The Owners Strata Plan No 80877 v Lannock Capital 2 Pty Ltd

[2023] NSWSC 1401

Supreme Court

New South Wales

Medium Neutral Citation:

The Owners – Strata Plan No 80877 v Lannock Capital 2 Pty Ltd [2023] NSWSC 1401

Hearing dates:

23, 24 and 25 October 2023; further submissions received 3 November 2023

Decision date:

24 November 2023

Jurisdiction:

Equity - Real Property List

Before:

Peden J

Decision:

(1) Further Amended Summons is dismissed.

(2) Parties are to confer and attempt to agree on appropriate costs orders. Should agreement not be possible within 7 days, the parties are to make a joint approach to the Associate to Peden J with a proposed timetable for a costs hearing.

Catchwords:

LAND LAW — Strata title — Termination of strata scheme — Where termination orders sought not unanimous — Where there are existing debts owed by owners corporation to an unsecured lender — Whether registered mortgagees ought be paid first from proceeds of sale if termination orders made — Whether collective sale pursuant to Part 10 of the Strata Schemes Development Act is more appropriate in the circumstances

Legislation Cited:

Conveyancing Act 1919 (NSW)

Conveyancing (Strata Titles) Act 1961 (NSW)

Corporations Act 2001 (Cth)

Real Property Act 1900 (NSW)

Strata Schemes Development Act 2015 (NSW)

Strata Schemes (Freehold Development) Bill 1973 (NSW)

Strata Schemes Management Act 2015 (NSW)

Strata Titles Act 1973 (NSW)

Cases Cited:

Application of Custom Credit Corporation Ltd (1975) 2 BPR 97083

Borsky v Proprietors Strata Plan No 19833 (1986) 7 NSWLR 84

Brenchley v The Owners – Strata Plan No 80609 [2022] NSWSC 646

Community Association DP 270982 v Registrar-General for New South Wales [2018] NSWSC 225

Community Association DP270212 v Registrar-General (NSW) (2004) 62 NSWLR 25

De Mol Investments Pty Ltd v Owners of Strata Plan No 31757 [2019] WADC 86

Denham Constructions Pty Ltd and Another v Proprietors Strata Plan No 17833 (1987) 11 NSWLR 615

Humphries v Proprietors "Surfers Palms North" Group Titles Plan 1955 (1994) 179 CLR 597

Mary Erling v The Owners Strata Plan No 8891 [2010] NSWSC 824

Massalski v The Owners SP 90255 [2023] NSWSC 23

Owners of Argosy Court Strata Plan 21513 v Wise (2016) 90 SR (WA) 148

Pritpro Pty Ltd v Willoughby Municipal Council (1986) 3 BPR 97224

Singh v Commonwealth of Australia (2004) 222 CLR 322

The Owners Strata Plan No 5709 v Anthony Andrews and Anor [2009] NSWCA 189

Texts Cited:

New South Wales Fair Trading, Strata Title Law Reform, (November 2013) New South Wales Legislative Assembly, Parliamentary Debates (Hansard), 14 October 2015

New South Wales Legislative Assembly, Parliamentary Debates (Hansard), 26 September, 1973

Category:

Principal judgment

Parties:

The Owners – Strata Plan No 80877 (Plaintiff)
Lannock Capital 2 Pty Ltd (First Defendant)
Mr Anthony Stevens (Second Defendant)
Commonwealth Bank of Australia (Third Defendant)
Another Bucket of Worms Pty Ltd (Fourth Defendant)
Westpac Banking Corporation (Fifth Defendant)
Australia and New Zealand Banking Group (Sixth Defendant)
Macquarie Bank Limited (Seventh Defendant)
National Australia Bank Limited (Eighth Defendant)
AFSH Nominees Pty Ltd (Ninth Defendant)

Representation:

Counsel:
M Castle and M Keene (Plaintiff)
D Sulan SC, J Mee and S Hoare (First Defendant)
M Isaac (Second Defendant)
Z Hillman (Third Defendant)
S Robertson SC and D Allen (Fourth Defendant)
T Mehigan SC and M Collins (Sixth Defendant)
V Whittaker SC and H Lenigas (Fifth, Eighth and Ninth Defendants)

Solicitors:
SLF Lawyers (Plaintiff)
Bugden Allen Graham Lawyers (First Defendant)
Kerin Benson Lawyers (Second Defendant)
Dentons (Third and Sixth Defendants)
Colin, Biggers & Paisley (Fourth Defendant)
TG Legal (Fifth, Eighth and Ninth Defendants)

File Number(s):

2022/00156218

Publication restriction:

Nil

JUDGMENT

1. The plaintiff owners corporation, Owners – Strata Plan No 80877 (OC), is applying for an order to terminate the strata scheme pursuant to s 136 Strata Schemes Development Act2015 (NSW) (SSDA), and for directions for the winding up of the scheme. The application is brought in very unfortunate circumstances, where defects in the scheme’s building have rendered it substantially uninhabitable and would require a significant amount of money to rectify.

Factual Background

2. The following facts are not in dispute.

3. The strata plan applies to two towers of residential and commercial units located in Mascot in Sydney, New South Wales, and is referred to as “Mascot Towers”. The strata plan was registered on 30 July 2008. Construction was completed in 2009. Between 2011 and 2018, defects were found, and the OC commenced proceedings against the builder/developer and its building manager. Those proceedings were settled.

4. On or around 18 April 2019, significant structural cracks were first identified in the transfer beams of Mascot Towers during a routine inspection. On the evening of 14 June 2019, Fire and Rescue NSW issued an order that all occupants be evacuated, because the building was deemed to be unsafe and at risk of collapse. On 21 August 2019, the Fire and Rescue NSW confirmed the decision to evacuate was made as a result of engineers advising the building was unsafe, and occupants’ safety could not be guaranteed. Shortly thereafter, some commercial lots were able to be reoccupied.

5. The OC engaged various building consultants about rectification of the buildings. The estimated cost was many millions of dollars. Following the evacuation, the OC received advice that some of the issues affecting Mascot Towers may have been caused by the construction of the adjacent Peak Towers building.

6. On 22 August 2019, at an extraordinary general meeting, the owners resolved to carry out the first stage of some remedial works and to raise a Special Capital Works Fund Levy of $7 million, payable over nine months to fund those works. This equated to approximately $5,000 per month for a one-bedroom unit and $10,000 per month for a three-bedroom unit.

7. At the same August 2019 meeting, a resolution to obtain finance from the first defendant, Lannock Capital 2 Pty Ltd (Lannock), was defeated. Some owners started making payments of the August Special Levy, but others did not.

8. On 22 October 2019, at an extraordinary general meeting, the August Special Levy was rescinded. At the same time, owners voted in favour of entering into a $10 million “multi-drawdown” finance facility with Lannock to fund rectification works (First Lannock Facility).

9. On 21 May 2020, at an extraordinary general meeting, the owners voted in favour of a resolution to commence proceedings against the builder, developer and engineer of Peak Towers, alleging the construction of the Peak Towers building resulted in significant structural damage to Mascot Towers. The OC claimed damages of $21.5 million in those proceedings.

10. At that same meeting on 21 May 2020, the lot owners resolved to explore a collective sale pursuant to Part 10 SSDA.

11. By July 2020, an expression of interest process had been carried out. The secretary of the strata committee, Isaac Lean, gave the following unchallenged evidence:

The EOI process took a period of 3 months at the cost of $20,000.00 to the OC. This resulted in 31 expressions of interest with 6 eventual offers ranging from 23 to 30 million, with each offer being conditional upon between 7 and 10 million being taken off for demolition costs. After months of negotiations, we managed to get the highest bidder to raise their offer from $30,000,000.00 to $40,500,000.00.

