to a resolution making a by-law or amending or repealing another by-law and the order has been recorded as provided by section 209, the by-laws have force and effect on and from the date the order is so recorded to the same extent as they would have had if the resolution had not been passed.

(4)  Subsection (3) is subject to the by-laws having been or being amended or repealed in accordance with this Act and to any relevant order made by a superior court.

(5)  An application for an order under this section may be made only by a person entitled to vote on the motion for the resolution concerned.

I spoke at length with my Man from the Ministry who confirm that the original owner (developer) is liable for debts calculated on the basis of his retained ownership of the remaining units and their unit entitlements.

By sending out incorrect invoices, he is in breach of the Act which requires him to base levies on accurate estimates of costs.

My contact suggests checking this with Fair Trading by sending  a question on this online form.  You want a direction in writing from Fair Trading as to the correct procedure the developer should be following which you can then pass to him

He also suggests that you and the other owners pay contributions calculated on the basis of your unit entitlements so that you are still ‘financial’ and can vote at the AGM.

At the AGM, you can ask for evidence that the developer has paid his proper share of contributions.  If he hasn’t, he can’t vote. Even if he can, he will be in the minority provided all of you purchasers stick together.

Serious irregularities at the AGM may well reult in it being declared invalid 

The question of the caretaker contract is very worrisome. All such contracts negotiated before the first AGM have to be approved at the AGM or they fall over.  I worry that your developer may have signed a feather-bedded contract from which he  has received payment but which you have to service.

If you get to the AGM, either reject the contract until such times as other quotes can be viewed and considered or, at the very least, limit the contract to one year.

If you can possible do so, delay the AGM until after November 30 when a whole new set of owner-friendly laws come in.

And when you get there, choose a size of strata committee that would exclude the developer who sounds like a bully and is already a nightmare to deal with.

If only three owners want to be on the committee, make it a committee of three (you vote on the size of the strata committee before the election) and don’t elect the developer.

These small scale developers need to realise that when they sell units, they don’t belong to them any more.

We took this issue up with Innovation and Better Regulation (inc. Fair Trading) Minister Victor Dominello’s office.

You can read the entire response below but the significant point is that any dodgy decisions made by a self-interested developer (or ‘original owner’ to give them their Sunday name) can be challenged and overturned by application to NCAT for Section 232 orders.

So now it’s a question of going to the developer and asking them if they want to do this the easy way (accept defeat and behave) or the hard way (pay legal fees, then accept defeat and behave).

Here’s the latest response from Minister Dominello’s office:

1. It appears that the original owner of the strata scheme, during the period prior to the end of the initial period (when at least one third of the unit entitlements have been sold), may be attempting to levy new lot owners for costs, including for unmetered water, associated with the lots that haven’t yet been sold.

[Flat Chat’s] advice to the complainants is essentially correct.  Section 83 of the Strata Schemes Management Act 2015 provides that contributions levied by an owners corporation must be levied in respect of each lot and are payable (subject to this section and section 82) by the owners in shares proportional to the unit entitlements of their respective lots. Therefore, lot owners cannot be required to pay for unmetered water.

It also appears that the original owner has engaged the services of a caretaker. The Act is very clear in that any contract that engages a caretaker or strata managing agent can only be enforced until the first annual general meeting, when it expires. It is then the responsibility of the owners’ corporation at that meeting to engage a caretaker or strata managing agent for the strata scheme if it wishes to do so.

Whilst the advice that [Flat Chat] has provided to the complainant relates to the previous Strata Schemes Management Act 1996, the advice is still largely relevant.

However, the complainant should be made aware of the provisions of s.232 of the new Act, and the associated wider powers of the NSW Civil & Administrative Tribunal (NCAT) to be able to address complaints. NCAT has powers to be able to disallow resolutions made at general meeting, remove members of a strata committee, including its officers, and to appoint a strata managing agent, amongst other powers. Lot owners have a right to apply to NCAT to exercise these powers.

Complaints

NSW Fair Trading has received a complaint regarding water charges in this strata scheme.       

