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Owners Corporation update: Owners Corporations left with a poison pill?

Feb 19, 2013

Sometimes lot owners find that the developer of their property has left them one or more poison pills in the form of long term contracts binding their Owners Corporation.

The contracts can be a poison pill if they lock the owners corporation into unfavourable terms and conditions, fees at levels that are much higher than they should be or do not give the owners corporation appropriate rights to terminate the contract if services provided are not of an acceptable standard.

Examples of these contracts can include:

  • building superintendent contracts,
  • service contracts,
  • maintenance contracts;
  • contracts for provision of  telecommunication services to the subdivision; and
  • renewable management contracts.

The antidote for a poison pill

There is an antidote for the poison pill. The owners corporation may have a right of recourse as against the developer under the Owners Corporation Act 2006 or against the other party to the poison pill contract under the Australian Consumer Law.

Duty of initial owner — to act in good faith

Section 68(1) of the Owners Corporation Act 2006 (the Act) requires ‘the initial owner of the land affected by an owners corporation to act honestly and in good faith and with due care and diligence in the interests of the owners corporation in exercising any rights under this Act’.

This obligation only lasts while the initial owner, who we call the developer, is the owner of the majority of the lots and only until the end of the period of 5 years following the registration of the plan of subdivision.

The owners corporation can seek damages from the developer for the breach of s68(1) if the developer breached this obligation by arranging for the owners corporation to enter into an “unfair” contract whilst it was an owner of majority of the lots and within 5 years of registration of the plan.

This however presupposes that the developer still exists and has assets at the time the claim is brought.

Many developers however structure their affairs so that the company used for a development is only involved in that development and its assets (i.e. profits from the development) are promptly distributed by dividends or otherwise when the development has been completed. Often these companies are then liquidated.

Terminating an ‘unfair’ agreement

An owners corporation is more likely to want to end these contracts rather than commence litigation to obtain damages from the developer.

An owners corporation can make an application to VCAT to have an agreement set aside or terminated if the contract does not comply with the Australian Consumer Law.

Under the Australian Consumer Law, a contract is unfair when:

  • its terms cause a significant imbalance in the parties’ rights and obligations arising under the contract;
  • it contains terms not reasonably necessary to protect the legitimate interests of the supplier; and
  • its terms would cause financial and non-financial detriment to a party.

For example a contract that only allows one of the parties to alter the terms or to terminate the contract would be considered an unfair contract.

Prior to August 2011, the application could only be made by the owners corporation. Due to changes in the Act, a lot owner can now bring an action on behalf of the owners corporation to resolve an owners corporation dispute relating to these poison pill contracts.

To our knowledge, there have not been any cases as yet brought by any individual lot owner pursuant to the amended Act for the purpose of terminating these contracts.

Why you should act now

The State government recently announced that new fees will be set shortly for all OC matters.

Claims brought pursuant to Australian Consumer Law will possibly face the biggest fee hike as it is proposed that the new fees more accurately reflect the cost of hearing these applications.

More information

For more information, or if you would like to discuss any poison pills your owners corporation is having issues with, please contact Anton Block, Principal Lawyer and Head of Owners Corporation, on (03) 8600 8833 or ablock@kcllaw.com.au.

Note: This update is a guide only and is not intended to constitute legal advice.