12. On 15 September 2020, the OC received a finance proposal for a further $22.5 million facility (Second Lannock Facility). By this time, the OC’s project managers, NS Group, had provided an estimate that the total cost of rectification works would be approximately $33.8 million. The Strata Committee was unable to identify a viable funding source for rectification works other than a further loan from Lannock. By October or November 2020, the First Lannock Facility had been exhausted due to engaging experts and builders, and for the Peak Towers legal proceedings.

13. On 19 November 2020, at an extraordinary general meeting, the owners resolved by ordinary resolution to enter into the Second Lannock Facility. Around that time, the owners also investigated doing nothing in terms of remediation other than make safe works, so that a collective sale could be progressed. The OC then terminated its building contract with the builder.

14. In February 2021, most commercial lots were forced to close. Three remained open and still remain open.

15. On 23 April 2021, at an information session, the Strata Committee provided lot owners with various scenarios, where the building was rectified. Owners were told of a “projected $45 million repair”.

16. In April 2021, the Strata Committee negotiated with another developer, that was not part of the earlier expression of interest process, and received a firm offer of $42 million.

17. On 3 June 2021, at the annual general meeting, 69 votes were received for a resolution to accept that firm offer. There were 12 votes against. However, the Strata Committee became aware another possible way forward might be through a termination of the strata scheme.

18. On 13 July 2021, the owners resolved to proceed to investigate the termination of the strata plan. On 4 April 2022, at an extraordinary general meeting, the owners resolved to proceed with the termination application to this Court. That resolution was not unanimous. Of the 91 lot owners present, 71 voted in favour, 10 voted against, 1 lot owner abstained and there were 9 invalid votes (the reason being the lot owners were non-financial).

19. During the Peak Tower proceedings, significant geotechnical and expert evidence reports on the defects were filed. The OC expended in excess of $3 million in legal fees. In around May 2023, the OC settled those proceedings, receiving a confidential settlement sum.

20. On 30 May 2022, the OC commenced these proceedings by filing a summons. As at that date, the sum of $16,216,617.41 remained available to be drawn down on the Second Lannock Facility.

21. The total sum payable to Lannock in relation to the First Lannock Facility is approximately $9,420,977.49 and the total payable in relation to the Second Lannock Facility is approximately $6,282,742.04. No further updated figures were provided to the Court. The Court was informed that the OC is currently up to date with its repayments.

Parties to the proceedings

22. Whilst Lannock resists a termination order, all other defendants are primarily concerned with the directions that ought to be made pursuant to s 136 SSDA, should a termination order be made. An overview of the position of each of the defendants is below.

23. Lannock submits that the Court cannot be satisfied that creditors of the OC, and primarily Lannock, will not be prejudiced by a termination order, and therefore a termination order would be inappropriate in the circumstances. It further submits that if a termination order is made, then its loan facilities ought be repaid from the OC’s assets in priority to individual lot owners’ interests in a pooled fund, and therefore in priority to the registered mortgagees.

24. The third, fifth, sixth, seventh, eighth and ninth defendants are all large banking institutions, who hold registered mortgages over approximately 110 units. They do not oppose a termination order, but submit that their current secured interests over individual lots ought to be preserved following any termination, and therefore be paid before Lannock is paid from any residuary fund of the OC.

25. The second defendant, Anthony Stevens, is the only lot owner who is a party to the proceedings. He supports a termination order being made, but makes submissions on the appropriate form of direction to a liquidator appointed to sell the OC's assets, which differs from the OC's proposed directions.

26. Another Bucket of Worms Pty Ltd is the fourth defendant and is the registered lessee of lots 135 and 137 in the Strata Plan. If a termination order is made, it seeks directions protecting its interests pursuant to its registered lease. The parties informed the Court that there was an agreement on the form of the appropriate directions in relation to the fourth defendant, should a termination order be made. Mr Robertson, senior counsel for the fourth defendant, indicated that those consent orders would be forwarded to the Court. However, nothing has been received.

27. Macquarie Bank was previously the seventh defendant. On 24 February 2023, by consent, the OC discontinued proceedings against the seventh defendant.

28. I note that other mortgagees and caveators in relation to various lots did not join the proceedings as parties. Further, there are approximately 31 lots that are not subject to a registered mortgage or a caveat.

Issues for determination

29. This application of s 136 SSDA is novel. A termination order has never previously been considered by this Court in circumstances where:

1. the Owners Corporation submits it is insolvent and unable to pay its debts;

2. the application is not brought by all lot owners; and

3. there are competing creditors, who are interested in the consequential directions concerning the proceeds of the inevitable sale of the Owners Corporation’s assets following a termination order.

30. There are three broad questions for the Court:

1. Whether the strata scheme ought be terminated;

2. If a termination order is made, what directions ought to be made, including as to priority of payment out of the OC’s pooled assets; and

3. How the termination process should be administered and by whom.

Legislative regime concerning termination of a strata scheme

31. Only a small number of applications for termination have been brought under s 136 SSDA and its predecessor, s 51(4) Strata Titles Act 1973 (NSW) (1973 Act). In all cases, the Court was dealing with an owners corporation, which did not appear to have significant liabilities, where the strata scheme was relatively small and the application was brought with unanimous consent, including where there was only one owner of all lots.

32. Uniformly, the Court’s concern has been to ensure existing rights in relation to the scheme’s assets, primarily land, are replaced with like rights after a termination.

33. By way of brief history, strata title was introduced into law in New South Wales in 1961 under the Conveyancing (Strata Titles) Act1961 (NSW) (1961 Act). That Act did not contain provisions for the “variation or termination” of strata schemes, but it did contain provisions, which permitted a means of bringing a strata scheme to an end where “destruction” of the scheme’s property occurred. In addition to actual destruction, destruction could be deemed to have occurred if voted by the members or declared by the Court where the Court was “satisfied that having regard to the rights and interests of the proprietors as a whole it is just and equitable that the building shall be deemed to have been destroyed and makes a declaration to that effect”: s 19(1)(b) 1961 Act.

34. Provisions expressly dealing with the variation and termination of strata schemes were introduced by the 1973 Act. When the Strata Schemes (Freehold Development) Bill 1973 was read for a second time, the Minister for Justice explained that the Bill came as a result of a full-scale legislative revision of the Real Property Act 1900 (NSW) (Real Property Act) and Conveyancing Act 1919 (NSW), for the benefit and protection of Torrens titles in New South Wales: see New South Wales Legislative Assembly, Parliamentary Debates (Hansard), 26 September 1973 at 1334.

35. In 2011, a further review of strata law in New South Wales commenced. The review was conducted by NSW Fair Trading on behalf of the NSW Government, in consultation with what is now known as the NSW Land Registry Services and industry stakeholders. The purpose of the review was to modernise and simplify the legislative framework that governed strata schemes in New South Wales in response to the growing prevalence of strataed property. In a ministerial statement introducing the Strata & Community Title Law Reform Position Paper, the Minister for Fair Trading indicated that “[t]here has been clear support for greater owner participation, increased transparency and accountability, easier dispute resolution, reducing red tape, improving awareness through better educational resources and using modern technology for communication.”: New South Wales Fair Trading, Strata Title Law Reform, (November 2013) at 2.

36. The SSDA came into operation on 5 November 2015. It replaced the 1973 Act and the Strata Schemes (Leasehold Development) Act 1986 (NSW) and, relevantly, introduced the mechanism of a collective sale, for the following purpose (see New South Wales Legislative Assembly, Parliamentary Debates (Hansard), 14 October 2015 at 4305):

… The objects of the Strata Schemes Development Bill 2015 are to facilitate the subdivision of land into cubic spaces, the disposition of titles, and the registration and renewal of strata schemes. This single bill covers land subdivision under both freehold and leasehold titles. The most significant reform in this bill is a new process to facilitate the collective sale or renewal of strata schemes. This proposed reform deals proactively with the issue of ageing strata schemes and enables strata owners to make collaborative decisions about their strata building. The majority of community feedback received on the strata reforms acknowledged that the decision to end a strata scheme should not require 100 per cent support of owners, provided that the process is flexible, transparent and fair. The alternative method proposed by this bill meets all those requirements. The renewal provisions are designed to empower strata owners to make a collective decision about the most important issue that will confront all strata buildings at some point: what to do with the building as it ages.

