NCAT terminates oppressive building management contract

Since the commencement of the Strata Schemes Management Amendment Act 2002 (NSW) (SSMA) in 2003, the NSW Civil and Administrative Tribunal (Tribunal) has had the power to terminate a building management agreement (formerly known as a caretaker agreement) in circumstances where:

• the building manager has refused or failed to perform the agreement or has performed it unsatisfactorily
• the charges payable by the owners corporation under the agreement are unfair
• the agreement is otherwise harsh, oppressive, unconscionable or unreasonable.

In January 2022, the Tribunal exercised its power to terminate a building management agreement for the first time, in the case of The Owners- Strata Plan No. 64807 v Sunaust Properties Pty Ltd [2022] NSWCATD 20.

This article considers the Tribunal’s decision, which identifies conduct that may result in a building management agreement being terminated under section 72 of the SSMA.

Facts

Meriton constructed the Acacia Gardens mixed use residential development in Ultimo (Property). Prior to strata registration, Meriton and the respondent building manager (BM) entered into an agreement by which the BM purchased from Meriton the right to be appointed as the building manager for the Property for up to 25 years.

The BM was a company with a single shareholder and director. The BM had two employees – the director’s husband and son.

Following strata registration, while Meriton remained the sole owner of all units at the Property, the applicant’s owners corporation (OC) entered into a building management agreement with the BM (Agreement). The Agreement provided that the fee could be increased to reflect consumer price index increases.

The director and her son each joined the strata committee for the OC. During their time on the committee, the BM began charging the OC two additional quarterly fees for the additional services provided to the OC. It also charged the OC fees for gardening and mowing services, which the Agreement stated were the BM’s responsibility. The BM also increased its fees under the Agreement by 5 per cent each year. 

The OC called an annual general meeting in 2020 (AGM), at which it proposed resolutions for an audit of the BM. In May 2020, the BM filed an application (in the OC’s name and without its authority) for an injunction to prevent the AGM from occurring. No injunction was granted.

On the day of the AGM, the BM employed security guards to prevent lot owners from entering the AGM and issued letters to lot owners stating that the meeting had been cancelled and that the Tribunal did not support the AGM proceeding.

Following the AGM, the BM refused to respond to requests from the strata manager for access keys, copies of CCTV footage and the password to the security cameras for the Property.

The Tribunal proceedings and issues in dispute

In December 2020, the OC commenced proceedings in the Tribunal seeking an order to terminate the Agreement under section 72 of the SSMA. 

The issues in dispute between the parties included whether:

• the BM had refused or failed to perform the Agreement or had performed it unsatisfactorily
• the charges payable by the OC under the Agreement are unfair
• the Agreement is otherwise harsh, oppressive, unconscionable or unreasonable.

Decision

After concluding that section 72 of the SSMA applied to the Agreement, the Tribunal determined that the Agreement should be terminated under section 72 on the basis that:

• the BM had failed to perform the Agreement satisfactorily
• the charges payable by the owners corporation under the Agreement were unfair
• the Agreement was otherwise harsh, oppressive, unconscionable or unreasonable.

Reasons for the decision

The Tribunal identified the following conduct as evidence that the BM had failed to perform the Agreement satisfactorily:

• the BM regularly failed to act on instructions given by the strata managing agent for the OC, including its requests for CCTV footage and access passes, contrary to the Agreement
• the BM charged fee increases and additional fees inconsistent with the terms of the Agreement. Further, there was no evidence to support a finding that the Agreement had been varied by, or the additional payments had been approved by, the strata committee
• the circumstances surrounding the attempt by the BM to halt the AGM were knowingly false and improper and were intended to avoid a resolution for an audit being made at the AGM.

The Tribunal noted that this conduct also amounted to gross misconduct, but did not consider whether that may have provided a contractual basis on which to terminate the Agreement.

In considering whether the charges payable under the Agreement were unfair, the Tribunal considered whether the fee increases and additional payments charged to the OC were permitted by the Agreement, and whether the strata committee had approved any variation to the Agreement. It concluded that the fees were unfair as they were not permitted by the Agreement and the strata committee had approved no variation to the Agreement.

In determining whether the Agreement was “otherwise harsh, oppressive, unconscionable or unreasonable”, the Tribunal noted that the use of the word “otherwise” was intended to capture conduct that did not fall within any of the other subsections of section 72(3) and applied the case of Cooper v The Owners – Strata Plan No 58068^[1] in which it was held that the words should be read as a single test and measured against “contemporary community standards.”

The Tribunal found that the Agreement breached that community standard as:

• the termination provisions were unbalanced and favoured the BM. On providing notice, the BM could terminate for any reason, whereas the OC could not terminate unless it could establish “gross misconduct or gross negligence”, which is a high threshold
• the Agreement did not preclude the BM, its shareholders, directors or employees from becoming members of the strata committee, it simply stated that the shareholders and directors could not offer themselves for election, which could be bypassed by having someone nominate them
• the Agreement did not require the BM to comply with the SSMA, with the result that a breach of the SSMA would not provide grounds for termination unless it also constituted gross misconduct.

Conclusion

While instances of gross misconduct, similar to that of the building manager in this case are, thankfully, unusual, the Tribunal’s reasons for concluding that the Agreement was “otherwise harsh, oppressive, unconscionable or unreasonable” are likely to apply to a number of building management agreements and are worthy of review against those agreements.

Authors: Marie-Louise Scarf & Lauren Boswell

^[1] Cooper v The Owners – Strata Plan No 58068 [2020] NSWCA 250.

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Marie-Louise Scarf

Lauren Boswell

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