The Dilemma of One v. Many in Strata Buildings: Part 1
or, why the essential nature of a strata title scheme remains enigmatic …
A Quick Read
If we want to fix strata for all strata citizens, we need to understand it better. But, still today a fundamental dilemma of strata title [the balance between the individual and the many in a strata building] is rarely considered, not well understood and almost never addressed intelligently.
In this 4 part series of articles, I look at the old and new strata cases that have considered the dilemma, what scholarly commentators have said, what they reveal, and, where things are likely to end up.
[a 14:25 minute read with 2864 words]
The Full Article
INTRODUCTION
Although the real estate and property interests created in Australian strata title buildings have been well defined by statute for a long time [since 1961 in New South Wales], detailed consideration of the true nature of those interests rarely occurs.
And, as a consequence the priority of individual strata owners’ rights vis-à-vis each other and the collective group of owners via the strata corporation, is unclear.
It causes many dilemmas that we see played out in day-to-day and major disputes all the time, like when a strata by law bans pets smoking or Air BNB or when two strata owners want to use the same common property, like limited parking areas, exhaust fans systems, or capacity limited electrical or telecommunications services. Fundamentally, that dilemma is about whether individual strata owner’s rights in property are more or less important than all the other strata owners’ rights in the rest of the strata building.
My view is that over the last 50 years, we have witnessed the recognition that strata title property is a unique and new form of real property that is not like other traditional property, does not have the same ownership characteristics, and provides strata owners with advantages and disadvantages over traditional property.
Strata title is 21st century property title that eschews the limitations of land title created in feudal times and is adaptable to changes in the demographics of strata owners, the values of society, and, technological advancements. Think Blade Runner rather than Stonehenge.
So, in a short mini-series of 4 articles I’m going to explore this issue by looking at underlying property law principles, important cases that have considered the topic, leading academic writings in the area, and, practical matters occurring in strata buildings.
Hopefully, by the end of the article series, we’ll all have a better understanding of the challenges in trying to define strata title property interests by conventional and traditional legal notions, why it matters and how to think about it going forward.
STRATA TITLE PROPERTY INTERESTS & RELATIONSHIP BASICS
Conventional wisdom about strata titles is that:
strata lots are a spatial form of land title: defining cubic spaces by reference to plans and physical structures,
common property is everything that is left after defining the lots,
strata owners own a fee simple in the lot, and
strata owners own a divided fee simple in the common property that is appurtenant to the lot and indivisible from it.
But title to the common property is vested in the strata corporation upon registration of a strata plan. And, the strata corporation has the ability, subject to appropriate decisions in strata owners’ meetings, to deal with the common property separately to and independently from the lots including to subdivide it, sell it, modify it, or make by laws about it. In fact, the strata corporation also has the ability to impose restrictions on strata lots and what goes inside them.
So, there’s a relationship between the strata corporation and the strata owners in relation to the common property and strata lots but its character is hard to define from a legal perspective.
Without defining that relationship, it’s hard to determine where the priorities are [and aren’t] and how to apply them when differences between a strata owner and another strata owner or the strata corporation arise.
But it’s not, in my view, like traditional property interests or relationships such as:
freehold title ownership interests,
leasehold interests & relationships,
the interests of an easement grantee,
the interests of a covenant beneficiary,
the interest of a person with a profit-a-prendre, or
an equitable interest in land or property.
In some ways, those interests and legal relations have elements of each traditional type, but there are extra features that are not found in any of those property structures.
So, strata title is, in my view, a new and different kind of property structure.
THE EARLY STRATA CASES
A series of superior Court cases have considered the nature of strata lots and the common property as land interests and the nature of the strata owners’ interests in the common property reveals that a new form of property interest may be emerging.
Here are the early decisions.
Immer’s Case
In 1997 the NSW Court of Appeal decided Immer’s case.
Although the case is well known as an authority for the existence of the equitable doctrine of ‘fraud on a power’ in a strata title building, the main issue in the case was the kind of resolution required to dispose of a new strata lot created from a subdivision of common property: whether special or unanimous?
In this case, the proceeds from the sale of the newly created strata lot were being split between two of the three strata owners in the building as they had more than 75% of the voting rights.
The issue in question was that because the transfer of common property required a unanimous resolution, didn’t the transfer of common property that had been converted into a strata lot by a subdivision plan also need a unanimous resolution? After all, it was precisely the same land in both circumstances, only having changed its title description from common property to a lot by the artificial mechanism of a strata plan of subdivision.