37. The legislative intention concerning the relationship between the SSDA and the Real Property Act is expressed in s 8:

Relationship with Real Property Act 1900

(1) This Act is to be read and interpreted with the Real Property Act 1900 as if it formed part of that Act, and that Act applies to lots and common property in the same way as it applies to other land.

(2) However, if a provision of this Act is inconsistent with a provision of the Real Property Act 1900, this Act prevails to the extent of the inconsistency.

(3) Words and expressions used in this Act have the same meanings as in the Real Property Act 1900 unless they are defined differently in this Act or the context or subject-matter otherwise indicates or requires.

38. Here, the OC seeks to engage Part 9, which concerns variation or termination of strata schemes. Of particular relevance are the following sections:

Part 9 Variation or termination of strata schemes

Division 1 Preliminary

129 Definitions

In this Part—

court means the Supreme Court.

section 115 termination application means an application made under section 115 that, under section 115 (6) or under sections 115 (6) and 133, is treated as an application for an order under section 136.

…

termination order—

(a) for Division 3—see section 136 (1)

…

Division 3 Termination of strata schemes by order of court

135 Application for order to terminate strata scheme

(1) Any of the following persons may apply to the court for a termination order for a strata scheme—

(a) an owner of a lot in the scheme,

(b) a mortgagee or covenant chargee of a lot in the scheme,

…

(d) the owners corporation.

(2) Notice of the application must be served, in accordance with rules of court, on—

(a) each person referred to in subsection (1), other than the applicant, and

(b) the local council, and

(c) the Registrar-General, and

(d) any other person (including creditors of the owners corporation) directed by the court.

(3) The applicant and each person entitled to be served with notice of the application may appear and be heard on the hearing of the application.

(4) An application under subsection (1) (b) may be made by a prescribed authority having the benefit of a positive covenant only if the authority has applied under section 88I of the Conveyancing Act 1919 for an order that the land the subject of the strata scheme be transferred to the authority.

(5) In subsection (4), prescribed authority means a prescribed authority within the meaning of section 88D or 88E of the Conveyancing Act 1919.

136 Order to terminate strata scheme

(1) The court may, on an application made under section 135, make an order terminating a strata scheme (a termination order).

(2) A termination order may include directions about any of the following—

(a) the sale or disposition of property of the owners corporation,

(b) the discharge of the liabilities of the owners corporation,

(c) the termination of any development scheme that relates to the parcel and the cancellation of the strata development contract,

(d) the termination or amendment of a strata management statement that relates to the parcel,

(e) the persons liable to contribute amounts required for the discharge of the liabilities of the owners corporation and the proportionate liability of the persons,

(f) the distribution of the assets of the owners corporation and the proportionate entitlement of each person under the distribution,

(g) the administration, powers, authorities, duties and functions of the owners corporation,

(h) the voting power at meetings of the owners corporation of persons referred to in paragraph (e) or (f),

(i) the winding up of the owners corporation, including the appointment, powers, authorities, duties and functions of any person to carry out the winding up,

(j) any matter in relation to which the court considers it just and equitable, in the circumstances of the case, to make provision in the order.

(3) The court may, from time to time, change a termination order on the application of any person entitled to appear and be heard on the hearing of the application for the order.

137 When order takes effect

A termination order takes effect—

…

(b) … on the day specified in the order.

138 Effect of order

(1) When a termination order takes effect—

(a) the estate or interest of the former owners in the part of the former parcel that consisted of common property vested in the owners corporation as agent for the former owners vests in the owners corporation as principal, subject only to an estate or interest recorded in—

(i) the folio, or on any registered lease or registered sublease, evidencing the estate or interest of the owners corporation in the common property, or

(ii) the relevant folio created under section 29 (1), and

(b) the estate or interest of each person in the part of the former parcel that did not consist of common property vests in the owners corporation as principal, subject only to an estate or interest recorded in—

(i) the folio evidencing the estate or interest of the owners corporation in the common property comprised in the former parcel, or

(ii) the relevant folio created under section 29 (1),

to the extent the recorded estate or interest was capable of affecting a former lot, and

(c) each person who, immediately before the order took effect, was an owner of a lot in the strata scheme ceases to be an owner of a lot in the scheme, and

(d) each person whose estate or interest is divested by paragraph (b) has instead the rights and liabilities conferred or imposed on the person by the order, and

…

3) A termination order has effect according to its tenor and despite any provision of this Act, other than this Division.

39. Section 28 of the Strata Schemes Management Act2015 (NSW) (SSMA) provides, consistently with the SSDA:

28 Termination of strata scheme

(1) An owners corporation for a strata scheme that is subject to an order under the Strata Schemes Development Act 2015 for the termination of the strata scheme continues in existence until it is wound up in accordance with the order.

(2) While it so continues in existence, the owners corporation is constituted of persons who the order specifies are liable to contribute money required for the discharge of the liabilities of the owners corporation and persons who the order specifies are entitled to share in a distribution of assets of the owners corporation.

Authorities

40. All of the parties referred to the few decisions concerning termination of a strata scheme, placing different emphasis on what was decided.

41. Section 136 SSDA involves an unqualified and broad discretion: see eg De Mol Investments Pty Ltd v Owners of Strata Plan No 31757 [2019] WADC 86 at [76] (Bowden DCJ), citing Young J in Pritpro Pty Ltd v Willoughby Municipal Council (1986) 3 BPR 97224 (Pritpro). In exercising the discretion, the relevant considerations are varied, but include the interests of anyone who might be prejudiced by the termination: Massalski v The Owners SP 90255 [2023] NSWSC 23 at [82] (Chen J), citing Community Association DP270212 v Registrar-General (NSW) (2004) 62 NSWLR 25 (Community Association DP270212) at [32]-[33] (Palmer J). It is appropriate to consider the likely impact of a termination order on the interests of all lot owners and others interested in the scheme and OC.

42. The language of “just and equitable” is not found in s136(1), unlike the 1961 Act. The OC submits the Court ought exercise the s 136 discretion in the same way as if considering a liquidation of a company on the “just and equitable” basis, because the OC is “insolvent”, rather than giving any other reason for the analogy. That submission is dealt with below.

43. The first known application made under s 51 of the 1973 Act was in Application of Custom Credit Corporation Ltd (1975) 2 BPR 97083, where Wootten J recorded he “was informed that this is the first application to come before the Court under that section”. At that time, s 51(6) of the 1973 Act mandated that the Court make directions in relation to eight specified matters, including the discharge of the liabilities of the body corporate. Accordingly, his Honour examined each of those matters. The precise orders are not included in the judgment. His Honour noted “there are unlikely to be any creditors of the body corporate” (at 9111). His Honour also found “the whole substratum of the strata scheme has been destroyed by the destruction of the building … there can be no question but that the body corporate must be completely wound up” (at 9112).

44. In Pritpro, Young J also dealt with an application to terminate a strata scheme under s 51 of the 1973 Act. The strata plan consisted of four lots in Chatswood, all owned by the same individual who described himself as the “sole member of the Council of the Body Corporate”. There was no question of any inability to pay creditors of the body corporate.

45. His Honour referred (at 9572) to the “drastic” alteration of rights caused by a termination and held:

… the function of the court under s 51 is to ensure that no-one is prejudiced by the termination of the scheme and the virtual subsuming of the strata lots into one non strataed lot. Furthermore, there must be protection to creditors both actual and contingent who may have charges on the building or against the body corporate.

