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Section 80D – Owners Corporations authorising Legal Action

22 March 2013

On 19 July 2013, Justice Pembroke of the Supreme Court of NSW delivered a

judgment in the case of The Owners – Strata Plan No. 70798 v Bakkante

Constructions Pty Limited [2013] NSWSC 848.  The case concerns an Owners

Corporation’s obligation to properly authorise the commencement of legal

proceedings in accordance with Section 80D of the Strata Schemes Management

Act 1996 (“the Act”).

 

On the application of the owner of a Lot, Dr William Zankin, his Honour

dismissed proceedings which had been commenced under the Home Building Act

1989.  The proceedings were originally commenced in the Consumer, Trader and

Tenancy Tribunal by the Owners Corporation in 2009.  Dr Zankin successfully

contended that the commencement of the proceedings was not authorised by the

Owners Corporation.  I acted for Dr Zankin in the proceedings.

 

His Honour found that legal costs of $260,000 had been incurred by the

Owners Corporation, despite its solicitors providing written estimates of

costs of only $39,000.  It was found that the chairman of the Owners

Corporation, Mr Murray Groom, aided by Mr David Baker, solicitor from

Makinson & d’Apice Lawyers,  commenced proceedings in the name of the Owners

Corporation against Bakkante Constructions Pty Limited (“the builder”) in

relation to defects in the common property which affected unit C17 in the

building.  The Executive Committee and Owners Corporation had not resolved

to commence the proceedings in accordance with the Act.  His Honour found

that “Mr Groom and Mr Baker slipped into a parallel universe, causing the

lot owners to become increasingly committed to legal expenses which they had

not approved and action which they had not authorised”.

 

The Owners Corporation resolved on 24 February 2009, at its annual general

meeting, to defer the commencement of proceedings against the builder, and

to accept the builder’s offer to carry out rectification works.  However, in

the days prior to that meeting, Mr Groom had instructed Mr Baker to commence

proceedings in the Tribunal on 13 February 2009.

 

At the annual general meeting, Lot owners were not informed that proceedings

had already been commenced.

 

As at 13 February 2009, the Executive Committee had only resolved to obtain

advice “to establish the position of the Owners Corporation” in relation to

building defects.  It had not resolved to commence proceedings, and had not

obtained an estimate of legal costs to take legal proceedings.

 

The commencement of the proceedings on 13 February 2009 was not authorised

by the Owners Corporation.

 

In May 2009, the Tribunal proceedings were expanded to include a claim for

defects affecting the whole of the common property and not just unit C17.

This was done without approval by the Owners Corporation.

 

The Tribunal proceedings were transferred to the Supreme Court of New South

Wales in 2011.

 

Under Section 80D of the Act, 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 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.  The regulations may make provision for exempting any type of

legal service or legal action from the operation of Section 80D.  Regulation

15 presently provides:

 

The seeking of legal advice, the provision of legal services or the taking

of legal action is exempt from the operation of section 80D of the Act if

the reasonably estimated cost of seeking the legal advice, having the legal

services provided or taking the legal action would not exceed:

 

(a) an amount equal to the sum of $1,000 for each lot in the strata scheme

concerned (excluding utility lots), or

 

(b) $12,500,

 

whichever is the lesser

 

As at February 2009, the figure was $10,000.

 

The judgment contains a number of important statements about the steps which

should be taken before the commencement of Court proceedings.

 

In particular, it says that Regulation 15 can only meaningfully apply where

there has been an actual decision of the executive committee to take

specified action, accompanied by an estimate of the legal costs of taking

that action from a solicitor.

 

This did not occur in the present case.

 

Also of significance was his Honour’s statement that “the reasonably

estimated cost of taking action by commencing proceedings cannot be

artificially minimised by requesting the solicitor to provide a costs

estimate up to some arbitrary point.Litigation does not work like that.

Once proceedings are commenced, they continue until dismissed or

discontinued or judgment is obtained.  In the usual case, the reasonably

estimated cost of taking action will be the estimate of the costs that the

owners corporation will incur in the proceedings until their final

resolution and determination..In the usual case, once proceedings have been

commenced, they will continue until finality and the estimate should reflect

that fact.”

 

In other words, it is not appropriate for a solicitor, when asked to

commence legal proceedings for an Owners Corporation, to provide an estimate

of the legal costs to take only several limited steps in the proceedings.

The estimate must be a written estimate of the total costs of running the

proceedings to a conclusion.

 

His Honour said that Section 80D of the Act “clearly imports a mandatory

quality” which “provides a compelling linguistic indication that the purpose

of the legislation is that an act done in contravention of Section 80D (or

Regulation 15) will be invalid.”

 

His Honour concluded that actions taken by an executive committee in

contravention of Section 80D, and without complying with the requirements of

Regulation 15 should be treated as invalid and unauthorised.   His Honour

said that the word “must” in Section 80D, means “must”.

 

In ignoring the section, his Honour said that the executive committee, and

particularly its chairman, only have themselves to blame.

 

The proceedings were dismissed.  They are now out of time and cannot be

recommenced.

 

The Owners Corporation, which has incurred several hundred thousand dollars

in legal costs to its own solicitors, Makinson & d’Apice, has been ordered

to pay the builder’s costs and Dr Zankin’s costs.

 

The significance of the case for solicitors who regularly act for Owners

Corporations, and for Owners Corporations, is that when contemplating the

commencement of legal proceedings, a written estimate of costs of

proceedings to their conclusion, should be obtained, and if this estimate

exceeds the amount specified in Regulation 15 (which is presently $12,500),

the proceedings must not be commenced until and unless an Owners Corporation

in general meeting has approved of the proceedings being commenced.

 

The principles expressed in his Honour’s decision reflect exactly the

objectives expressed in the second reading speech to the NSW Parliament

concerning Section 80D; namely:

 

“Concern has been expressed that prior to commencing action individual

owners should be made aware of the cost of legal action and the likelihood

of success….

 

Firstly, if legal action of any type is being contemplated, the estimated

cost of the action is to be provided in writing to all owners in accordance

with the Legal Profession Act.  A meeting of the owners corporation must be

called before the action can actually commence to ensure that everyone can

have a say if they wish….

 

Executive committees will effectively be prevented from undertaking legal

action under their own initiative thus removing the possibility that claims

will be made that a committee has not acted in the interests of all owners

and added to existing conflict rather than dissipated it.”

 

Justice Pembroke’s decision enforces the legislative intention which was

clearly expressed in this speech.