Court of Appeal finds strata schemes may restrospectively approve legal action

December 2014 saw two decisions of the NSW Court of Appeal confirm the effect of section 80D of the Strata Schemes Management Act. This is the section that requires legal action to be approved by the general meeting if the reasonably estimated costs of taking that action exceed the amounts stipulated in the Regulation (currently $1000 per lot or $12,500 in total, whichever is the lesser).

In 2 Elizabeth Bay Road Pty Ltd v The Owners – Strata Plan No 73943, the Court found that section 80D would require “much clearer words” if it was intended to nullify, invalidate or mandate the dismissal of legal action commenced without the approval of the general meeting. A court or tribunal may exercise its discretion to allow legal action to continue, even where its commencement had not been approved by the general meeting. In doing so, the following should be taken into consideration:-

  • whether the breach of section 80D has been cured;
  • if it has not been cured, will it be cured reasonably promptly; and
  • whether the breach was inadvertent or deliberate. For example, if approval was purportedly given before proceedings had been commenced, but a defect was noticed shortly afterwards and rectified immediately by a further approving resolution, then it is unlikely the proceedings would be dismissed. On the other hand, a court would be more likely to dismiss proceedings commenced by an owners corporation which was fully aware of the provision, made no effort to comply with it, and had no intention to seek approval at a general meeting.

In this case, the contravention of s 80D was promptly cured by the Owners Corporation. The litigation the Owners Corporation had commenced against the developer for defective building work was upheld as valid.

The contrary occurred in The Owners – Strata Plan No 70798 v Bakkante Constructions. In a judgment delivered on the same day, the Court of Appeal agreed with the primary judge that, because the Owners Corporation had been so tardy in its attempt to approve the commencement of the proceedings (in fact delaying until after the final hearing of the matter), it should not be given the benefit of the principles established by 2 Elizabeth Bay Road. The Owners Corporation could not seek to ratify its actions some two months after the final hearing and four weeks after the judgment.

The Court also confirmed that it is not possible to avoid the operation of section 80D by approving lawyers’ cost estimates for early stages of initiating litigation only. A reasonable estimate of total costs must be provided, however rough that estimate might be.

These decisions give some very necessary comfort to owners corporations that are forced to contend with legislation which, in particular circumstances, can be unduly restrictive – such as when they are facing fast approaching time limits to commence litigation against builders and developers in relation to defective building work. In our view, we will see more litigating owners come to rely on these principles, particularly with the recent changes to the Home Building Act severely limiting the time available to some buildings to commence such proceedings.

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