46. His Honour appointed the plaintiff for the administration of the scheme because:

…there are no creditors of a strata scheme and what is happening is that the existing lot holders are redeveloping the parcel of land upon which the former strata title was situate.

47. Borsky v Proprietors Strata Plan No 19833 (1986) 7 NSWLR 84 (Borsky) is a further case dealing with an application brought under s 51 of the 1973 Act. Key features of the application were:

1. The plaintiff owned the only four unencumbered lots;

2. The plaintiff intended to demolish the existing building and erect a new single unstrataed dwelling for his family; and

3. The body corporate had little, if anything, by way of assets or liabilities.

48. While McLelland J was prepared to make the termination order, he nevertheless considered it appropriate to appoint a qualified and disinterested person for the winding up. This was so that the assets and liabilities of the body corporate could be ascertained and dealt with appropriately.

49. On the topic of unregistered interests, his Honour commented (at [85]):

It is important to note in applications under s 51 that by virtue of s 51(7) one effect of an order terminating a strata scheme is to vest in the body corporate the whole of the land to which the scheme relates subject only to registered estates or interests and, thus, to divest and effectively terminate unregistered estates or interests. The court has power, by the order, to confer on, inter alia, persons with unregistered estates or interests in lots in the strata scheme rights in lieu of the estates or interests so divested and terminated. It is possible and would, in many cases, including the present, be desirable to make an order in general terms for the reinstatement of any unregistered estates or interests but where, as here, it is proposed to demolish the building, this may not be sufficient to protect the rights of those persons whose estates or interests are dependent upon the existence of the present structure, such as a lessee or chargee of a particular lot in the strata plan. The court might have to consider whether to direct that notice of the application be served on such persons.

50. Further, his Honour made directions to protect creditors, including:

(i) that if the liquidator does not otherwise have sufficient funds to discharge the liabilities of the body corporate, the plaintiff [the only lot owner] shall contribute such amounts as are necessary to provide such funds;

(j) that the administration, powers, authorities, duties and functions of the body corporate during the winding up may be exercised or performed by the liquidator.

51. In Community Association DP270212, the plaintiff made an application under s 70(1) of the Community Land Development Act 1989 (NSW) for the termination of a community scheme. The relevant section of this Act, which has now been repealed, conferred power on the Court to terminate a scheme that had become “impracticable”. All owners within the community scheme consented to its termination, and no party interested in the land opposed the orders sought. In that case, the relevant question was whether the continuation of the community scheme was “impracticable”, in circumstances where lot owners merely sought termination so that they were afforded more freedom to utilise their respective lots. Palmer J concluded that the community management statement included terms that were so imprecise and general such that they “[could not] be applied with any practical certainty, consistency or predictability. On the contrary, they are likely to lead to frequent disputation whenever particular proprietors of lots seek to do anything on their properties which requires the approval of the community association” (at [24]).

52. Palmer J noted that all interested parties had been made aware of the termination and did not oppose the orders (at [35]-[36]):

In most cases, termination of a scheme would require the winding up of the community association as its reason for existence will have ceased. The community association may have assets of considerable value; it may also have considerable debts. Whether or not the community association will be left unable to discharge its obligations to creditors if the Scheme is terminated is a material consideration in the exercise of the Court's discretion. For this reason, the Court should have evidence as to the current financial position of the community association.

Except where the winding up of a community association is very straightfor­ward — for example, where there are no creditors and the assets are easily distributable to the proprietors of the lots in the scheme — the administration of the winding up should be placed in the hands of a liquidator entitled to administer liquidations under the Corporations Act 2001 (Cth).

53. In Mary Erling v The Owners Strata Plan No 8891 [2010] NSWSC 824, Einstein J dealt with an application of a lot owner, who owned three of five lots in the subject strata scheme, to terminate the scheme under s 51(4) Strata Schemes (Freehold Development) Act 1973 (NSW). His Honour considered it relevant in the determination of the application that the approximate costs of repairing all the dilapidated units in question was $302,500 for the minimum amount of work necessary to make the premises fit for habitation, and $803,000 for complete rectification. The cost of demolishing and rebuilding the townhouses was estimated at $1.1 million. His Honour observed (at [7]):

… in summary, the plaintiff’s valuation evidence makes clear that it would make no commercial sense to proceed with any of the repair options. The value, in Mr McGill’s view, is that the combined value of the five units fully repaired is about $960,000, the partially repaired value in his view is about $840,000. When the costs of repairs for both of those options are subtracted, the only sensible course appears to be to sell the premises as what is colloquially described as a knockdown at a gross value of $625,000.

54. While his Honour also referred to evidence of continuing disagreement between various owners, most emphasis was placed on the commercial reality that the building would be sold as a “knockdown”, because on the evidence, repair works were not commercially “sensible”.

55. In Owners of Argosy Court Strata Plan 21513 v Wise (2016) 90 SR (WA) 148, the owners corporation sought an order for the termination of a 12 lot strata plan. Constructed on each of the lots were free-standing transportable dwellings (known as “dongas”). In 1999, a tropical cyclone damaged the dongas. The owners corporation removed the dongas and thereafter the property was vacant. At [58], McCann DCJ commented that:

… termination is a drastic matter, a fortiori, drastic reasons should be apparent. Assistance in that regard is to be found in s 28(6) which contemplates that damage or destruction of the building(s) comprised in a strata plan may justify the termination of the plan. That was the case in Re Appln of Custom Credit Corporation Ltd (1975) 2 BPR [97083], 9112 in which:

the whole sub-stratum of the strata scheme [had] been destroyed by the destruction of the building which was the subject of it and the loss of the land to the mortgagee.

56. In concluding to make a termination order, McCann DCJ stated (at [115]-[116]):

The termination of the Strata Plan will drastically alter the property rights of the parties, but only in an abstract, legal sense. In practical terms the drastic alteration occurred when the dongas were removed, at which point the subject matter (or ‘sub-stratum’) of the Strata Plan ceased to exist.

In short, a drastic change in the parties’ legal rights is justified because there has been a drastic change in the parties’ opportunity to enjoy those rights and there is no present, viable pathway to wholly or partly restore them. The Strata Plan is obsolete and untenable. I am satisfied that it is appropriate for it to be terminated.

57. In Community Association DP 270982 v Registrar-General for New South Wales [2018] NSWSC 225, Kunc J ordered the termination of a community scheme. All interested parties consented to the termination, and relevantly at [29], Kunc J noted that:

… it is necessary to consider the interests of anyone who may have dealt with the [community association]. In some cases this will necessitate consideration of the financial position of the community association and, in particular, whether it has any debts. That is not an issue in the present case. The evidence discloses that the first plaintiff, has, in effect, never traded. It certainly has no creditors.

58. In Brenchley v The Owners – Strata Plan No 80609 [2022] NSWSC 646 (Brenchley), a strata scheme of 5 lots was terminated. The plaintiffs owned 3 of the lots and 2 were held by the second defendant. The building had become uninhabitable, such that the termination of the strata scheme was “inevitable” (at [11]). There was evidence that there would be a higher return to lot owners if the entire building was demolished and redeveloped. The relevant dispute concerned the “conduct of the affairs” of the owners corporation (at [12]), not whether termination of the scheme was appropriate. In fact, all parties considered termination was appropriate and were only divided on the appropriate directions for the winding up of the scheme. At [28]-[29] of the judgment, Robb J states:

The position is different in respect of the termination of a strata scheme and the winding up of an owners corporation because, as I have said, the individual lots disappear, as it were, when the termination becomes effective, and the lot owners' rights, and therefore the rights of any mortgagees, are fundamentally changed. Furthermore, there is no established regulatory scheme for the determination of the assets and liabilities of the strata scheme and the determination of claims by and between lot owners and the owners corporation.

