Can a Strata Committee Use the Capital Works Fund for Private Benefit?

Strata disputes in small schemes often arise not from major building defects, but from everyday decisions about maintenance and expenditure. A 2021 decision of the NSW Civil and Administrative Tribunal (NCAT), Taylor v The Owners Strata Plan No 53919 [2021] NSWCATCD 2, provides important guidance for strata property owners and committee members about:

• The proper use of the capital works fund;

• The obligation to disclose pecuniary interests; and

• The limits of NCAT’s power to overturn strata committee decisions.

Although the application was ultimately dismissed, the Tribunal’s reasoning contains important lessons for strata schemes across New South Wales.

Background

The strata scheme comprised three townhouse lots in Cronulla. Each lot had its own external yard, and each lot was represented on the strata committee.

The dispute arose in April 2020 when the owners of Lots 2 and 3 arranged for tree pruning works. The tree in question was located on an adjoining property (not within the strata scheme), but its branches overhung the private courtyards of Lots 2 and 3. Lot 1 was unaffected.

Two quotes were obtained:

• $825 (Dynamic Tree Services) – for raising and reducing overhanging branches and removing dead wood; and

• $2,860 (Bob and Ben The Tree Men) – for more extensive pruning and thinning.

The lower quote was accepted, and the work was completed in May 2020.

The applicant, the owner of Lot 1, objected before the work was carried out. She questioned whether the cost should properly be borne by the Owners Corporation, noting that the overhanging branches affected only the private courtyards of Lots 2 and 3.

A Common Property Memorandum (November 2011) for the scheme provided:

“The part of a tree within common property is common property. The part of the tree within the cubic space of a Lot is part of that Lot. Costs associated with the tree (including damage and trimming) are apportioned according to that ratio.”

Despite concerns raised, the strata committee (by majority of two out of three members) directed the strata manager to engage the contractor and pay the $825 invoice from the capital works fund.

The applicant applied to NCAT under section 232 of the Strata Schemes Management Act 2015 (NSW) (SSMA), seeking:

1. A determination as to whether the payment was lawful;

2. Orders requiring reimbursement by the owners of Lots 2 and 3 if it was not; and

3. Reimbursement of her filing fees.

The Issues Before the Tribunal

The Tribunal (General Member Ringrose) was required to consider several key issues:

1. Was the payment from the capital works fund authorised under the SSMA?

2. Did committee members breach their duties by failing to disclose a pecuniary interest?

3. If there was a breach, could NCAT invalidate the decision or order reimbursement?

4. Did NCAT have power to grant the specific relief sought?

Each issue required close consideration of the statutory framework governing strata schemes in NSW.

The Legal Framework

1. The Capital Works Fund

Section 74 SSMA requires every Owners Corporation to establish a capital works fund. Under section 79(2), that fund is for anticipated expenditure such as:

• Replacing or repairing common property;

• Renewing fixtures and fittings forming part of common property;

• Other expenses of a capital nature.

Importantly, capital works funds are intended for common property, not for private lot improvements.

2. Duties of the Owners Corporation and Strata Committee

Section 9 SSMA confirms that the Owners Corporation is responsible for:

• Management and control of common property;

• Managing the finances of the scheme;

• Maintaining and repairing common property.

Section 37 imposes a duty on strata committee members to carry out their functions:

“for the benefit, so far as practicable, of the owners corporation and with due care and diligence.”

The Tribunal referred to appellate authority including Owners – Strata Plan No 43551 v Walter Construction Group Ltd [2004] NSWCA 429, where Spigelman CJ explained that lot owners have a beneficial (equitable) interest in common property, and the Owners Corporation holds it in a representative capacity.

This reinforces that committee decisions must be made for the collective benefit of lot owners, not for individual gain.

3. Disclosure of Pecuniary Interests

Clause 18 of Schedule 2 to the SSMA requires a strata committee member who has a direct or indirect pecuniary interest in a matter being considered to:

• Disclose the nature of that interest;

• Have the disclosure recorded; and

• Refrain from deliberating or voting unless the committee determines otherwise.

Failure to comply attracts a maximum penalty of $1,100.

However, critically:

“A contravention of this clause does not invalidate any decision of the strata committee.” (cl 18(6))

Evidence and Arguments

The Applicant’s Position

The applicant argued that:

• The pruning benefited only Lots 2 and 3;

• The tree branches were within the cubic airspace of those lots;

• Under the Common Property Memorandum, costs should be apportioned accordingly;

• Payment from the capital works fund was unlawful; and

• The owners of Lots 2 and 3 should reimburse the fund.

She also raised concerns about procedural irregularities and conflict of interest.

The Respondent’s Position

The respondent (represented by the secretary of the strata committee) submitted that:

• Previous pruning in 2012 had been paid from the capital works fund;

• The committee acted honestly and transparently;

• A majority of committee members agreed to the expenditure;

• The strata manager indicated the committee could authorise payment even if technically the owners were responsible.

Photographs showed that the tree affected only Lots 2 and 3. The respondent ultimately did not press a claim that the pruning was strictly an Owners Corporation responsibility under the Act.

The Tribunal’s Findings

1. Use of the Capital Works Fund

The Tribunal noted that the capital works fund is retained for works and repairs to common property. On the evidence, the tree was on adjoining land and affected only the private areas of Lots 2 and 3.