The complainant was provided with information on the application of strata laws and lodging an application for mediation.  If mediation is unsuccessful an application may be lodged with the NSW Civil and Administrative Tribunal.   

Will you keep us posted Faraway Girl – this issue is fascinating (less so for you I can imagine).  Would love to know how he reacts when he realises he has to work within set boundaries.  I hope you don’t have to take him to the Tribunal.

A further point and a reminder of how important it is to keep telling people who refuse to listen what they should and shouldn’t be doing. 

Firstly, Section 26 of the Act (below) restricts the powers of initial owners (developers) and, significantly, allows the Owners Corporation to recover from any debts that were wrongly incurred before the first AGM. It also allows for damages claims against the initial owner as well as the legal costs incurred in recovering debts and damages.

However, there is a potential get-out clause in Section 26 (4)(a) if the initial owner says they weren’t aware that they were breaching the law.  That’s why it’s important to keep writing letters telling them how and why they are in breach and demanding that they communicate in writing with you.

At the very least, I would be pointing out that they:

a. shouldn’t be charging for the water apart from in proportion to levies related to unit entitlements

b. shouldn’t be charging a special levy for lift repairs that surely must come under a warranty and, if not, should be paying the bills  himself

c. shouldn’t be issuing contracts that go beyond the first AGM

d. shouldn’t be adjusting levies from the amount agreed at sale. See Section 89 (below) – it gives owners three years in which to claim back additional levies payments incurred because the initial estimates were too low and/or not properly calculated.

By the way, for the purposes of Section 26, until the first AGM the initial owner or developer is considered to be acting as the Owners Corporation.

In this case, I would be writing to the developer (collectively) with a copy of Section 26 below, warning him that unless he starts complying with the law immediately, when the unit owners take over the running of the building at the AGM, you will be seeking repayment of all debts plus damages from loss of amenity (lights and lifts), plus levy overpayments, plus full legal costs incurred in so doing.

26. Restrictions on powers of owners corporation during initial period

(1) An owners corporation for a strata scheme must not, during the initial period, do any of the following things unless the owners corporation is authorised to do so by an order of the Tribunal under this Division:

1. alter any common property or erect any structure on the common property otherwise than in accordance with a strata development contract,
2. incur a debt for an amount that exceeds the amount then available for repayment of the debt from its administrative fund or its capital works fund,
3. appoint a strata managing agent or a building manager or other person to assist it in the management or control of use of the common property, or the maintenance or repair of the common property, for a period extending beyond the holding of the first annual general meeting of the owners corporation,
4. borrow money or give securities.

(2) An owners corporation may recover from the original owner:

1. as a debt, any amount for which the owners corporation is liable because of a contravention of subsection (1) (b), together with the expenses of the owners corporation incurred in recovering that amount, and
2. as damages for breach of statutory duty, any loss suffered by the owners corporation as a result of any other contravention of this section.

(3) An owner may recover, as damages for breach of statutory duty, any loss that has been suffered by the owner as a result of a contravention of this section (other than subsection (1) (b)).

(4) It is a defence to an action under this section in debt or for damages if it is proved that the original owner:

1. did not know of the contravention on which the action is based, or
2. was not in a position to influence the conduct of the owners corporation in relation to the contravention, or
3. used due diligence to prevent the contravention.

(5) A remedy available under this section does not affect any other remedy.

89 Order requiring original owner to pay compensation for inadequate estimates and levies

(1) The Tribunal may, on application by the owners corporation for or an owner of a lot in the strata scheme, order the original owner of the strata scheme to pay compensation to the owners corporation if the Tribunal determines that the estimates and levies determined during the initial period for the purposes of determining and meeting expenditures relating to the scheme were inadequate to meet the actual or expected expenditures of the owners corporation.

(2) The Tribunal must not make an order under this section if the original owner satisfies the Tribunal that the original owner used due care and diligence in determining the estimates and levies.

(3) An application under this section must be made not later than 3 years after the end of the initial period.