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Owners’ Corporation Law - August 2019

30 Jul 2019

10-year caretakers’ agreements

Joint owners’ voting rights have been put under the microscope by the Victorian Civil and Administrative Tribunal (VCAT).

There is a very interesting proceeding winding its way through VCAT presently, and once determined, it will no doubt have seismic consequences throughout Victoria for owners’ corporations (OC) and their relationships with caretakers, building managers and concierges.

The proceeding involves two OCs in the same large development in Mount Alexander Rd, Travancore, alleging that agreements to appoint a building manager entered into by the developer (initial owner Bensons Property Group) at the Inaugural AGM, are invalid.

The OC claims that the terms and conditions of the contracts were most disadvantageous to owners. Principally, that a 10-year duration for the contracts is excessive, and that the fees and charges payable to the building manager under the contracts are also excessive.

The OC alleges that Bensons Property Group breached its duties under the Owners Corporation Act to act honestly and in good faith with due care, skill and diligence in the OC’s interests, and acted in breach of fiduciary duties owed to the OC and all original owners.

It is indeed very common for developers to act on behalf of OCs to enter into service contracts on non-competitive terms and bind the OC to potentially long-term inequitable arrangements. And, not just for building management services. Bulk electricity, gas and hot water service contracts, as well as essential services and fire service maintenance contracts are all now under the microscope with this proceeding.

Some bulk electricity agreements that I have seen from clients can run for terms of up to 25 years, and the longest caretaker contract I have come across sought to bind an OC for up to 55 years to the caretaker.

In an interlocutory decision recently handed down by senior member Vassie, Bensons Property Group had its application for summary dismissal of the proceeding dismissed, meaning the matter may now proceed to a final hearing.

Bensons Property attempted to have the proceeding dismissed on the basis that the two OCs were unable to pass interim special resolutions to bring the claim in VCAT.

In Victoria, an OC must pass a special resolution (or interim special resolution) in order to bring a legal proceeding in the OC’s name.

In this case, the OC passed the interim special resolutions by ballot. The chairperson nominated himself as the returning officer to count the ballot forms and to declare the outcome of the ballots. Interestingly, by doing so, the decisions made by him as chairperson were only amenable to challenge if (i) a decision was made in bad faith, or (ii) the chairperson made an error of law by reaching a decision that was so unreasonable no other chairperson could reach.

In this instance, there were multiple ballot forms filled out by owners where only one of the co-owners of the lot signed the ballots. However, the chairperson declared the votes as valid, and counted them towards the final outcome of the special resolution.

Bensons Property contended that if these votes were invalid, then the interim special resolutions did not pass and the proceeding against them could be dismissed.

In ruling against Bensons Property, VCAT backed the chairperson’s declaration, finding that “there is no provision in the Act about how a vote for a co-owned lot is to be treated, other than section 90 [which directs that joint owners of a lot have only one vote between them]”.

VCAT found that “there is no general principle that a document signed in respect of a co-owned lot must be signed by all owners in order to be effective.”

While it is always best practice for joint owners to sign a ballot form or proxy form, this case shows that a ballot or proxy will not be invalid even if signed by only one owner, unless the chairperson declares it so.

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