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Owners’ Corporation Law - April 2017

30 Mar 2017

Read the fine print

Developers owe fiduciary duties to owners’ corporations (OCs), but always read the fine print in your sales contract.

The strata law titling system has existed in Victoria for more than 50 years and, as each year passes, the system gets more and more sophisticated as clever lawyers obtain judgments from courts regarding the interpretation of statutory and common law concepts and existing laws continue to be amended.

Since 1968, the courts of Australia have been prepared to recognise that a developer, acting as a promoter of the building, will owe the OC a fiduciary duty to act in an OC’s best interests and in relation to the ways in which it sets up an OC to be managed in the future.

Over time, the scale, extent and operation of this fiduciary duty has expanded and contracted as various parliaments around Australia have sought to legislate in this area and various courts have issued rulings in cases regarding this duty.

Within the Owners Corporation Act in Victoria, there is also a legislative provision which requires a developer to act honestly and in good faith and with due care and diligence in the interests of the OC in exercising any rights under the legislation.

The common law duty extends this principle, requiring a developer not to obtain any unauthorised benefit from the relationship and not to find itself in a position of conflict (where it might be tempted to “self-deal”).

The operation of this duty can take many forms. For instance, it can arise in such diverse areas as “embedded networks” where a developer might enter into an agreement on behalf of the OC with a gas or electricity supplier for the bulk buy of utility services.

Typically, the developer would take an annual fee as a commission for the bulk purchase of the utility. It could be said that the developer has no right to earn a commission from the energy or gas that the OC consumes and that any commission should be payable to the OC itself ­– not to the developer.

In other circumstances, a developer might enter into a service contract on behalf of the OC with a related company (such as concierge or building management services, property management, cleaning or security). If these agreements are found to be uncompetitive with the market (either in duration of years or based on the annual fees) then these agreements may be able to be impugned.

However, before OCs rush off to VCAT seeking declarations and injunctions, careful consideration and analysis is required of what was disclosed by the developer in the off-the-plan sales contracts.

This is because the fiduciary duty of a developer may be constrained or limited if there was sufficient disclosure to purchasers of what exactly the developer was going to do in the future.

In addition, if there has been ratification of any of the agreements by the OC, then the developer might have a defence to say that the OC has accepted the contractual arrangements and is now bound to the commercial terms.

For instance, if a developer placed an OC into a 25 year agreement with the developer’s company to provide a service and, if that agreement has been on foot for say, the last five to 10 years without complaint, then the conduct of the OC has been such that it has accepted the services and may have ratified the agreement through its operation and would be prevented from impugning the agreement.

As always, much depends on the exact facts and circumstances of each case, however it will be critically important for OCs that are less than five years old to take advice on these matters – because if you snooze, you’re likely to lose.

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