As a practical matter, if the termination of a strata scheme and the winding up of an owners corporation is to be done in a proper, fair and orderly manner, the Court must fashion appropriate orders under the Strata Schemes Development Act on an ad hoc basis to deal with all of the issues that may arise.

59. The particular orders Robb J made protected the registered mortgagees’ interests and are considered further below.

60. The above authorities outline examples of the exercise of the Court’s discretion to order termination of a strata (or other similar) scheme. There are significant differences between those cases summarised above and the current. For example, Mascot Towers is a large strata complex, not all of the lot owners consent to the termination of the scheme, and there are several debts owed by lot owners and the owners corporation, such that a termination order will affect the interests of several creditors. Further, there is no clear evidence that the building must be sold as a “knockdown”, nor that it is commercially unwise to carry out repairs.

Ought the strata scheme be terminated?

61. The OC submits that the scheme ought to be terminated for several reasons. First, it submits that “it is insolvent”. An analogy is drawn to the winding up of an insolvent company on the just and equitable ground. Attention is drawn to the “devastating personal situation” of lot owners, for example:

1. No owner can live in, rent or sell their apartment;

2. Approximately 110 owners have a financial obligation to a mortgagee;

3. Each owner continues to be liable for levies;

4. The costs of rectification relative to the value of each apartment is high;

5. The majority of lot owners voted in favour of seeking a termination order, rather than attempting to rectify the building defects or pursue a collective sale.

62. Secondly, the OC submits the buildings “which are the underlying foundation of the strata scheme have effectively failed due to defects”.

63. I accept that many lot owners are in an invidious position. However, that does not mean a termination order must be made. Instead, the Court must consider the legislative intention in the relevant sections of the SSDA and whether making a termination order for this is an appropriate exercise of the Court’s discretion, keeping in mind the power within s 136 to frame appropriate directions dealing with the termination.

64. I do not consider this is an appropriate case to make a termination order for the following reasons.

Is the OC insolvent?

65. To describe the OC as “insolvent” is inapt. As detailed below, an owners corporation is required to levy owners for sums that are estimated to be sufficient to cover the OC’s expenses. The fact that the OC submits that it is insolvent, raises concerns that the lot owners may be unaware of how the legislative regime operates, and the extent of their liability for the OC’s debts. Further, there was no evidence before the Court about the financial records of the OC, the financial status of all lot owners or the value of individual lots.

65. There is no evidence that the OC is not able to pay its debts as required; the OC is not in default of the Lannock facilities, which requires monthly payments.

Owners may be insufficiently informed

67. While it is understandable that many lot owners seek to be relieved of the burden of continuing ownership of lots in the currently uninhabitable building, I consider that the Part 9 process is not appropriate where the Court has concerns about the understanding and intentions of all the lot owners and the availability of protections for them and creditors in a Part 10 process. This is not a straightforward case where termination of the scheme and demolition of the building is inevitable.

68. There is no evidence of the opinion of all lot owners, unlike in other cases. The OC’s evidence is unclear as to exactly what information was before the 2022 meeting concerning the Part 9 and Part 10 processes, including information about the likely cost and timing of rectification works. Further, while an affidavit of service demonstrates that all necessary persons, including lot owners, were served with the OC’s original Summons, it is unclear whether owners have been provided with the Further Amended Summons and the OC’s opening written submissions, or whether they are aware of the OC’s oral submissions that deviated from those written submissions.

69. For example, the evidence discloses that at the information presentation in April 2022, the lot owners were informed that rectification costs could be as high as $50 million and take several years. However, the parties’ experts now agree that further rectification costs would be at most $21.5 million. Further, the experts agree that lot owners could re-occupy within 6 months, with complete rectification being achievable within 12 months. That divergence in the opinion presented to the owners in 2022 and the joint expert opinion before the Court on this application raises a concern that lot owners who attended and voted in favour of a termination application were not fully appraised of the position now accepted by the OC. A particular concern for the Court is whether lot owners understand the extent of their personal liability for the OC’s debts. The OC’s opening written submissions indicated that lot owners would only be liable up to the value of their individual entitlement from a pooled fund following the sale of the building. As detailed below, I reject that submission, and note that the OC resiled from that position in closing oral submissions.

Part 10 is a more appropriate process

70. As accepted in the authorities above, the termination power under s 136 ought be used sparingly. In other cases, the applicant for a termination order had a particular purpose for the termination, such as converting multiple units into a single dwelling (Borsky) or a single-owner developer wanting to re-develop (Pritpro). In other cases, the building has no longer been viable (Erling, Brenchley). There is no case about a termination, where, as here, the applicant intended to sell the whole building, which could in fact be repaired, and where the evidence did not demonstrate that such repair was commercially insensible.

71. In all cases where a termination of a strata scheme has been ordered, it has been done cautiously, and only where every lot owner within the scheme seeks such an order. That is not the case here.

72. While in 2022, a resolution was passed at a general meeting to make the termination application, not every lot owner was at the meeting, and not all those present voted in favour of the resolution. Where there is not a unanimous desire to sell all lots in a strata scheme, Part 10 of the SSDA provides a mechanism for a 75% majority of owners to nevertheless apply for a Court order approving the collective sale of the all the lots. Reluctant owners can be compelled to join in a collective sale, but only after various detailed procedures found within ss 170-190 SSDA have been satisfied, and the Land and Environment Court approves a specific sale (see s 182 SSDA). Such a process provides all lot owners with certainty about a sale price and process, with a clear and known outcome for each of them.

73. The OC’s submission against the application of Part 10 is only:

…[the] collective sale process is cumbersome, lengthy and expensive and there is no assurance it would result in a better outcome.

74. However, other than the opinion of the former chair of the strata committee, there is no clear evidence that such a process would take significantly longer or be significantly more expensive than the owners having to bear the costs of a liquidator tasked with a sale and accounting process pursuant to a termination order.

75. The submission that the outcome may not be “better” does not assist. The OC is asking the Court to make an order on unproven assumptions and there are further problems with the submission.

76. First, there is no explanation of what “better” means. If “better” means a higher sale price would be achieved, then it has not been demonstrated that the Part 10 process would achieve a lower price than a “liquidation sale”.

77. Lannock’s unchallenged evidence is that the current value of the building as-is is $59.75 million, and, if rectified, would be $122.3 million. That evidence taken together with the joint expert opinion, suggests that if the further approximately $20 million was spent on rectification works, then there is a value in the building of about $100 million (not taking into account other assets or liabilities of the OC). Therefore, on the evidence available, it would appear that, the OC could obtain a better price than that offered by a potential buyer of the whole building in 2021, irrespective of the sale process.

78. Secondly, Part 10 provides protections for lot owners and creditors. The authorities show that if making a termination order, the Court is anxious to protect all those with an interest in the lots in the strata scheme. However, there is no legislative provision, nor authority, that explains how those interests ought to be protected when there is competition between them, because there is a risk that there will be insufficient funds to satisfy those interests. Those issues would necessarily be considered and resolved in a Part 10 process, and all lot owners would be given full details of the consequences and have an opportunity to voice their concerns to the Court, pursuant to s 180 SSDA, without becoming a party to the proceedings and incurring costs consequences.

79. I accept Lannock’s submission that the SSDA contemplates that whether there is a Part 9 or Part 10 process, it is expected that there will be a mechanism for the payment of the owners corporation’s liabilities. In Part 10, s 184(4)(b) provides protection to creditors of the OC, because “the rights and liabilities of the owners corporation vest in the purchaser, unless the order otherwise provides”. Section 183 provides the Land and Environment Court with power to make directions concerning the liabilities of the owners corporation and who ought to contribute to their discharge. This would fall within the language of s 184(4)(b) of the order “otherwise providing”. The authorities demonstrate that where there has been a court-ordered termination under Part 9, the interests of creditors have also been considered and directions made to protect them.

