Rita Sahade v The Owners - Strata Plan No 62022 and Ors - [2015] NSWCATCD 5 - NSWCATCD 2014 case summary

NCAT Consumer and Commercial|2014-12-03|Before: Basten JA, McColl JA

Application

Rita Sahade, as owner of lot 3 of Strata plan 62022, filed an application with the Tribunal seeking orders for re-allocation of unit entitlement (the applicant). The contested matter was heard, determined and a decision was published in 2012, dismissing the application.
The decision of the Tribunal was appealed to the District Court. The District Court found that the Tribunal had made an error of law in failing to provide reasons for its refusal to reallocate unit entitlements in accordance with the market value of the respective units at the time of registration of the plan. The District Court also found that the Tribunal should take into account the effect of any proposed reallocation on the power of the unit holders to control the management of the strata scheme (the control issue).
The District Court decision was appealed to the Court of Appeal.
The principal judgment of that Court was published on 3 June 2014.
The Court of Appeal remitted the matter back to the Tribunal for determination so much of the application as concerned: 1. Whether the original allocation of unit entitlements was unreasonable; 2. if so whether the unit entitlements should be reallocated and; 3. if so, the appropriate allocation of unit entitlements on the basis of the values of the respective lots assessed by the Tribunal on 4 September 2012.
The Court of Appeal declared that in determining the questions as set out in (b) and (c) above the Tribunal is entitled to take into account: (a) if a variation in the allocations will affect the level of control of the owners' corporation currently enjoyed by each lot holder, that fact, and (b) if a particular reallocation could lead to the potential for deadlock in voting at meetings of the owners corporation, that fact.
The remitter was listed for hearing before the Tribunal differently constituted on 18 December 2014. The decision was reserved on 22 December 2014 after receipt of submissions and evidence tendered by agreement of all parties.

The Hearing

The three hour hearing proceeded on submissions only. At the conclusion of the hearing the parties were asked to tender an agreed bundle of documents. That bundle was tendered on 18 December 2014 and the following exhibits are now before the Tribunal: Exhibit (a) the original and amended strata plan 62022; (b) paragraphs 1 - 34 inclusive of the statement of Celia Bischoff dated 15 February 2012 together with exhibits CBB1 - CBB 20; (c) Transcript of proceedings on 20 April 2012 and 15 August 2012; the applicant's and respondents' submissions respectively; the respondent's outline of argument 14 August 2012; Applicant's submissions dated 9 September 2014; submissions of the applicant dated 3 October 2014; respondent's outline of submissions 3 December 2014, applicant's submission of 15 December 2014 and respondent's submission dated 22 December 2014.
No evidence or submission other than that outlined above has been considered.

History of the matter

The strata plan was registered on 5 April 2000. The unit entitlement as then allocated was: Lot 1 - 30; Lot 2 -30; Lot 3- 40.
The applicant is the owner of lot 3. In 2012 she commenced proceedings in the Consumer Trader and Tenancy Tribunal. It was the applicant's contention that the unit entitlement should reflect the market values of the respective lots. As the value of her lot was significantly greater than that of the other two she argued her unit entitlements should exceed 50% of the total aggregate.
The published decision did not explain why the Tribunal, having arrived at a finding that the unit entitlement was unreasonable, declined to reallocate the entitlement. The matter was appealed on a question of law only to the District Court. The District Court found that the question of control over the affairs of the owners corporation will often be a relevant consideration at it was in this case.

The Valuation

The Tribunal handed down its decision on 4 September 2014. Among other things the Tribunal decided that the market value of the lots should be assessed as follows. Lot 1 - $3.8million (27.14%) Lot 2 - $3.2million (22.86%) Lot 3 - 7 Million (50%)
This valuation was adopted by District Court and was not challenged before the Court of Appeal. That Court ordered that the "value of the lots should stand" (see paragraphs 59 and 60 of Sackville JA's reasons). On remittal this Tribunal must determine whether the original allocation of unit entitlements was unreasonable on the basis of the respective lots as outlined above.

Decision

I am satisfied the Tribunal has jurisdiction to make orders allocating unit entitlements pursuant to section 183(1) of the Act. It is not in contention that the application was first brought by Ms Sahade in accordance with section 183(8)(b) of the Act and that the original application complied with section 183(4) of the Act in that it attached a certificate of valuation in relation to each of the lots of the scheme as at 5 April 2000.
The circumstances under which an order can be made by the Tribunal are stated in section 183 of the Act. For convenience I shall set out the section in full: 183 Order for reallocation of unit entitlements (1) The Tribunal may make an order allocating unit entitlements among the lots that are subject to a strata scheme in the manner specified in the order. (2) An order may be made only if the Tribunal considers that the allocation of unit entitlements among the lots: (a) was unreasonable when the strata plan was registered or when a strata plan of subdivision was registered, or (a1) was unreasonable when a revised schedule of unit entitlements was lodged at the conclusion of a development scheme, or (b) became unreasonable because of a change in the permitted land use, being a change (for example, because of a rezoning) in the ways in which the whole or any part of the parcel could lawfully be used, whether with or without development consent. (3) In making a determination under this section, the Tribunal is to have regard to the respective values of the lots and (if a strata development contract is in force in relation to the strata scheme) to such other matters as the Tribunal considers relevant. (4) An application for an order must be accompanied by a certificate specifying the valuation, at the relevant time of registration or immediately after the change in the permitted land use, of each of the lots to which the application relates. (5) The certificate must have been given by a registered valuer under the Valuers Act 2003 authorised under that Act to make such a valuation (a "qualified valuer"). …

Was the unit allocation as at 5 April 2000 unreasonable?

