Lubransky v Owners Corporation No 1 PS519798G (Owners Corporations) [2014] VCAT 1301

1. I direct that on or before 16 October 2014 the applicants provide to the Tribunal particulars of the terms on which Klair Morey will act as administrator of the first respondent.

1. The proceeding shall be listed for further hearing before me as to what terms and conditions the Tribunal should set for the appointment.

1. This case is about an impasse in an apartment subdivision. The majority of the apartment owners in the subdivision want to take action against the builder of the apartments. Such action would need a 75% vote and the six applicants have less than 75% of the vote. The builder, who has all the other votes, has used her vote to block such action. To overcome the builder's veto, the applicants have brought the present proceeding, asking the Tribunal either to appoint an administrator or else to authorise the applicants to bring proceedings on behalf of the owners corporation. The builder, Vicky May, is a respondent in the proceeding.

1. The apartment building is located in Wattletree Road, Armadale. The plan of subdivision was registered on 12 October 2005. The certificate of occupancy was issued on 25 October 2005. There are nine apartments in the building. Six are owned by the applicants and three are owned by the builder. There are 900 lot entitlements, of which the applicants have 600 and the builder 300.
2. On 25 November 2011 Robert Turnbull of T. D. & C. Pty Ltd, consulting engineers and construction managers, provided a report to the owners corporation which described defects in the building. Mr Turnbull noted:
   • That the waterproof membrane on the penthouse balcony had failed where it bridged a construction joint.
   • That tiles had been laid over the construction joint. "Provision should always be made for movement by incorporating a flexible joint in the tiling immediately above the joint in the structure." Such provision appeared to be absent.
   • "Rusting structural steel supporting the various concrete balconies."
3. On 4 March 2013 Tim Gibney of Tim Gibney and Associates Pty Ltd, consulting structural and geotechnical engineers, provided a report to the owners corporation. In his report, Mr Gibney recorded his observations of:
   • Plaster cracking and water damage in a number of apartments.
   • Tile popping and cracking on the ground floor terraces and the absence of expansion joints or movement control joints in the tiled surfaces.
   • Corrosion of structural support steel supporting the suspended concrete slabs and balconies of the upper level apartments caused by moisture penetrating the concrete slab and tanking membrane and sitting on top of the support beams.
   • In apartment one, a crack in the weld connecting the column to the terrace support beam, evidencing movement or poor preparation of the joint.

Mr Gibney concluded that the tanking membrane in apartment nine had broken down.

1. On 23 April 2013 the builder's solicitors wrote to the owners corporation. Referring to Mr Gibney's report, the letter said, among other things:

1. the issues raised in the Report should be discussed at a Special General Meeting of the Owners Corporation; and
2. a Special Levy should be raised to pay for the works proposed for the Property in that Report.
3. On 22 October 2013 there was a special general meeting of the owners corporation. The business of the meeting was to consider special resolutions authorising the owners corporation to issue legal proceedings in its name, or in the names of lot owners against the builder in relation to defects in the building.[1] The applicants voted in favour of the resolutions with their 66.7% of the votes and the builder (33.3% of the votes) voted against them.
4. On 23 April 2014 the applicants issued the present application. By their Amended Points of Claim the applicants alleged that the owners corporation was dysfunctional and sought orders for either:
   • the appointment of a nominated administrator, Klair Morey, or
   • authority for the applicants to bring proceedings on behalf of the owners corporation with any costs incurred by or ordered against the applicants to be paid by the owners corporation.

1. The Owners Corporations Act 2006 sets out a procedure by which the Tribunal may appoint an administrator for an owners corporation.

173 Application for appointment of administrator

An owners corporation, a lot owner, a creditor of an owners corporation or any person with an interest in land affected by an owners corporation may apply to VCAT for the appointment of an administrator for the owners corporation.

On an application under section 173, VCAT may -

(a) appoint an administrator and set down terms and conditions of the appointment; or

176 Powers and responsibilities of administrator

(c) subject to any order of VCAT or court order, may do anything that the owners corporation or the committee can do.

1. In McKinnon v Adams [2003] VSC 116 the Supreme Court considered an application to appoint an administrator under section 38 of the Subdivision Act 1988.[2] In that case His Honour Bongiorno J said:

To justify the appointment of an administrator, the body corporate concerned must be affected by some incapacity, or must be acting so dysfunctionally as to render the provision of appropriate services to unit holders and/or care of the common property either non-existent, or so beset by difficulties as to render the body corporate unable to function at what the Court considers to be a satisfactory level. There may or may not be financial difficulties, or even financial impropriety affecting the body corporate's capacity to function but there must be some deficiency in its operational capacity sufficient to justify the Court's intervention in the interests of some or all of the unit holders.

Thus, the power to appoint an administrator pursuant to s 38(6) of the Subdivision Act 1988, may be ordered, in the Court's discretion, where the evidence discloses that the body corporate is failing to operate properly in the interests of its members, is being inefficiently or incompetently managed, or the appointment is necessary to protect the interests of the members.