The strata manager had expressed the view that the pruning was “probably the responsibility of the individual Lot owners affected.”

The Tribunal observed that two committee members who benefited from the decision directed payment from the fund.

2. Breach of Pecuniary Interest Obligations

The Tribunal found:

“two members of the strata committee who stood to gain a financial advantage… failed to disclose that interest… and continued thereafter to be present in a deliberation and to take part in the decision.”

This was a clear failure to comply with clause 18 of Schedule 2.

However, clause 18(6) expressly provides that such a breach does not invalidate the decision.

3. NCAT’s Power to Grant Relief

The application was brought under section 232 SSMA, which allows NCAT to make orders to settle disputes or rectify complaints about the management of a strata scheme.

However, relying on Walsh v Owners – Strata Plan No 10349 [2017] NSWCATAP 23, the Tribunal confirmed:

• NCAT has no inherent powers;

• It can only make orders authorised by statute;

• Orders can only be made against persons named as parties.

The applicant sought reimbursement from the owners of Lots 2 and 3, but they were not named as parties in the application.

The Tribunal concluded it did not have power to:

• Invalidate the committee decision; or

• Order reimbursement in the manner sought.

Accordingly, the application was dismissed.

Each party was ordered to bear their own costs under s 60 of the Civil and Administrative Tribunal Act 2015 (NSW).

Key Learnings for Strata Property Owners

1. Capital Works Funds Are Not a General Expense Account

Capital works funds are for common property and capital expenses, not for private lot improvements.

Even where an expense seems minor, committees must carefully consider whether it falls within s 79(2) SSMA.

2. Disclosure of Conflicts Is Mandatory

Committee members must disclose any direct or indirect pecuniary interest and abstain from deliberation and voting unless properly authorised.

Although failure to comply does not automatically invalidate a decision, it:

• Exposes the member to penalty;

• Undermines governance; and

• Risks further regulatory consequences, including potential appointment of a compulsory strata manager under s 237 SSMA.

3. NCAT’s Powers Are Limited

NCAT cannot grant broad declaratory relief or undo decisions simply because they appear unfair.

Applicants must:

• Properly identify the legal basis for relief;

• Name all relevant parties; and

• Seek orders within the Tribunal’s statutory powers.

Procedural missteps can result in dismissal even where governance concerns are justified.

4. Small Schemes Are Not Exempt from Governance Rules

In three-lot schemes, governance can become informal. However, the SSMA applies equally to small and large schemes.

Majority voting does not override:

• Statutory duties of care and diligence;

• Disclosure requirements;

• Financial management obligations.

Practical Guidance for Strata Committees

To minimise risk:

• Maintain clear records of meetings and votes.

• Keep a register of disclosed pecuniary interests.

• Seek written legal advice before using capital works funds for borderline expenses.

• Ensure decisions are demonstrably for the benefit of the Owners Corporation as a whole.

While the Tribunal dismissed the application due to limits on its statutory powers, it issued a pointed reminder to strata committees about:

• Their obligations under s 74 and s 34 SSMA; and

• The strict requirements of clause 18 regarding pecuniary interests.

For strata property owners in NSW, the case reinforces that proper process, transparency and statutory compliance are essential, even for relatively modest expenditures.

Formally, the Owners Corporation is the entity responsible for managing the capital works fund and enforcing contribution obligations. If money was wrongly paid out, the “proper plaintiff” in a conventional sense would ordinarily be the Owners Corporation itself.

However, in this case, the difficulty was that the Owners Corporation was controlled (by majority on the strata committee) by the very lot owners who benefited from the payment, and it was those owners had voted to authorise the expenditure.

Potential procedural pathways may have included:

1. Naming the Individual Lot Owners as Respondents

If the relief sought was reimbursement by Lots 2 and 3, they should have been joined as parties. That would at least overcome the “non-party” obstacle identified by the Tribunal.  However, as noted earlier, clause 18(6) (failure to disclose pecuniary interest does not invalidate a decision) still presents a substantive hurdle.

2. Framing the Relief Differently

Rather than seeking a direct repayment order against the lot owners, the applicant might have:

• Sought orders that the Owners Corporation breached its statutory duties (for example, misapplication of capital works funds); and

• Sought consequential orders directed at the Owners Corporation to rectify the financial position.

That approach keeps the legal focus on the entity responsible for financial management, rather than trying to leap directly to personal reimbursement.

3. Seeking Orders Under s 237 (Compulsory Strata Manager)

Where governance has broken down and conflicts of interest are entrenched, an application for the appointment of a compulsory strata managing agent under s 237 SSMA may be a more effective remedy.  In very small schemes, particularly 2–3 lot schemes, persistent conflict and misuse of funds can justify that step.

4. Breach of Statutory Duty or Recovery Proceedings

There is also a theoretical possibility of:

• An application alleging breach of statutory duty by committee members (s 37 duty of care and diligence), or

• Proceedings in a different forum if a proprietary or equitable basis for recovery existed.

However, those avenues are legally more complex and fact-sensitive.

Even if the individual lot owners had been joined, success was not guaranteed. The stronger pathway may have been to focus on governance failure and seek structural relief (for example, s 237 appointment), rather than reimbursement alone.