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Unreasonable Refusal to Make a Common Property Rights By-Law


09 Dec 2022

The matter of Kaye v The Owners – Strata Plan No 4350 [2022] NSWSC 1386 (Kaye) was an appeal from the Appeal Panel to the Supreme Court. The Supreme Court considered whether an Owners Corporation had unreasonably refused to make a common property rights by-law.

The plaintiff lot owner had proposed two versions of a common property rights by-law. The first version of the by-law authorised the lot owner to carry out works to a common property roof area including to replace waterproofing and install new balustrades that would result in a roof terrace area for the lot owner’s use. The first version of the by-law did not offer the Owners Corporation any compensation. The second version of the by-law was the same as the first version of the by-law,  however it required the Owners Corporation to replace the waterproofing membrane and offered the Owners Corporation $7,500 in compensation. The Owners Corporation refused to make the first version of the by-law at three general meetings of the Owners Corporation, and refused to make the second version of the by-law at one general meeting.
The Appeal Panel considered the reasons the Owners Corporation refused to make the first version of the by-law and included a summary of the reasons in their decision which was:

In summary, the matters raised by lot owners (other than the appellants) included that:

(1)   the roof was common property and therefore not available for exclusive use and never should be;
(2)   the information presented with the motion was scant and not detailed enough;
(3)   the works would disrupt others with noise;
(4)   the use of the area after the completion of works would disrupt others with noise;
(5)   if the proposal is approved, it might open a ‘pandora’s box’ of other applications and approvals;
(6)   changing the balcony terrace requires development consent which could trigger a fire order;
(7)   no compensation was provided;
(8)   the potential loss of privacy, including any person standing on the proposed exclusive use area will be able to see directly onto the Lot 8 rooftop area, into the stairwell of Lot 8 and possibly into the living area of the lot;
(9)   [the lot owner]  was looking to make ‘a quick buck’ from his investment and he would likely sell Lot 4 once he had exclusive use over the roof terrace;
(10)   there was no reassurance that additional common property benefits would not be sought.”

The Appeal Panel found that the Owners Corporation was not unreasonable in their reasons to refuse to make the first version of the by-law (the appeal to the Appeal Panel was somewhat limited to that question).The lot owner appealed the decision and argued that the Appeal Panel failed to determine that the Owners Corporation unreasonably refused to make the first version of the by-law.

The Supreme Court considered the ruling in Capcelea v The Owners – Strata Plan No 48887 [2019] NSWCATCD 27 which considered section 146(2) of the Strata Schemes Management Act 2015 (the Act). In Kaye, the Supreme Court found that the “two matters identified in section 146(2) are not expressed as relevant to the unreasonable refusal criterion, but to the determination by the Tribunal as to whether to make an order. Furthermore, that section 149(2) identifies two sets of interests to which regard must be had: it does not prescribe a weighing of one set against another.”
The Supreme Court found that the Appeal Panel’s finding that no lot owner other than the plaintiff had access to the roof area was incorrect. It considered that it was possible that with development of the common property, access to the roof area could be provided to any lot owner.
The lot owner also argued that that where the Tribunal considered the offer of $7,500 in compensation in the second version of the by-law to be too low, that with the lot owner’s consent  under section 146(3) of the Act, the Tribunal could adjust the compensation amount to $38,000. The Supreme Court concluded that section 146(3) could not be engaged unless the preconditions in section 146(1)(a) – that the Owners Corporation had unreasonably refused to make the by-law – was satisfied. The Court found that neither the Tribunal nor the Appeal Panel found that the Owners Corporation had been unreasonable in relation to the second version of the by-law therefore section 146(3) was not engaged.
The plaintiff argued that specific matters in the Appeal Panel’s summary were not supported by evidence or were wrong based on the law. In particular, the Supreme Court held that the statement “the roof area was common property and not available for exclusive use” was a flawed reason on its face but in obiter found that that there might be more nuanced reasons to justify the conservative approach the statement suggests including that insufficient information had been presented to the Owners Corporation, because one approval might open a floodgate which could then not reasonably be rejected, or because an owner might seek approval in a piecemeal fashion.

The Supreme Court found the Appeal Panel was not in error to consider that the use of the roof area once it became a terrace would disrupt others with noise. The Supreme Court also found that it was not in error to consider that privacy of other lots may be impacted following the change to common property. The Supreme Court found that it was not unreasonable for other lot owners to consider what possible disadvantages changes to the common property might have for them stating “lot owners were entitled to have regard to their own interests [when voting on the motions to make the first and or second version of the by-law] and, so long as they did not act unreasonably, have regard to their own experience and beliefs as to how a particular change might affect them”.
In relation to the lack of compensation offered by the plaintiff in the first version of the by-law, the Supreme Court found that there were two limbs to the plaintiff’s submissions. Firstly, that it would be unreasonable for the Owners Corporation to refuse a proposal if it were financially advantageous to the Owners Corporation. Secondly, that it was unreasonable for the Owners Corporation to disregard the plaintiff’s offer to do the waterproofing work at their cost. In relation to the first limb, the Supreme Court found it was not unreasonable for the Owners Corporation to refuse a proposal which was finically attractive in order to retain other intangible and even speculative benefits. Secondly, that it was not unreasonable for the Owners Corporation to refuse the offer by the plaintiff to carry out and pay for repair to common property (i.e. replacement of the waterproofing) – something that could happen immediately – in exchange for the exclusive use rights – which is a long term loss of access by the Owners Corporation or other lot owners or occupiers to that part of common property.
The Supreme Court noted in relation to a decision maker’s role in assessing whether an owners corporation has been unreasonable, that it is a gloss on the legislation to assess whether an owners corporation had “no objectively reasonable reasons.
Ultimately, the Supreme Court was not satisfied there had been an error of law by the Appeal Panel and dismissed the appeal. The Supreme Court noted it was clear that a large minority of owners had legitimate concerns about the wisdom of the first version of the by-law.

Kerin Benson Lawyers acted for the Owners Corporation.
This is general information and should not be considered to be legal advice. You should obtain legal advice specific to your individual situation.
Authors: Gemma Lumley & Allison Benson