Property 101: Victorian strata and lot owner proprietary rights

GUEST OBSERVER

In a landmark ruling, the Supreme Court of Victoria has found that planning law, not strata law, is to govern short-term lettings of strata apartments.

Specifically, in Owners Corporation PS 501391P v Balcombe [2016] VSC 384, Justice Riordan found that a rule made to prohibit the use of a residential lot ‘for any trade or business’ in a strata scheme was invalid for these reasons:

1. The role of the owners corporation was confined to managing and administering the common property, and did not extend to restricting the use of a lot..
2. The rule was a substantial interference with the lot owners’ proprietary rights.
3. The strata law needed to clearly spell out clearly an intention to inhibit a lot owner’s use of their own lot for the rule to be valid - which it did not.

Background

The Watergate Apartments, Strata No PS 501391P is a mixed use development. It consists of 349 residential lots in two 16 storey apartment towers, erected upon a four storey podium which contains 12 retail lots and car park facilities. The plan of strata subdivision was registered on 28 June 2004. It is a residential Class 2 building under the Building Code of Australia, and therefore was not designed for the operation of a serviced apartment style business.

Ms Balcombe and Mr Slater utilise 14 apartments (1 owned, 9 leased, 4 available on a commission basis) to operate a Short-Term Letting business trading as ‘Docklands Executive Apartments’. In eight and a half years of operation, they have had over 3,500 bookings and 10,500 guests. They charge ‘executive’ prices, have minimum seven days stays, require photo identification and credit card details and can evict disruptive tenants immediately.

The City of Melbourne Council (the planning authority) consented to the use of apartments in the building for short-term commercial accommodation (serviced apartments) on condition that: a smoke alarm was installed in each bedroom; an emergency evacuation plan was affixed inside the entry doors; exit signs were placed in the corridors; and the tenants acknowledged the receipt of a safety/evacuation induction.

The proceedings were commenced by the Owners Corporation which sought restraining orders against Ms Balcombe and Mr Slater, alleging a breach of its rule (Rule 34) that provided:

The Proprietor or Occupier of a residential Lot must not use a Lot or the Common Property for any trade, profession or business (other than letting the Lot for residential accommodation to the same party for periods in excess of one month), nor permit any other person to do so, unless:

1. The person … is a full time resident of the Lot and only operates a home office …; and
2. The relevant planning scheme does not prohibit the relevant trade, profession or business to be carried on in a Lot; and
3. The Lot owner has obtained all necessary permits from the relevant authorities …

The Court’s finding that the Owners Corporation had no power to make the rule

The functions of an owners corporation are set out in section 4 of the Owners Corporations Act 2006(Vic). They can be summarised as:

1. to manage and administer the common property;
2. to repair and maintain the common property, fittings, fixtures, equipment and services relative to it;
3. to maintain strata insurance;
4. to keep records and issue certificates.

The powers of an owners corporation to make rules are set out in section 138 of the Owners Corporations Act 2006 (Vic), and are limited to the purposes set out in Schedule 1 of that Act. These purposes are relevant:

1. Health, safety and security – of lot owners, occupiers of lots and invitees.
2. Change of use of lots – which affect the insurance premiums payable by the owners corporation.
3. Behaviour of owners, occupiers and invitees on common property, noise and other nuisance control.

The Court found that the principal function of the owners corporation was ‘to own and manage the common property of the strata development’.

The Court found that the power of the owners corporation to make rules to prevent the use of a lot for an illegal or injurious purpose, to prevent a nuisance or hazard, or the behaviour of and noise created by tenants, was limited. It was not sufficient to support a general ban on Short-Term Letting on all lots. 

Health and safety issues and changes of use for a lot (an apartment), were planning matters for the Melbourne City Council to deal with.

Therefore the rule to outlaw use of an apartment for short-term letting was invalid as it exceeded the power of the owners corporation and interfered with the rights of the freehold owners.

As a result of this decision, an apartment owner in Victoria needs only planning permission to use their apartment for short-term lettings: Airbnb style short stays and service accommodation. They do not need permission from the owners corporation and any rule in place to restrict or prohibit that use is invalid.

Is the position the same or different in NSW?

There are subtle but significant differences in the strata law between NSW and Victoria:

• In Victoria the owners corporation makes rules, in NSW it makes by-laws.
• In both states, the common property is owned by the owners corporation (it used to be called the body corporate).
• In NSW, under section 47(1) of the Strata Schemes Management Act 1996 (NSW), by-laws can be made generally ‘for the purpose of the control, management, administration, use or enjoyment’ of the lots or common property’, without limitation (see section 43), and with a right of appeal.
• In Victoria, the rules are limited to the powers set out in Schedule 1.
• Also in NSW, original by-laws which are lodged with the strata plan for registration can be broader than the section 47(1) powers, but are subject to section 49 restrictions which include prohibitions on by-laws which restrain leasing.

In NSW, the new Strata Schemes Management Act 2015 will commence on 30 November 2016. Section 136(1) is in similar terms to section 47(1) of the 1996 Act. Section 139 contains the section 49 restrictions, with some additions, including an override that a by-law must not be harsh, unconscionable or oppressive.

As a result, it is unclear whether the Victorian decision can be taken as a precedent to invalidate by-laws in NSW Strata Schemes which prohibit the use of lots for short-term letting.

Comments

The NSW Parliamentary Committee on Environment and Planning is currently conducting an inquiry upon the Adequacy of the Regulation of Short-term Holiday Letting in New South Wales. It would be most helpful if it were to indicate how the strata law should be clarified to deal with short-term lettings when it reports at the end of August 2016.

This matter needs to be addressed because of the requirement that all strata schemes review their by-laws within 12 months of the commencement of the 2015 Act.

My suggestions are:

• That the planning authorities specifically provide for the regulation of short-term lettings for strata apartments in their planning policies.
• That owners corporations be able to include a policy statement, which sets out their policy upon use of the residential apartments for short-term lettings, as an adjunct to their by-laws. This policy statement would not have the legal force of a by-law, but would be influential if an application were made to the planning authorities for approval to use an apartment for short-term lettings.
• To assist in enforcement, the owners corporation should be given the power to assist the enforcement officers of the planning authority to prosecute contraventions of the planning laws.
• If a short-term letting use is being carried on, with or without planning approval, the owners corporation should be entitled to levy a surcharge upon the Strata levies payable for the apartment in question, to cover extra wear and tear, garbage, insurance premiums, visitor parking and water use.

Anthony J Cordato is lawyer, Cordato Partners and can be contacted here.