By-laws Striking the Right Balance: the case of The Owners – Strata Plan 91684 v Liu; The Owners SP No. 90189 v Liu [2022] NSWCATAP 1

By-laws and strata living

For anyone living in a strata scheme, by-laws will play a key part in their use and enjoyment of the property. Whilst they are approved through a democratic process of the owners corporation (in most cases that is, a 75% vote in favour of the by-law), not all by-laws are fair and reasonable.

The Tribunal has the power to declare that a by-law be invalidated if the Tribunal considers that the owners corporation did not have the power to make the by-law, or, if the by-law was harsh, unconscionable, or unreasonable (see section 150 of the Strata Schemes Management Act 2015 (‘Act’)).

The case of Liu

The 2022 case of The Owners – Strata Plan 91684 v Liu; The Owners SP No. 90189 v Liu [2022] NSWCATAP 1 (‘Liu’) considered a by-law related to short-term rental accommodation. The by-laws allowed the owners corporation to de-activate access devices if an owner was in breach of its terms. It also enabled the owners corporation to recover expenses it incurred under that by-law as a levy debt.

The impact of the by-law was that if the owners corporation considered a lot owner had breached the by-law, it could de-activate a lot owners fob which allowed them access to various parts of the property. Additionally, the owners corporation could recover any costs it incurred as a result of a breach of the short-term letting by-law as a levy debt. 

The reference to a levy debt is important. Levies are statutory debts that not only accrue interest immediately once overdue, but will result in a lot owner being deemed an ‘unfinancial owner’ and restrict them from voting at any general meeting.

In Liu, the Appeal Panel found that:

(1) De-activation of access devices – In considering whether a by-law is harsh, unconscionable or oppressive the Tribunal will need to engage in valuative judgment and the fact that a by-law is ‘administratively convenient’, does not justify interference with the ordinary rights of the lot owners.

Specifically, the Tribunal considered the de-activation of access devices infringed on the fundamental rights of the property owners within the strata scheme, as they would be prevented from accessing parts of the common property. Access could therefore be taken away without any pre-conditions, without any proper investigation and it was unclear how long the de-activation would last.  

(2) Levy debt – Moneys can only be levied in accordance with the provisions of the Act. Levies need to be directly related to the Administrative Fund, the Capital Works Fund or if a lot owner causes an increase in insurance (see section 82).

In other words, there is no legislative provision enabling the owners corporation to recover expenses as a levy debt under a by-law. The owners corporation was held not to have the power to make this by-law.

(3) Severability – Notwithstanding that the de-activation of access clause and levy debt clause were invalid, the remaining parts were not in dispute. The question was whether the offending clauses could be severed and the balance allowed to stand.

The short answer is no, on the basis that:

• Section 150 allows the Tribunal to declare “a” by-law to be invalid and there is no express power to redraft or alter parts of the by-law.
• If the by-law was amended, it would become something fundamentally different to what was approved by a special resolution and may not be acceptable wording to the owners corporation. If the owners corporation wanted to retain the by-law, with the amendments, it could simply hold another meeting to make a new by-law.

What lessons can we learn from Liu?

1. A by-law purporting to allow expenses of the owners corporation to be recovered a levy debt will be invalid if not made according to the provisions of the Act.
   
2. When enacting a by-law, significant weight should be given the rights of the lot owners and the potential adverse impacts on their day-to-day use of their lot and the common property. The mere fact that a tough by-law provides administrative or commercial benefit to the owners corporation is not enough.
    
3. If an owners corporation is concerned about a clause in their current by-laws, they should have it reviewed and if necessary, amended by passing a special resolution.
   
4. Whilst Liu is clear authority surrounding levy debt clauses, this does not necessarily prevent a by-law from enabling an owners corporation to recover costs.