How A Winner Becomes A Loser

21 April 17

The NSW Supreme Court recently handed down a decision which is of interest to many management rights operators.

The Case

The case revolved around two 26 storey strata apartment buildings in downtown Sydney. In 2002, the Owners Corporation entered into a caretaker agreement with a building manager. The caretaker agreement also provided that manager would perform certain sales and letting functions in respect of individual apartments in the complex. In 2005, the manager was given a licence by the Owners Corporation to use an area of 63 square metres which comprised part of the mail room and part of the community games room in the complex.


The development approval for the complex prohibited the use of residential apartments as a hotel or serviced apartments. Notwithstanding these prohibitions, the manager operated a hotel-style serviced apartment business for a period of at least 6 years. In 2009, the Sydney City Council commenced proceedings against the manager in the Land and Environment Court and, not long thereafter, the building manager applied for development consent to use 142 apartments as serviced apartments. This application was declined in 2010. A later appeal was also dismissed. The Land and Environment Court judgement found that the manager had breached development approvals by operating its serviced apartment business and the Owners Corporation subsequently terminated the caretaker agreement.


The Owners Corporation then commenced the Supreme Court proceedings in 2013 for a declaration as to breach of contract. Essentially the owners were seeking to be compensated for the unauthorised use of the common property and the breach of the caretaker agreement.


It was not in dispute that the manager was under an implied obligation to comply with applicable local government planning instruments in exercising its rights and performing its obligations under the caretaker agreement. The manager admitted its breach of that obligation. In the course of its serviced apartments business, the manager made use of areas of the common property, including a combined office and baggage room adjoining the complex foyer and part of the community games room and a store room in the basement. At no time did the Owners Corporation grant the manager any lease or formal licence to occupy these common property areas.


In the proceedings, the Owners Corporation sued the manager for damages for breach of the caretaker agreement and for trespass to the common property. The Owners Corporation asserted that it suffered loss caused by the breach of the caretaking agreement by the manager because the running of the complex as a hotel caused excessive use of the lifts with the resultant excessive wear and tear and increased electricity consumption (both in respect of the lifts and as a consequence of the use of the common areas). The Owners Corporation also claimed various other heads of damage which were subsequently abandoned early in the hearing. The Owners Corporation also claimed compensation for the alleged unauthorised use by the building manager of the common property.


As the hearing progressed, it eventually became clear that the Owners Corporation position was untenable. The Owners Corporation could not establish that it suffered any loss, let alone any attributable to the serviced apartment business. It also could not establish that the common property would have been differently used had the alleged trespass not occurred. Moreover, it was clear that whatever the manager did, it did with the implicit, if not explicit, consent of the Owners Corporation (which at that stage was under stewardship of a different executive committee).


Under cross-examination of the manager’s barrister, the Owners Corporation ultimately conceded that it had failed to make its case with the consequence that the Owners Corporation was restricted to a damages verdict in a nominal sum for breach of the caretaker agreement. The Judge decided that an appropriate nominal figure for the manger to pay for the breach was $20.00 per apartment, which came to a total of $3,400.00.


The Kicker – Legal Costs!


Following the decision of the Judge, there ensued a discussion as to legal costs during which it was disclosed that the manager had made an offer of compromise of $75,000.00 plus costs to the Owners Corporation in 2013 and a further offer of compromise of $300,000.00 plus costs in 2015.


The Court ordered that from the date of commencement of the proceedings until September 2014, each party was to bear their own legal costs. However, from September 2014 to August 2015, the Owners Corporation had to pay the defendant’s costs on the ordinary basis. From August 2015 forward, the Owners Corporation was ordered to pay the defendant’s costs on the indemnity basis. It is estimated that these costs will be as high $500,000.00.


You judge – who’s the winner?


Conclusion


This case is a good reminder that Owners Corporations who argue that the operation of short-term lettings in buildings creates substantial wear on common property and substantial additional expenditure for Owners Corporations need to beware.


Making that allegation is one thing, proving it is something completely different!

 

Liability limited by a scheme approved under Professional Standards Legislation
Disclaimer – This article is provided for information purposes only and should not be regarded as legal advice.

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