80. Should a Part 10 process be engaged, then the lot owners would know the exact sale price and the exact financial position they will face, following the sale. Currently, it is not apparent whether all the lot owners understand that their potential liability for the OC’s debts could extend beyond their proportionate interest in the pooled fund that would be achieved in a sale of the building; in fact, lot owners would have to contribute in proportion with their unit entitlements to the OC’s debts, even if they received insufficient funds from the sale process, as detailed further below.

81. I note that in a New Zealand case, Heath J concluded that a collective sale process was more appropriate than a termination. In World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673, an application was brought for the termination of a scheme under s 46 of the now repealed Unit Titles Act 1972 (NZ). Section 46 was relevantly identical to s 188(2) Unit Titles Act 2010 (NZ), which includes:

The High Court may authorise that the unit plan be cancelled if—

(a) the High Court is satisfied that it is just and equitable that the body corporate be dissolved and the plan cancelled having regard to—

(i) the rights and interests of any creditor of the body corporate; and

(ii) the rights and interests of every person who has any interest in any unit or in the base land or in any part of the base land …

82. Heath J refused to make the termination order sought. His Honour noted (at [52]) that “[t]he power of the Court to make orders cancelling a unit plan and dissolving a body corporate, under s 46 of the Act, must be considered against the scheme and purpose of the Act and the underlying principles”, which he considered included (at [51]):

That owners will, occasionally, disagree. For that reason:

(i) This Court is given power to dispense with the need for a unanimous resolution if a particular act is supported by 80 per cent or more of those entitled to vote: s 42.

(ii) Disaffected members of the body corporate in a minority can seek relief against any resolution passed on the grounds that it “would be inequitable for the minority”: s 43.

83. At [95], his Honour concluded:

This is not a case in which it is necessary for World Vision [being one of the lot owners in a mixed-use development] to demolish the office building for health or safety reasons. Neither is it a case in which the proprietors forming the body corporate are acting in a dysfunctional manner. While the residents [being the other lot owners] disagree with World Vision's proposals, there is no deadlock of a type which would justify intervention from the Court. World Vision cannot garner unanimous support (nor 80 per cent support) for its proposal. In those circumstances the residual powers contained in ss 42 and 43 of the Act do not come into play. I am with Mr Thwaite to the extent that he submits that the s 46 jurisdiction should not be interpreted in a manner which undermines the jurisdiction conferred under ss 42 and 43 of the Act.

84. Put simply, the Court was not prepared to terminate the scheme as an alternative to a failed collective sale process and where it was not necessary to demolish the building. I agree with that approach.

Other reasons

85. I am not refusing the termination order for all the reasons submitted by Lannock. For example, I do not accept that the Court can recommend, or mandate, that the lot owners decide to repair the building using the Lannock funds, in the hope of obtaining a better financial outcome, rather than the sale of the unrepaired building.

86. Further, it is unlikely that a lot owner would claim that the OC is in breach of its s 106 SSMA obligation to “repair and maintain” the building, in circumstances where the extraordinary general meeting voted to seek a termination order and to date no lot owner has agitated for that.

Appropriate directions for any termination

87. For the reasons identified above, I do not consider it appropriate to make a termination order.

88. However, should that conclusion be wrong, below I determine the major issue of controversy between the defendants, namely, how the OC’s debt to Lannock ought to be repaid, where the various bank defendants seek the payment of their mortgaged loans first out of any fund generated by a termination and sale of the building.

89. It is unnecessary to formulate the precise orders that ought to be made, should a termination order have been made, including because the parties sought to be heard further on the precise form of appropriate orders and the agreed orders concerning the fourth defendant were not provided to the Court.

Registered mortgagees’ positions

90. In its written submissions, the OC was “agnostic” as to whether Lannock or the banks ought be given priority over any sale fund. However, orally, the OC submitted that the approach taken by the banks was more aligned with caselaw and the statutory regime.

91. Of the bank defendants, most oral submissions were made by Ms Whittaker SC, counsel for the fifth defendant, Westpac Banking Corporation (Westpac), the eighth defendant, National Australia Bank Ltd (NAB) and the ninth defendant, AFSH Nominees Pty Ltd (AFSH) (jointly, the Westpac Defendants). The Westpac Defendants are registered mortgagees of about 39 lots in the scheme.

92. The Westpac Defendants do not oppose the termination of the strata scheme, subject to the Court making appropriate directions for the termination, that provide protection for their existing indefeasibility of title of their first registered mortgages.

93. The sixth defendant, Australia and New Zealand Banking Corporation (ANZ), the mortgagee of approximately 15 lots in the scheme, in substance adopts the position and submissions of the Westpac Defendants.

94. The Commonwealth Bank of Australia (CBA) is the third defendant and mortgagee of approximately 30 lots in the scheme. Its primary concern is the priority of payments, similar to the other bank defendants.

95. CBA also submits that the operation of the discretion in s 136 is informed by what directions would be appropriate pursuant to s 136(2)(f) for the distribution of the OC’s assets. It submits that an order for termination would only be made if directions can be made that are “just and equitable” in the circumstances, and a fact telling against a direction that Lannock take priority in relation to payment from the pool of funds is that Lannock’s approach to lending to the OC was less appropriate than that of CBA lending to lot owners, which was in strict compliance with the consumer protection regulations that bind consumer lenders.

96. I do not accept that in considering making a termination order or directions concerning distribution of the OC’s assets the Court is to embark on a comparison of Lannock and CBA’s lending practices in relation to particular lot owners and the OC. Instead, it would be appropriate for all the defendant lenders and Lannock to have their existing legal rights protected, including as to the way funds are paid from the pooled assets of the OC. Determining what those existing legal rights are does not require the Court to consider how CBA and Lannock obtained those rights and a comparison of the process of negotiation of loans.

Lessee’s position

97. As noted above, the Court was informed that all parties have reached a consensus as to the appropriate directions concerning the fourth defendant, should a termination order be made. The Court was informed that those agreed orders were designed to ensure that the fourth defendant’s rights as a lessee are preserved after any termination order, but provide the liquidator the ability to seek a variation of those rights, should they be necessary to the process of sale. Such type of directions would be appropriate, if a termination order was made.

Lannock’s position

98. Lannock’s submission is that each of the matters listed in s 136(2) “must” form the basis of directions on a termination order. The bank defendants instead submit that the language of s 136(2) is clear – the Court “may” make directions about the listed matters. It is unnecessary to resolve that issue of statutory construction, because if a termination order ought to have been made, I consider it would be appropriate to make directions about the “persons liable to contribute amounts required for the discharge of the liabilities of the owners corporation and the proportionate liability of the persons”, the matter that most concerns Lannock. Such an approach is consistent with the authorities referenced above and the operation of s 28(2) SSMA, which contemplates directions identifying those persons who will be liable for the OC’s debts.

99. However, for the reasons below, I reject Lannock’s submission that the OC’s debts, including the total liability under the Lannock facilities, must be paid from any pooled fund from the sale of the building before lot owners’ liabilities to mortgagees.

Priority dispute between mortgagees and Lannock

100. As stated above, a key issue in dispute is whether Lannock or the mortgagees ought be paid first from any pooled sale fund. It is necessary to understand the different nature of those parties’ rights, in order to resolve the issue of “priority” between them.

Secured mortgagees’ interests in individual lots

101. The authorities make plain that on a termination, the Court will make directions that attempt to give any person with a registered interest in the property, that will be held by the OC after termination, the same type of interest following the termination (see eg Pritpro at [43], discussed above). Often those types of orders have been agreed.

102. This was captured succinctly by Young J in Denham ConstructionsPty Ltd and Another v Proprietors Strata Plan No 17833 (1987) 11 NSWLR 615 at 618:

… the rights of each proprietor and mortgagee shall be the right to have in equity as against the body corporate and its liquidator a trust for partition entitling them to the same interests in the land as they had immediately before the order.