1. McKinnon v Adams was cited with approval by Senior Member Lulham (as he then was) when appointing an administrator in Owners Corporation 1 Plan No. PS 440878V and others v Dual Homes Victoria Pty Ltd [2011] VCAT 211, a case squarely on all fours with the present.

1. The builder argued that the owners corporation was not dysfunctional; the builder had made a proposal which would allow the owners corporation to take action, namely the proposal in the 23 April 2013 letter from the builder's solicitors. In effect, that proposal amounted to the owners corporation not pursuing the builder, but rather, rectifying the defects at the owners' expense.
2. I do not accept the builder's argument. The test posed by Bongiorno J in McKinnon v Adams was dysfunction, not paralysis. The test is not: is the owners corporation incapable of any action, but rather: whether the owners corporation " ... is failing to operate properly in the interests of its members".[3] In the present case, the evidence made it clear that there are defects in the fabric of the apartment building. The majority of the lot owners wish the owners corporation to take action against the builder in relation to those defects. The case against the builder may be good or it may be bad, but investigating and possibly taking action against the builder would appear to be in the interest of those members; members who constitute a majority.
3. The builder submitted that if the owners corporation were to be authorised to bring proceedings against her it should be done, not by appointing an administrator, but by authorising a member or members to bring proceedings under section 65(ba) of the Owners Corporations Act 2006. This was so, the builder said, because "... appointment of an Administrator will have a more significant negative impact on the value of the lots in the subject property as is required in the Owners Corporation Certificate".[4] No evidence was adduced to support that proposition.
4. I doubt that the appointment of an administrator for the relatively short period of time required in the present case would have any material effect on the value of the lots. Certainly, if such a negative effect occurred, it would be outweighed by the greater vice that a member who was authorised to bring proceedings under section 65(ba) would be exposed to any costs which might be incurred or ordered. That point was underscored by the builder's further submission that the authorisation of the member or members be "... on condition that the other members of the Owners Corporation must not be asked to pay or contribute towards any costs of the proceeding, unless at a general meeting the members of the Owners Corporation so resolve to pay or contribute".

Appointment of administrator: this proceeding

1. It is plain that the owners corporation is dysfunctional in the sense used by Bongiorno J in McKinnon v Adams and that the appointment of an administrator is justified. Such an appointment would be both fairer and more efficient than authorising individual lot owners to bring proceedings. Apart from the problem that authorising an individual lot owner to bring proceedings exposes that lot owner to the risk of costs, a professional administrator as opposed to a no doubt busy lot owner is more likely to bring such an exercise to a satisfactory conclusion.
2. The applicants proposed that Klair Morey be appointed for a period of 28 days. Ms Morey gave evidence that she has been an owners corporation manager for 14 years. Ms Morey is General Manager Operations of the present manager of the owners corporation. She gave evidence that the manager holds $10 million professional indemnity cover and that her changes would be similar to those already charged by the manager for its services to the owners corporation. I am of the view that Ms Morey would be an appropriate person to act as administrator.
3. The builder objected to the appointment of Ms Morey and proposed the appointment of either Tony Selak or Stephen Danne, also owners corporation managers. The ground for the builder's objection was that:

Klair Morey failed to fulfil her duties in issuing a Notice of Special General Meeting to discuss the matters raised in the Second Interested Party's letter dated 23 April 2013 pursuant to section 74(d)(ii) of the Owners Corporation Act 2006, despite repeated requests.

... Accordingly, the Second Interested Party does not believe she will:

1. Clearly, there was some delay between the letter of 23 April 2013 and the special general meeting on 22 October 2013, but the delay could well have been caused by matters outside Ms Morey's control. In any event, the delay would not have caused any prejudice to the builder. Certainly, the delay is no basis for concluding that Ms Morey will not act honestly and in good faith or fail to exercise due care and diligence. No doubt Mr Selak and Mr Danne would be acceptable administrators, but it is more efficient for the role of administrator to be carried out by someone from the manager already familiar with the building and its problems.

1. I will appoint Ms Morey as administrator as requested. Section 174(a) of the Owners Corporations Act 2006 requires the Tribunal to set the terms and conditions of Ms Morey's appointment. At the hearing Ms Morey did give some general evidence about the terms on which she proposed to act, but no great detail was given. Accordingly, I will direct the applicants to provide those details for incorporation in my orders, which will be generally in the terms of the Tribunal's orders in McKinnon v Adams (above). There will be a further hearing as to what terms and conditions the Tribunal will set, although the parties may avoid the need for a further hearing if they submit an agreed minute of those terms and conditions.

[1] Section 18(1) of the Owners Corporations Act 2006 requires an owners corporation to be authorised by a special resolution before it can bring legal proceedings.

Section 97 of the Owners Corporations Act 2006 provides that a special resolution is one passed by 75% of the lot entitlements (ie votes) of all lots.

[2] Section 38 was similar in effect to the provisions of the Owners Corporations Act 2006 which deal with appointment of administrators.

[3] McKinnon v Adams [2003] VSC 16, paragraph 21

[4] Section 151 of the Owners Corporations Act 2006 requires that owners corporations must on request supply certificates stating, among other things, whether there has been any appointment of an administrator.