Is there a Strata Damages Gold Rush in NSW?

Or, easy compensation for strata owner losses …

Since many strata buildings suffer from long-standing leaks and other faults, strata committees take a long to time fix them, and half of strata apartments are tenanted, there’s always been a lot of exposure to the adverse consequential impacts on strata owners.  But, the new and easy ways for NSW strata to recover losses means they’re in a strata damages gold rush …. 

[9.50 minutes estimated reading time, 1886 words]

Introduction

Strata buildings have always had strict obligations to fix damaged or failing common property and those obligations start as soon as they find out about the problem [or even earlier]. And, strata owners have always been able to get Court or Tribunal orders to force strata buildings to perform those repair works.

Additionally, strata owners [and other stakeholders] have always been able to make claims against strata buildings for consequential losses they may have suffered as a result of the failure to, or, delays in performing common property repair works. 

But, those kinds of damages claims have been legally complex [since they’re based on breach of statutory duty principles] and involved action in Civil Courts.  So, they were fairly uncommon.

But, since 2016, NSW strata owners have a much easier and simpler way to claim and recover those strata damages for losses they suffer against their strata buildings.

That’s because the introduction of section 106(5) into the Strata Schemes Management Act 2015 created a new [and separate] right for strata owners to claim losses

Some typical strata owner loss and damages scenarios

It’s not hard to find a few atypical scenarios in strata buildings where strata owners suffer losses that can be claimed against strata buildings.  Here are just a few.

Scenario 1:  Mould takes over the apartment

An older strata building has not been maintained very well for a few decades and the walls, flashings, windows, and, roof membrane let water in whenever it’s windy and rainy.

Most of the strata apartments are typically damp and smelly, but not generally flooded. 

However, there’s an ongoing problem of mould growth in strata apartments that are variously complained about to the strata committee and strata manager.  The strata manager usually responds to mould complaints by telling strata owners and residents to open the windows and do other things to clean up the mould.

The strata building has received advice about, and, a costing for major refurbishment works to fix the building, but it is very expensive [at about 10 times the annual budget] so decisions about doing that work have been deferred for a few years.

After a warm summer, one strata owner reports major mould contamination throughout their apartment [covering most walls, ceilings, and carpets and inside most cupboards], experiencing respiratory issues that required hospitalisation, and, that they have had to move out of their strata apartment.

The strata owner makes claims against the strata building to do the work to fix the leaks that caused the mould, but also, makes claims for:

• removal of all mould in the strata apartment,

• repair of all the damaged parts of the strata apartment [which is effectively fully refurbishing it],

• their past and ongoing medical expenses, and

• the cost of equivalent alternate accommodation until all that work is done and they can re-occupy the strata apartment.

Scenario 2:  Investors lose their tenants after roof flooding

A new medium rise strata building is mostly owned by investors who lease out the strata apartments for permanent residential use.

A few building defects have been identified in the building, but it’s early days so they haven’t been investigated yet and no notices or claims have been given to or made against the builder or developer.

After a weekend of very heavy and continuous rain, water pours from the ceilings of the 4 top floor strata apartments flooding them, damaging furniture and cabinetry, and, causing all the tenants to break their leases and leave.

Preliminary investigations suggest that the water came from inadequately constructed and designed roof drainage, flashings and membranes; which are likely to be something the strata building can claim for against the builder or developer.

The 4 strata investor owners make claims against the strata building to do the work to fix the leaks, but also, make claims for:

• repair of all the damaged parts of the strata apartments [which is effectively fully refurbishing them],

• the cost of replacing damaged furniture and fittings, and

• the rent lost from when the tenants left until all that work is done and they can re-let the strata apartments,

• the cost of advertising and reletting the strata apartments, and

• interest on their mortgages for the period from when the tenants left until they re-let the strata apartments.

Scenario 3:  Medical practice has to close down

An established commercial strata building includes a busy medical imaging clinic in one of the strata lots where hundreds of patients come daily for x-rays, CT scans, radio imaging, etc.

The roof of the building has experienced minor leaks into the medical imaging clinic over a few years and the strata building has undertaken minor repairs from time to time to address them.

After a severe storm, water pours into the medical imaging clinic from the roof flooding reception and treatment rooms, damaging some of their expensive medical imaging equipment and computers, damaging furnishings, and, causing the medical imaging clinic to close temporarily.

It takes the strata building 6 weeks to repair the roof before the medical imaging clinic can re-open.  That’s because the strata building’s insurer disputes the claim based on their view that the strata building failed to properly maintain the common property roof.

A few months later, the medical imaging clinic’s business insurer makes claims against the strata building [under its subrogated rights] for:

• the replacement costs of replacing the damaged medical imaging equipment, computers, and furnishings, and

• the clinic’s lost profits for the 6 weeks when it could not operate.