103. Very recently, Robb J in Brenchley at [67] expressed the view that orders on the termination of the strata scheme were required:

…in a manner that protected the interests of third-party mortgagees …

104. Consistently with that approach, one of his Honour’s detailed orders and directions recorded at [62] was:

… any security interest held against a lot in the Scheme becomes, on the termination taking effect, a charge against the applicable lot owner’s entitlement to receive a distribution in the winding up of the Scheme …

105. I would adopt the same approach as Young J and Robb J in relation to the secured mortgagees; they must be given a charge over that portion of the fund that represents the mortgagor/lot owner’s interest in that fund.

106. This conclusion is also harmonious with the fundamental concept of indefeasibility of registered interests found within the Real Property Act. If it had been intended that the SSDA would depart from the known position of protecting registered interests, such as those of mortgagees, then it would be expected that this would be unequivocally set out in the SSDA. Instead, s 8(1) SSDA states that “[t]his Act is to be read and interpreted with the Real Property Act as if it formed part of that Act…”.

107. Section 8(2) does provide: “if a provision of this Act is inconsistent with a provision of the Real Property Act, this Act prevails to the extent of the inconsistency”. It is well understood that a Court will look for the legislature’s intention in construing legislation. For example, in Singh v Commonwealth of Australia (2004) 222 CLR 322 at [19] Gleeson CJ states:

… references to intention must not divert attention from the text, for it is through the meaning of the text, understood in the light of background, purpose and object, and surrounding circumstances, that the legislature expresses its intention, and it is from the text, read in that light, that intention is inferred. The words “intention”, “contemplation”, “purpose”, and “design” are used routinely by courts in relation to the meaning of legislation. They are orthodox and legitimate terms of legal analysis, provided their objectivity is not overlooked.

108. I do not accept that the discretion of the Court to terminate a strata scheme was intended to be exercised in a way that would otherwise disrupt the rights and interests of any registered mortgagee, nor to prioritise unsecured creditors of an owners corporation.

109. The absence of any reference to the rights of registered mortgagees upon termination of a scheme cannot be considered an “inconsistency” for the purpose of enlivening s 8(2). Further, there is nothing in the SSDA that provides a “contrary intention”, such that it ought be construed contrary to the Real Property Act. Therefore, registered secured interests ought be preserved following any termination, and unsecured creditors of the OC are not entitled to be paid from the pooled sale proceeds first.

108. Such an approach of protecting existing rights is consistent with the Lannock’s and the other parties’ agreement that the fourth defendant ought have rights similar to those under its existing registered lease, after the termination.

Lannock’s rights as OC’s unsecured creditor

111. Lannock loaned money to the OC and is not secured against the OC property, because of the prohibition in s 100 SSMA. After a termination, unsecured creditors of the OC, such as Lannock, ought also be put in the same position as they were before the termination order, which does not include them holding any interest “in the land”. However, it is appropriate that their existing rights are protected. I do not accept Lannock’s submission that because authorities speak of ensuring creditors are not “prejudiced”, that means a termination order cannot be made, unless creditors of the OC will be paid in full. Instead, the position of creditors ought be preserved following a termination, but not improved.

112. Before a termination order is made, unsecured creditors have a personal right to sue the OC for the payment of debts. As explained below, that personal right is not in any way altered by the operation of ss 81-84 SSMA.

113. Lannock submits that an owners corporation is like an “unlimited company”, in the sense that all lot owners have unlimited liability. To support that submission, Lannock placed emphasis on a statement by McHugh J in Humphries v Proprietors “Surfers Palms North” Group Titles Plan 1955 (1994) 179 CLR 597 at 616:

… [the Queensland equivalent of the Management Act] imposes an unlimited liability on the proprietors for all liabilities properly incurred by the body corporate (s 38A(1)(c); s 38B).

114. Sections 38A and 38B of that Building Units and Group Titles Act1980 (Qld) are the equivalents of ss 81 and 83 of the SSMA, empowering and requiring the levying by an owners corporation of contributions necessary for “amounts estimated” to be needed for the operations of the owners corporation.

115. Section 81 SSMA provides:

81 Owners corporation to set contributions to administrative and capital works funds

(1) The owners corporation must determine the amounts to be levied as a contribution to the administrative fund and the capital works fund to raise the amounts estimated as needing to be credited to those funds.

(2) That determination must be made at the same meeting at which those estimated amounts are determined.

(3) The owners corporation must levy on each person liable for it such a contribution.

(4) If the owners corporation is subsequently faced with other expenses it cannot at once meet from either fund, it must levy on each owner of a lot in the strata scheme a contribution to the administrative fund or capital works fund, determined at a general meeting of the owners corporation, in order to meet the expenses.

(5) A contribution is, if an owners corporation so determines, payable by the regular periodic instalments specified in the determination setting the amount of the contribution.

116. Section 83 SSMA provides:

83 Levying of contributions

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

(2) 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.

(3) Any contribution levied by an owners corporation becomes due and payable to the owners corporation on the date set out in the notice of the contribution. The date must be at least 30 days after the notice is given.

(4) Regular periodic contributions to the administrative fund and capital works fund of an owners corporation are taken to have been duly levied on an owner of a lot even though notice levying the contributions was not given to the owner.

117. McHugh J’s statement can be understood as simply providing a high-level summary of the operation of the particular sections of the legislation. The statement is consistent with s 81(4), which provides that additional levies can be raised if there are insufficient funds held by the owners corporation to meet expenses. An owners corporation is able to commit itself to an unlimited sum and thereafter levy lot owners for contributions to meet its expenses until sufficient funds are raised. To that extent only, it might be said that lot owners have “unlimited liability”.

118. However, s 83 does not provide an owners corporation with any security over a lot owner’s property for the payment of levies. Instead, if a lot owner does not pay levies when they are due and payable, the owners corporation may bring legal proceedings for the debt: s 86 SSMA. The owners corporation must go through debt recovery processes in the ordinary way, up to and including bankrupting a lot owner. However, a judgment debt does not rank above a secured interest.

119. Further, where a lot owner does not pay levies, then the owners corporation must raise new levies to ensure its expenses are paid. Therefore, an owners corporation may end up requiring other lot owners to cover the shortfall created through the non-payment of levies by one or more recalcitrant lot owners. This is consistent with the statement made by Hodgson JA (with Tobias and Young JJA agreeing) in The Owners Strata Plan No 5709 v Anthony Andrews and Anor [2009] NSWCA 189 at [44]:

…If an owners corporation determines that the levy will not in fact be paid by some of the unit holders (for example, because of bankruptcy), the amount of the levy necessary to raise the required amounts and/or to meet the expenses will be that much greater. … the contributions have to be payable in shares proportionate to unit entitlements.

120. This means the OC’s opening written submission is incorrect when it states:

… individual lot owners ought to contribute to the OC’s unsecured debt, but only to the extent that their respective shares of the proceeds of sale allow for it.

121. However, before a lot owner could be sued for unpaid levies they must have fallen due in accordance with the relevant resolution empowering the raising of the particular levy (see SSMA s 81), and in accordance with the relevant notice issued (see SSMA s 83). The whole of Lannock’s loan is not currently repayable. Instead, monthly instalments are payable under the two facility terms and it appears that lot owners are being issued levy notices for their proportionate contribution to those instalments, or accept that they are so liable.

122. Lannock relies on ss 84 and 184 SSMA to support a submission that a mortgagee can become liable for a lot owner’s liability for the owners corporation’s debts, and that demonstrates an intention of the legislature that any creditor of the OC ought to take from a fund in priority. I reject that submission. Section 84 provides:

84 Liability of persons other than owners for contributions

(1) If, at the time a person becomes the owner of a lot, another person is liable to pay a contribution in respect of the lot, the owner is jointly and severally liable with the other person for the payment of the contribution and any interest on the contribution.