The NSW Court of Appeal said no, overturning the trial judge’s view on the matter.
In making that decision, the NSW Court of Appeal court held that the subdivision had fundamentally changed the character of the land in question from common property (where each strata owner had an interest) to a strata lot where each strata owner did not.
This was the start of an emerging recognition of the separate interests of the strata owners as individuals and the strata corporation as a collective.
Houghton & Anor –v- Immer & Anor (1997) 44 NSWLR 46
https://nswlr.com.au/view/44-NSWLR-46
Young’s Case
A few years later [in 2004] the NSW Supreme Court looked at strata owner interests in common property when making a by law in Young’s case.
An unusual situation developed in this strata building, where the owners corporation decided to make a by law conferring exclusive use of most of the common property in favour of most, but not all, strata owners in the strata scheme: effectively excluding two strata owners from using common property. That was because those two strata owners owned car spaces and lived in a building next door but were using the strata building’s pool, and the other strata owners wanted to stop that use.
When those strata owners challenged the strata corporation’s power to make such a by law the NSW Supreme Court agreed and decided that every strata owner was ‘interested’ in the common property by reason of their appurtenant property rights and therefore needed to consent to the making of the by law. Since the two strata owners had not consented, the by law was not validly made.
So, despite the strata corporation controlling the common property, and despite that common property having a completely separate legal character from the strata lots, strata owners still had a direct enough property interest in it that they must consent to giving exclusive use under by laws which affect their interests.
Young & Anor –v- The Owners – Strata Plan No. 3529 & Ors (2001) 54 NSWLR 60
https://nswlr.com.au/preview/54-NSWLR-60
Lin’s Case
The individual interests of strata owners in common property were confirmed in Lin's case again in 2004 by the NSW Supreme Court.
In Lin’s case a commercial strata owner wanted the strata corporation to extend common property ventilation facilities to serve his strata lot which was used as a take away food outlet. That was necessary as the existing food court ventilation system has reached its capacity, as a result, it was very expensive to do the upgrade work, and the strata corporation had refused to do it.
When ordering the strata building to do the upgrade work, the NSW Supreme Court decided that each strata owner has an equitable interest in common property and is entitled to possession of common property so that they had rights to use it.
The NSW Supreme Court relied, in part upon the decisions in Young’s case and Immer’s case, and concluded that strata owners’ right to the use and enjoyment of common property could not be excluded by the strata corporation’s independent powers to manage and control it. In other words, the strata corporation’s power of management and control of the use of common property does not extend to overriding the proprietary rights a strata owner has in that common property that it wants to use.
In its judgement, the NSW Supreme Court referred to the:
‘tension in the legislation between the rights of lot owners as the equitable owners of the common property and the rights of control, management and administration of that property by the owners corporation as the legal owner’.
However, the NSW Supreme Court did not explain how this tension should be resolved when demand for the use of common property exceeds the supply.
So, there’s a bit more confusion now since the two positions are contradictory.
The answer to this contradiction must lie in the precise nature of the strata owners’ interests in the common property and the status of the strata corporation’s title to the common property.
Lin & Anor –v- The Owners – Strata Plan 50276 [2004] NSWSC 88
Walter’s Case
The issue arose again for a decision in 2004 by the NSW Court of Appeal from an unlikely source in Walter’s case.
In a claim for compensation for negligence for construction defects in a strata building, the defendant builder argued that the strata corporation did not have standing to sue since it was not the beneficial owner of the common property and therefore did not suffer any loss if it was defective.
Rather, it argued that the strata owners as the beneficial owners suffered the loss and should be the plaintiffs instead of the strata corporation.
The Supreme Court agreed with the builder, but on appeal, the NSW Court of Appeal did not.
The decision of the NSW Court of Appeal in Walter’s case explores the true nature of a strata corporation’s ownership of common property and concludes that it is held on a kind of trust rather than as an agent for the strata owners.
The most important passage in the NSW Court of Appeal’s decision on this reads as follows:
‘It is clear from the statutory scheme that an owners corporation is in no sense the beneficial owner of common property. Its ownership is always in a representative capacity identified by the Act as that of `agent', with the lot proprietors, as the owners in equity of undivided interest of tenants in common, each identified as having a `beneficial interest'. The restrictions upon alienation and other dealings and the provisions with respect to repair, renewal and replacement proceed on the assumption that common property exists for the benefit of the lot proprietors as a general body. ... As was observed in Houghton v Immer (No 55) Pty Ltd (1997) 44 NSWLR 46, by Handley JA (with whom Mason P and Beazley JA concurred), a provision that vests this common property in an owners corporation as `agent' for lot proprietors makes the proprietors equitable tenants in common.’