You might think these scenarios are a bit far-fetched, but I can assure you they’re not as they mimic actual disputes I’ve been involved in. 

Plus, I’m sure similar scenarios are happening everywhere in strata title buildings right now.

What is a section 106(5) damages claim?

After a few decades of complicated Court decisions about how and when strata owners can get damages from their strata building for losses resulting from non-maintained common property, the NSW Government decided to introduce a new and codified [but limited] right to seek damages in the NSW Consumer and Administrative Tribunal by adding section 106(5) of the Strata Schemes Management Act 2015 to the strata laws.

Section 106(5) allows damages claims to be made if the following things can be established.

• The claimant is a strata owner.

• A strata building has not maintained, repaired, or replaced a part [or parts] of the common property.

• The strata building’s obligation to maintain that common property was not reduced, modified, or transferred to a strata owner by a decision of the strata building, a common property memorandum, or, a by-law.

• The strata building’s failure to maintain, repair, or replace the common property caused damage or loss to the strata owner [importing the well known legal principle of causation].

• It was reasonably foreseeable that the kind of loss the strata owner suffered could occur due to the strata building’s failure to maintain, repair, or replace the common property [importing another well known legal principle of foreseeability].

• The action for the loss is made within 2 years of when the strata owner first becomes aware of that loss.

These kinds of strata damages claims are made in NSW Consumer and Administrative Tribunal, and not civil Courts, which is a low cost and less formal jurisdiction.

Plus, we’ve had a series of Tribunal and Court decisions about section 106(5) claims that have clarified how the new strata laws apply and the extent of the damages that can be claimed. So, the law on these kinds of damages claims is pretty clear. 

I wrote about one of those decisions in The Strata Gavel: Vickery’s Case Clarifies Damages Claims at NCAT.

And, if there’s reader interest, I’ll write more articles about the other leading cases on strata damages.

What makes section 106(5) strata damages claims a gold rush?

For NSW strata owners wanting strata damages, it’s now like digging for gold in Kalgoorlie.  In other words: pretty easy.

That’s because of the following 10 features of section 106(5) strata damages claims.

1.     A strata building’s obligation to maintain, repair and replace faulty common property is compulsory, absolute, and arises as soon as the fault arises [even if the strata building doesn’t know about it].  Plenty of NSW Courts have said so.

2.     What a strata building must do to maintain, repair and replace faulty common property is unlimited and has to be done even if the faults were caused by someone else [like original construction building defects].

3.     It’s relatively easy to predict the kind of damage or loss a strata owner will suffer when there’s faulty common property affecting their strata lot, so the losses are usually foreseeable.

4.     It’s also typically easy to show that physical damage or loss in a strata lot was caused by common property faults since it’s rare that it’s caused by strata owners themselves or by something outside the strata building.

5.     Strata owners can make damages claims for many things like rental losses [up until the strata lot is occupiable], cleaning costs, internal repair costs, damage to personal property, expert fees, and, probably, for pure economic losses [like lost profits and interest].

6.     The NSW Consumer and Administrative Tribunal has no monetary limit on the amount of damages it can order, so strata damages of more than $100,000 are not uncommon.

7.     The processes and rules for making claims in the NSW Consumer and Administrative Tribunal are far less formal and complex than in civil Courts, making it easier and cheaper to pursue strata damages claims.

8.     Strata buildings can sometimes be unrealistically optimistic, yet disorganised and weak legal opponents.  And, sometimes they personalise their opposition to strata damages claims; making things worse for them.

9.     Successful strata owner claimants usually also get their legal costs paid by the strata building [especially when the strata damages are more than $30,000].

10.  Successful strata owner claimants usually also get excluded from paying their unit entitlement share of the strata damages that are ordered to be paid to them and of the strata building’s legal and expert costs.

All those things converge to make it easy for savvy strata owners with good advice and skilled representation to get strata damages from their strata building when common property faults affect their strata lot.

If that’s not a strata damages gold rush, I don’t know what is.

Conclusions

The convergence of the many factors I’ve outlined in this article makes strata buildings easy targets for strata damages for not fixing common property at all or quickly enough. 

Add to that the preponderance of water entry problems in strata buildings, the high level of investor ownership in [around 50%], and, much easier ways to claim strata damages, and NSW has created a situation where many strata buildings are, and many more will be, paying strata owners for those losses.

It’s certainly good for strata owners.

But, it may also be good [long-term] news for strata buildings and the strata sector as it brings to account the hidden cost of unmaintained and unrepaired common property in ways that could change stakeholder thinking.

October 03, 2023

Francesco ...