Can an Owners Corporation Ratify Legal Proceedings Commenced Without a Section 80D Resolution?

In a win for Owners Corporations on Friday, 29 November 2013, the Supreme Court of NSW handed down a decision that will have a positive and wide reaching impact on all strata schemes. The decision clarifies the ability of an Owners Corporation to commence legal action but also to seek legal advice.

The ability of an Owners Corporation to seek legal advice, the provision of any other legal service, or initiate legal action for which any payment may be required is limited by section 80D of the Strata Schemes Management Act 1996 (NSW) and regulation 15 of the Strata Schemes Management Regulation 2010 (NSW) in that it must not do so where the cost of doing so will be above the statutory threshold of $12,500, or, where there are fewer than 12 lots, will exceed $1,000 per lot (unless the proceedings or legal services are to recover unpaid strata levies).

The Supreme Court’s decision confirms that an Owners Corporation can commence proceedings without first complying with the Act or the Regulation, provided that this decision is later ratified by the Owners Corporation in general meeting.

The Key Facts

The Owners Corporation, through its executive committee, sought legal advice regarding a potential building defects claim. The solicitor’s initial cost disclosure was below the statutory limit established by regulation 15. With the statutory time frame to commence legal action under the Home Building Act 1989 (NSW) about to expire, the solicitors commenced proceedings in the District Court to preserve the rights of the Owners Corporation against the developer. Due to the urgency a further cost disclosure that required a section 80D resolution was not passed by the Owners Corporation before the proceedings were commenced. Crucially, the Owners Corporation later passed a section 80D resolution ratifying the commencement of proceedings and the engagement of the solicitors.

The developer, who was also a lot owner, sought to strike out the proceedings on the basis that they had been commenced without “lawful authority” as a section 80D resolution approving the commencement of the proceedings had not first been passed. The developer argued this meant the legal proceedings were a nullity and that the legal action could not be authorised by a later section 80D resolution.

The Supreme Court determined that although the proceedings were commenced without a section 80D resolution, they were not invalid or a nullity. The Court’s reasoning was that:

-­‐ Section 80D does not expressly state any consequences for failing to comply with it, it applies to court proceedings generally and does not limit claims to a particular court;

-­‐ There is sufficient incentive for persons in management positions in strata schemes and legal advisors not to act without authority;

-­‐ While it is preferable to first pass a section 80D resolution it may not always be possible to do so particularly in emergencies;

-­‐ The plain wording of section 80D(1) means that it can be fulfilled by a resolution after the initiation of legal action or the taking of legal advice; and

-­‐ The wording of section 80D(1) differs to other provisions namely sections 45 and 65A of the Act, which strictly require enabling resolutions to be passed prior to undertaking action.

The Supreme Court found that it was open to the Owners Corporation to subsequently ratify the legal action as at the date that legal action was taken and that no undue prejudice was caused to the Developer by the later ratification. In fact, the Court held that if the Owners Corporation were prevented from ratifying the decision the developer would have received a windfall benefit that it was not entitled to.

Effect of the Decision for Owners Corporations

The practical effect of this decision is that while an Owners Corporation must always comply with the limitations imposed by section 80D and regulation 15, it need not always do so prior to commencing legal action, seeking legal advice or other legal services provided the decision to do so is later ratified.

Executive committees should note that the limitations on expenditure imposed by the Act still exist. This decision is not cure for proceedings where ratification has not occurred. It does however, allow an Owners Corporation to act to seek advice or commence proceedings in an emergency or when urgency is required, providing the decision to do so is later ratified. Importantly, the ratification must be within a reasonable time frame.

This decision is important as previously, builders, developers, other third parties and even lot owners had previously been able to use a failure to comply with section 80D as a technical defence to claims made against them. Now a failure to comply with section 80D prior to undertaking an action cannot be used against the Owners Corporation provide a resolution is later passed.

Allison Benson TEYS Lawyers 2 December 2013