(2) A mortgagee or covenant chargee in possession of a lot is jointly and severally liable with the owner of the lot--

(a) for any regular periodic contributions to the administrative fund or capital works fund together with any interest on those contributions, and

(b) for any other contribution together with interest on that contribution taken to recover unpaid contributions, if the mortgagee or covenant chargee has been given written notice of the levy of the contribution, and

(c) for any costs payable as a debtor in respect of enforcement action to recover unpaid contributions.

(3) Subsection (2) does not affect the liability of an owner of a lot for any contribution levied under this section.

123. Section 184 entitles any “owner, mortgagee or covenant chargee of a lot in a strata scheme” or their nominee to seek from the owners corporation a certificate outlining certain information about the strata scheme, including whether a particular lot has outstanding levies, and when that lot will be required to pay further levies that have been resolved to be raised.

124. Section 84 merely provides that an owners corporation will have a personal right to seek payment of unpaid levies from an incoming owner, or mortgagee, who decides to take possession, while retaining the owners corporation’s right against the outgoing lot owner. The section does not change or elevate the owners corporation’s unsecured right to enforce the payment of levies by lot owners. Further, I do not accept that secured mortgagees, who have not exercised their right of possession prior to a termination order, ought to be “deemed” to be or are “notionally” mortgagees in possession and therefore liable as quasi owners pursuant to s 84. That would be inconsistent with the fact that the SSMA distinguishes between a “mortgagee in possession” and a “mortgagee”; different rights and liabilities are assigned to those entities: see eg ss 24, 48 SSMA.

125. Instead, the secured mortgagees ought to have their rights before the termination preserved after the termination. That does not involve alteration, as if they had exercised a right to take possession, which would not have occurred. I reject Lannock’s submission that the mortgagees are “in substance enforcing their security”.

126. Contrary to Lannock’s submission, lenders are likely to agree to lend to an owners corporation without security, because they are aware that pursuant to ss 28, 81-84 SSMA, an owners corporation must raise levies to cover all expenses, and those expenses include the repayment of loans made to the owners corporation.

127. I also do not accept Lannock’s submission that the above approach causes inequity between lot owners. Each lot owner will effectively be liable for their own proportion of the Lannock liability. Whether they pay that liability from their portion of the proceeds of sale of the building or from other assets is irrelevant to “fairness”. It is possible some lot owners may be required to contribute more, because other lot owners do not comply with their obligations to contribute. However, that is not a reason to ignore the secured nature of the mortgagees’ interests.

Conclusion

128. Should directions be necessary, then they must be fashioned to include a direction to the effect that lot owners are personally liable to contribute to the discharge of the OC’s debts, including the Lannock debt.

129. Practically, that would mean that after termination, the pooled fund realised through a sale would be distributed in the following order (vis a vis lot owners, their mortgagees and creditors of the OC):

1. Each lot owner would be entitled to their portion representing their original unit entitlement.

2. That portion would be charged by the current registered mortgagees to the extent of their security.

3. Any remaining portion would be allocated to the lot owner.

4. Each lot owner would be liable to contribute in their proportion to the debts of the OC, similar to the way levies are raised to pay expenses. If a lot owner had insufficient funds from their portion of the fund, then they would be personally liable to pay the balance. If one or more lot owners did not pay their allocation of the OC’s debts, then the person administering the OC could seek further contribution from lot owners, again in their respective proportions, similar to s 81(4) SSMA.

130. One other contested proposed order is that the OC sought a direction that from the OC’s assets the liquidator pay “unpaid strata levies, out of each lot owner’s notional share of the assets, determined according to unit entitlement”. I accept that the OC and Lannock are both unsecured creditors for unpaid debts. Therefore, the liquidator ought be able to recover unpaid levies from each lot owner in order to pay the OC’s debts, including that to Lannock.

Second defendant’s proposed directions

131. Anthony Stevens is the second defendant and the only lot owner who is a party to the proceedings. He does not oppose a termination order, but seeks three variations to the orders sought by the OC.

132. First, he submits the Court has no power pursuant to s 136(1) to make the order 4 sought in the Amended Summons for an order under s 138. The plaintiff did not press for this order in the proposed orders provided to the Court during the proceedings. As such, this submission was not developed and is unnecessary to resolve.

133. Secondly, Mr Stevens seeks an order that the liquidator be appointed with the same duties and functions of a liquidator as though appointed pursuant to s 472(1) Corporations Act 2001 (Cth) (Corporations Act) and that the liquidator have the powers specified in s 477 Corporations Act.

134. The OC does not oppose this variation of its proposed direction in relation to the liquidator’s powers. Lannock does oppose that order, on the basis that it is misconceived and may lead to “confusion for the liquidator as to what their role is, particularly in circumstances where there are very broad powers without some of the other aspects of the Corporations Act which have not been sought to be incorporated by the second defendant’s orders”.

135. In Brenchley at [64], Robb J made orders in the context of terminating a scheme, that individuals be appointed to carry out the winding up and:

… are so far as practicable to discharge all the duties and functions of a liquidator as though they were appointed as liquidators pursuant to s472(1) of the Corporations Act 2001 (Cth) …

136. Further, order 1(f) recorded at [64] states:

… the Appointees have power to do, or to cause the Owners Corporation to do, all other things reasonably necessary for winding up the affairs of the Owners Corporation, including but not limited to: … so far as is relevant, the matters specified in s 477 of the Corporations Act as if the Owners Corporation was a 'company' for the purposes of the Corporations Act;

137. No particular problem with the scope of the power being provided was identified by Lannock. I consider broad powers ought to be provided to the liquidator. I accept that Robb J’s use of language “so far as is relevant” and “so far as practicable” is appropriate, because it provides a control on any possible confusion the liquidator may have, and I consider similar orders would be appropriate. Further, liberty to apply ought be given to the liquidator, should there be any issue concerning the directions made.

138. Thirdly, Mr Stevens also seeks an order that the liquidator conduct a formal expression of interest process for the sale.

139. The OC does not actively oppose the order in relation to an expression of interest process, but says that the precise process is a matter which ought to be left to the liquidator, as it is in ordinary liquidations. When challenged in submissions as to why the expression of interest process ought be ordered, Mr Isaac, counsel for the second defendant, accepted that there was no evidence that the expression of interest process was necessarily going to achieve a better outcome. I accept that the second defendant and all lot owners have a legitimate concern that the sale process is public and is designed to ensure the best possible price in a timely manner. I have no reason to believe that the liquidator would not take steps to adopt the most appropriate process, in accordance with the obligations consequent on the appointment by the Court. I would not make this particular direction sought by the second defendant.

Costs

140. While the OC and Lannock provided proposed directions concerning costs, should a termination order be made, no submissions were made by the parties as to costs, should no termination order be made. The OC and fourth defendant submit that the question of costs ought to be reserved and dealt with separately to the substantive issues arising in the proceedings. No other submissions as to costs were made. I will therefore hear the parties on costs.

Conclusion

141. For the reasons above, the following are the appropriate orders:

1. Further Amended Summons is dismissed;

2. Parties are to confer and attempt to agree on appropriate costs orders. Should agreement not be possible within 7 days, the parties are to make a joint approach to the Associate to Peden J with a proposed timetable for a costs hearing.

142. I note that because of these orders, the Plaintiff has the benefit of Lannock’s undertaking to the Court:

The First Defendant undertakes to the Court that, if the Further Amended Summons is dismissed, it will not charge interest on existing drawdowns pursuant to its tow loan facility agreements with the Plaintiff (executed by the Plaintiff on or about 6 November 2019 and 20 November 2020, respectively) for a period of 12 months commencing on the date of the orders.

Decision last updated: 24 November 2023