Are the proposed works to the strata building correctly classed as repairs, replacement and renewal, or an improvement?

Case:

Glenquarry Park Investments Pty Ltd v Hegyesi [2019] NSWSC 425

Facts:

The matter related to a dispute between the lot owners of a strata title property at Point Piper in Sydney’s eastern suburbs regarding proposed works on the common property.

The plaintiffs between them owned Lots 3, 5 and 6, and held 52% of the voting rights in the strata scheme, which entitled them, as majority owners, to pass an ordinary resolution (which requires more than 50% of votes) but not a special resolution (which requires more than 75% of votes).  It was their wish to have the property refurbished at a cost of several million dollars.

The defendants owned lots 1, 2 and 4.  The owners of lots 2 and 4 voted against the proposed works, on the grounds that the proposed works were too extensive and expensive, whilst the owner of Lot 1 was impartial.  The strata manager was joined as a defendant in the proceedings.

The majority owners attempted to pass a resolution for the proposed works, but without a sufficient majority to pass as special resolutions and were therefore passed as ordinary resolutions.

The proposed works included replacing the lift (which was installed in 1936) and the lift shaft and replacing the timber staircase with a concrete staircase to ensure compliance with the Building Code of Australia.

Issue:

Whether the proposed works were correctly classed as:

1. repairs to, and replacement and renewal of, common property (for which an ordinary resolution sufficed)

OR

2. the improvement of common property (for which a special resolution was required) – actions that add to the common property, alter the common property or erect a new structure on the common property.

Decision:

At first instance, the Tribunal determined that the proposed works required a special resolution – noting that replacing the lift shaft was not necessary, although there were benefits in doing so (such as increased space and light).  The Tribunal instead ordered that the strata scheme replace or repair certain specified parts of the common property.

The Supreme Court referred to an owners’ corporation responsibility to properly maintain and keep the common property in a state of good and serviceable repair.  The issue here was whether the old lift should continue to be repaired and maintained, at risk of parts not becoming available and more significant issues arising in the future, or whether it should be replaced by a modern equivalent.  Parker J stated:

There is force in the contention that practicality requires allowing a degree of judgment and latitude to an owners’ corporation in determining how far to go with repair and replacement work in a maintenance context.  Often, the replacement of an old and obsolete item may be cheaper and more effective in the long run than continuing to try to patch it up.  There is also a textual basis for allowing a degree of latitude to an owners’ corporation in deciding what and when should be replaced.  Maintenance is not necessarily confined to responding to a breakdown; the term usually also includes preventative maintenance, that is, replacing something which has reached the end of its service life before it fails.

The Court acknowledged that there is an element of protection required for minority owners from having the costs of enhancement imposed on them by the majority.  The Court concluded that the obligation to repair and maintain is “limited by a concept of reasonable necessity”.  After referring to the expert’s report and conclusion that the lift could continue to be maintained and remain operable for many years into the future, the Court noted that there was no evidence to establish that a new lift car was required, nor a new lift shaft.  Therefore, installing a glass lift would be an improvement, not the maintenance or reinstatement of the functionality of the existing lift – and a special resolution would be required.

The Court also concluded that rendering the external walls, putting a new surface on the building and incorporating the external pipe work – following the repairs to the damaged bricks and mortar – would be an enhancement.  Parker J stated:

It involves going beyond the restoration of the walls to their previous functional state.  A fully rendered wall with pipework chased into it is in my view something different from a brick wall with exposed pipework affixed to it.

Finally, the Court dealt with the issue as to whether the orders were specific enough such that the Owners Corporation was clear as to what it was being ordered to do.  There needed to be a defined scope of works.  The recipient of the order should not be in any doubt as to what is required.