Owners Corporation insurance obligations
Pursuant to section 59(1) of the Owners Corporation Act 2006 (the Act), the owners corporation must take out reinstatement and replacement insurance for all buildings on common property.
Section 60(1) of the Act provides that the owners corporation must take out public liability insurance for the common property.
Section 61 of the Act provides that the owners corporation must take out insurance in accordance with sections 59 and 61 for all lots on a plan in multi-level developments.
These provisions do not apply to 2-lot subdivisions.
A recent VCAT decision has shed light on the obligations of owners corporations to insure fixtures found in private lots in multi-level developments.
The owner of a lot in a multi-level development leased it to a supermarket operator. A compressor, which formed part of an air conditioning unit, was owned by the lot owner and located wholly within the lot.
In 2012 the compressor broke down and needed to be replaced at a cost of $12,320.00.
A dispute arose as to who was responsible for insuring the compressor: the owners corporation or the lot owner?
The decision came down to whether the definition of ‘building’ in section 61 of the Act extended to lots and whether the compressor was a fixture.
The Act provides that the OC must take out and maintain reinstatement, replacement and public liability insurance, which covers all buildings in lots in the plan in multi-level developments.
In this case VCAT determined that the effect of section 61 is to make the OC responsible for insuring fixtures within lots as well as on common property in multi-level developments under section 59(1).
What is a fixture?
A fixture is an object (chattel) that has been attached to land to such an extent that it is seen as having become part of the land at law.
In order to assess whether an object is a fixture, the following factors are considered:
- the nature of the object;
- the way in which the object is used;
- the degree to which it is attached to the building e.g. by bolts which make it difficult to remove;
- the length of time that it is intended to remain attached to the building; and
- the reason why the object was attached to the building.
In the case, VCAT noted that the compressor was a fixture because:
- the compressor was installed when the lot was purchased;
- the lot owner did not intend to take the compressor with it when it sold the lot; and
- the air conditioning unit, together with the compressor would remain attached to the building on the lot for as long as the building is used as a retail business.
While the Tribunal Member conceded that the compressor was capable of being detached from the building, the fact that it was not easily detached indicated that the compressor being a fixture.
Impact of the decision
Practically, OC managers need to be aware of the ‘nature and value of fixtures located on lots within the development’. If these fixtures are not insured, the OC and its manager can be exposed to a claim.
If you are an OC manager of a multi-level development, you should:
- Review your procedures for collecting information regarding fixtures contained in private lots.
- Check your existing insurance policy to make sure that fixtures in lots are covered by the OC policy. If not, you will need to advise the OC that it should arrange the appropriate insurance cover.
- Obtain a warranty from each lot owner that they will advise the owners corporation if a fixture is added to or removed from their lots.
Difficulties may arise where significant fixtures such as air conditioning units are installed in lots which impact upon the insurance premiums payable by the OC.
The OC may need to review and develop procedures for the apportionment of the insurance premiums payable if there is a significant impact on the insurance premium costs of the OC.
The perils of applying the benefit principle under the Owners Corporation Act
Building defects in common property and repairs required to common property are particularly vexing for owners corporation members. When a defect is discovered or when repairs are required, an owners corporation naturally turns its attention to the following key questions:
- Who is responsible for arranging the necessary works?
- Who is liable for the cost of the works?
- How are the works to be paid for?
The starting point
The starting point is that under the Owners Corporation Act 2006 (Act) an owners corporation has an overriding duty to repair and maintain common property, and must levy fees for the repair and maintenance of the common property.
If an owners corporation levies fees under section 23 of the Act (i.e. for general administration, maintenance and repairs), then those fees must be based on lot liability.
- an owners corporation levies special fees and charges to cover extraordinary items of expenditure under section 24 of the Act; and
- the fees relate to repairs, maintenance or other works that are wholly or substantially for the benefit of a particular lot owner,
then the fees may, be levied on the basis that the lot owner of the lot who benefits more pays more.
This is known as the ‘benefit principle’. The benefit principle is also stated in section 49 of the Act.
The benefit principle applies where an owners corporation recovers the cost of repairs, maintenance or other works as a debt, as opposed to recovery under section 42 of the Act (contributions to maintenance funds) which applies to works that are budgeted for and levied prospectively.
Recent Supreme Court decision
The Victorian Supreme Court recently considered the application of the benefit principle to the following fact scenario:
- The lot owner owned a penthouse unit in an apartment building.
- 34 of the 39 units in the building had balconies, but the applicant’s unit did not have a balcony.
- The owners corporation levied fees for repair works to the balconies based on a lot liability basis, despite five of the units not having balconies.
- The repair works were undertaken and paid for out of the levied funds as well as the owners corporation’s maintenance fund.
- The applicant issued proceedings against the owners corporation, disputing that it ought to contribute to the repair works.
His Honour found in favour of the owners corporation. Significantly, in his judgment His Honour stated that:
“To the extent the benefit principle applies in the Act it applies at the point of levying and collecting monies from lot owners rather than at the point of payment.
There is no provision in any of those sections (sections 43, 44 or 45 of the Act) to the effect that an adjustment (to the levied funds) is to be made at the point of payment out of the fund to reflect the benefit principle”.
The implication of the decision is that an owners corporation will forever lose an opportunity to seek the contribution of more funds from a lot owner under the benefit principle if fees have already been levied on a lot liability basis, or the cost of the works has already been paid out of the owners corporation’s maintenance fund.
What the case means for owners corporations
The decision in that case has serious implications for the way in which owners corporations should tackle defects in and repairs to common property and the allocation of responsibility for the costs of those works.
As a result it is imperative that once an owners corporation becomes aware of a defect in common property or the need for repair of common property, it should immediately consider the issue of whether any lot owner or group of lot owners will benefit more from the works than other lot owners.
If a particular lot owner or group of lot owners will benefit more from the works than other lot owners, the owners corporation should levy fees to fund the works under section 24 of the Act and on the basis of the benefit principle.
Section 49 of the Act suggests that when urgent repairs, urgent maintenance works or other urgent works are required and those works have not been budgeted for by the owners corporation, it can seek to recover the cost of those works as a debt from the lot owners on the basis of the benefit principle even though the fees for those works have not previously been levied.
To find out more about how developments in owners corporation law affect your rights, contact Anton Block, Principal Lawyer and Head of Owners Corporation, on (03) 8600 8833 or email@example.com.
Note: This update is a guide only and is not intended to constitute legal advice.