In a year dominated by COVID-19, vaccines and lockdowns, do not be surprised if you missed an equally significant headline from New South Wales’ highest court – the appointment of a building manager in a strata scheme!
When the Strata Schemes Management Act 1996 (NSW) was amended by the Strata Schemes Management Act 2002 (NSW), the legislation restricted a building manager from continuously extending an agreement for more than 10 years after the Amendment Act, including any term or option to renew the agreement.
Previously, a building manager could be engaged by an owners corporation indefinitely.
However, it appears that the recent appeal decision of Australia City Properties Management Pty Ltd v The Owners – Strata Plan No 65111 has, for the time being at least, affirmed the legislature’s intention when it introduced a 10 year limit on the appointment of a building manager in a strata scheme.
Australia City Properties Management Pty Ltd
In Australia City Properties Management Pty Ltd v The Owners – Strata Plan No 65111, there was a dispute between the building manager and the owners corporation regarding the term of the management agreement (“Agreement”), which was entered into on 30 March 2001 – before the Amendment Act.
While the Agreement, dated March 2001, was for an initial period of ten years, with an option to renew for three (3) additional terms of five (5) years, the building manager and owners corporation entered into two (2) deeds of variation (“Deeds”) in March 2010 and March 2015 – after the Amendment Act took effect.
The Deeds had the effect of extending the term of the Agreement beyond the 10-year limit, such that it had an expiration date of March 2041.
In August 2019, the owners corporation terminated the Agreement, on the basis that the building manager had been “grossly negligent” in performing its caretaking duties. The manager argued that the Agreement was not validly terminated and as such, was entitled to damages in the amount of $2 million. These damages were calculated on the basis the Agreement was for a (total) term of 40 years.
Supreme Court Appeal
The issue on appeal was whether the Deeds in 2010 and 2015 were considered “caretaker agreements” under the Amendment Act, such that they were limited to a term of 10 years.
In determining whether the Deeds were limited to a term of 10 years, the Supreme Court considered their “text, context and purpose”.
Given the purpose of the Deeds was to grant a further option under the original Caretaking Agreement, the Court held that the Deeds were, in fact, separate “caretaker agreements”, as defined by the legislation.
The effect of this is that the Deeds were “read down” to expire on 29 April 2025, rather than March 2041, such that the Agreement was limited to a term of 10 years.
As a result, any award of damages to the service contractor for unlawful termination of the Agreement would be calculated up to April 2025.
While Australia City Properties Management may ultimately reach the High Court of Australia, for the time being at least, the decision by Chief Justice Bathurst has provided guidance on the term of a management agreement in a strata scheme.
Will Queensland follow?
While the term of appointment for building managers in NSW strata schemes is (currently) capped at a maximum term of 10 years, the same cannot be said of schemes across the border.
In Queensland, bodies corporate which are regulated by the Body Corporate and Community Management (Accommodation Module) Regulation 2020 (“the Accommodation Module”) may appoint a service contractor for a maximum term of 25 years, including any terms of extension.
And if you thought snap lockdowns were long…
Bodies corporate regulated under the Body Corporate and Community Management (Standard Module) Regulation 2020 are currently restricted to a term of ten (10) years.
Given the significance of the decision in Australia City Properties Management, it will be interesting to see if Queensland follows the lead of New South Wales and implements a limit on the term of a caretaking agreement for schemes regulated under the Accommodation Module.
OMB – Specialist Strata Professionals
OMB Solicitors’ specialist strata practitioners have recently seen a number of building managers attempt to circumvent the 10-year limit by requesting owners corporations extend their management agreement beyond this term.
Owners corporations should consult with OMB Solicitors when reviewing (or varying) the terms of its management agreement, to ensure it complies with the legislation.