So, this is an important decision that clarifies that strata owner interests in common property are not as simple as they might appear, and not just a conventional property interest.
Interestingly, the decision also draws a clear line from Immer’s case [where this article begins] to their more refined conclusions.
The NSW Court of Appeal decision was appealed by the builder, Walter Construction, to the High Court of Australia but they went into liquidation before it was decided so we did not hear what the High Court thought about that issue.
The Owners – Strata Plan No. 43551 –v- Walter Construction Group [2004] NSWCA 429
https://nswlr.com.au/preview/62-NSWLR-169
White’s Case
In 2007, the NSW Court of Appeal was looking at these issues again in White’s case.
White’s case was about an exclusive use by law with a twist. The by law gave one strata owner the exclusive right to store a small water craft on a specified part of another strata owner’s lot [rather than on common property] and rights to enter that other strata lot to move the water craft into and out of the river at the property boundary.
The difficult question raised in White’s case was whether a by law could create rights over privately owned strata lot property and not just common property.
That seems unlikely since a real property owner’s rights over their land cannot be infringed without their consent.
But, if it could, that would mean that strata owners’ property rights were also subject to the strata corporation’s power to confer rights over parts of the strata building and not the same as freehold property owners’ rights.
The Supreme Court decided the by law was valid and, on appeal, the NSW Court of Appeal agreed.
The NSW Court of Appeal made the following interesting findings in reaching its decision:
A by law was valid if it dealt with matters appropriate to the type of strata scheme it applied to [in this case providing reasonable access to and use of the adjoining river].
An exclusive use by-law could apply to any property in a strata building [lot property and common property].
The strata title laws created an alternative mode for creating what is in the nature of an easement or restrictive covenant with its own detailed processes distinct from that under the Conveyancing Act 1919.
So, this decision is another clue that there are new and different property rights and interests in strata title schemes.
White v Betalli & Another [2007] NSWCA 243
https://nswlr.com.au/view/71-NSWLR-381
Tate’s Case
The NSW Court of Appeal had another look a complex strata issues later in 2007 in Tate’s case.
Tate’s case was about how to allocate expenses for common property lifts between the strata owners where lift 4 was used exclusively by one strata owner [a hotel] and lifts 1 to 3 were used by all the other strata owners and by law allocated all the expenses for lift 4 to the hotel owner as well as 25% of the other lift costs.
For many years the strata corporation had charged the hotel owner 3 categories of lift expenses as follows:
all the costs for lift 4,
25% of the costs for lifts 1 to 3, and
strata levies [19.382% of the aggregate] for the remaining 75% of the costs for lifts 1 to 3.
So, the hotel owner said it was being double charged when it paid 25% of the costs for lifts 1 to 3 as well as its share of the strata levies for lifts 1 to 3.
The NSW Supreme Court applied contractual interpretation principles to the by law to decide that it was the parties’ intention that the hotel owner would only pay for lift 4 and 25% for lifts 1 to 3 but not strata levies as well for the costs of lifts 1 to 3.
But, the NSW Court of Appeal disagreed and applied principles of statutory interpretation to the by law [treating it as delegated legislation] to interpret the by law according to the literal words, and not the parties’ intentions, making the hotel owner liable for all 3 categories of lift expenses. It said that rights to use common property [even if changed under by laws] did not impact strata owners’ statutory obligations.
In doing so, the NSW Court of Appeal effectively created a separation between a strata owner’s interests in the common property, a strata owner’s rights to use the common property and a strata owner’s obligations to pay shared strata costs.
Effectively disaggregating strata owners’ collective property rights in the common property, a little more and opening up the possibility for treating strata property interests as simple and modifiable use rights rather than as property interests only [or at all].
The Owners Corporation Strata Plan 3397 v Tate [2007] NSWCA 207
CONCLUSIONS
So, over the first 4 decades of Australian strata titles Courts have made decisions that have characterised a strata lot and a strata lot owner’s interest in their strata lot and the common property as distinctly different to freehold property ownership, independent from a strata corporation’s and other strata lot owners’ interests in the common property, subject to the operation of by laws as quasi property instruments and treating by laws as delegated legislation.
Effectively setting up Courts to make even more interesting and legally challenging decisions going forward.
In my next article in this mini-series, I’ll explore the more recent superior Court decisions that continue to consider the nature of property interests in strata title schemes and where they leave things today.
December 10, 2024
Francesco ...