I am satisfied that the unit allocation as at the time of registration of the strata scheme was unreasonable.
It is not in dispute between the parties that a reallocation requires as a statutory prerequisite or jurisdictional threshold finding that the unit allocation was unreasonable as at the time the scheme was registered on 5 April 2000.
It is further not in dispute that the market value is a mandatory consideration for the Tribunal when determining whether the unit allocation as at the date of the creation of the scheme was unreasonable, but it is not the only consideration.
In determining the question of reasonableness I have been guided by the principles as set out in the Court of Appeal decision of Sahade v OC SP 62022 [2014] NSWCA per Basten JA at paragraph [38]: "The question which then arises is whether either in determining the reasonableness of the original allocation or in deciding whether to make an order varying the allocation, or in both circumstances, the Tribunal may take account of (respectively) the significance or the consequence of the original allocation and the effect of a reallocation."
Market value being one consideration, other factors which may be taken in to account when determining whether the unit entitlement was unreasonable are identified at [17] through to [51] of Basten JA's reasons. The respondent submitted that the Tribunal should have particular regard to the other factors as outlined by his Honour when determining whether the unit allocation was unreasonable. The factors that may be taken into account are:

unit entitlement as an essential element of a form of property created by the strata titles legislation…. as a part of a bundle of rights constituting a form of realty;
unit entitlement forms a part of the market value as the degree of control given to the unit holder with respect to the scheme and the proportionate responsibility for fees and charges;
unit entitlement as a right attaching to property and that right may provide a significant reason not to interfere with such rights at least when units have been sold and purchased on the basis of a known unit allocation;
unit entitlement forms the basis for liability to rates, payments with respect to the maintenance and upkeep of common property; levies for the administrative and sinking funds; liability for statutory charges and sharing in the assets and liabilities of the body corporate on termination of a strata scheme;
unit entitlements control the power of a management through an owners corporation. Thus they are counted for determining a quorum.

The respondent submitted I must have regard to the operation of the scheme as it is currently constituted when taking these factors into account.

The applicant's submissions

I have summarised some of the submissions as relied upon by senior counsel for the applicant. It was submitted that the jurisdictional gateway for the Tribunal, before the exercise of its discretion must be a finding that the original unit entitlement was unreasonable. A finding of "unreasonableness" is clearly open to the Tribunal.
As per his Honour Justice Sackville, at [86] "the disparity between the valuation and the original allocation in the present case clearly points towards a finding that the allocation was unreasonable…. Basten JA at [20] said that "whether other mandatory considerations or even permissible consideration operate at the stage of identifying unreasonableness (Tribunal emphasis added) or in determining whether or not to make an order is not a question which can be resolved in the abstract……"
On the question of unreasonableness it was the applicant's argument that the Tribunal should take into account the disparity between the original unit allocation and the valuation of the lots as a mandatory consideration; the disparity between the valuation and unit allocation clearly points towards a finding that the allocation was unreasonable; and whether the control factor has any weight at all in in this case is a matter of evidence and there is no evidence in the current case to arrive at such a finding. Further it was submitted that "there is no evidence in this case that could weigh against the substantial disparity between the original unit allocation and the valuation determination".
Once it is held that the unit entitlement was unreasonable the relevant consideration or notion of control becomes relevant.
It is this last submission in particular that the respondent submits represents a misinterpretation of the Court of Appeal decision. It is submitted by the respondent that the threshold question, was it reasonable to allocate units in a certain way, may also be considered by reference to the control issues.

Was the unit allocation unreasonable?

I am bound by the values of the respective lots as determined by the Tribunal before me. The comparison of the respective values of the lots constitutes a mandatory and primary consideration pursuant to section 183(3), albeit not the only one.
The value of the units (3.2, $3.8m and $7m respectively) leads me to come to the conclusion that the unit entitlement was unreasonable. The value now attributed to lot 3 at $7 million demonstrates a disparity between the lot values compared to unit entitlements of 30, 30 and 40 respectively.
I have considered whether at "this stage of identifying unreasonableness" (per Basten JA) any other factor militates against a finding that the unit entitlement was unreasonable. Such other factors were set out by his Honour Justice Sackville and, as Mr Walker SC submitted, are a matter of evidence. The only evidence relevant to this issue is the affidavit of Celia Bischoff of 15 February 2012. The applicant, who bears the onus of proof, has filed no evidence, other than that contained in the agreed bundle. By that I mean there is no lay or expert evidence that was prepared in the applicant's case and tendered on the remitter hearing.
In his reasons Sackville JA finds at [83] "the Tribunal has not yet made any determination as to whether the original allocation of unit entitlements was unreasonable, having regard to the Tribunal's findings as to respective values of the lots…." At [87] his Honour continues "... but other factors may bear on the determination that the Tribunal is required by s183 to make. There may be some material that may militate against a finding that the original allocation of unit entitlements was unreasonable…. [the Tribunal] will have to decide whether having regard to the evidence, and the parties' submissions, the original allocation was unreasonable. Depending on the evidence and the submissions it may well be open to the Tribunal to take into account in determining that question whether a departure from an apportionment of unit entitlements on the basis of the respective values of the lots can be justified by reference to consideration of the good governance of the strata scheme."
The only part of Ms Bischoff's evidence that may conceivably go to the question of reasonableness at this stage is contained at paragraph 17: "[Mrs Bischoff's mother] decided that the best course was to effect the strata subdivision as was effected on 5 April 2000 by registration of strata plan 62022. This in particular, as she was advised, solved the problem of limiting the height of any development on no 86 which would interfere with the views from the upper two residences (lots one and two)." It is submitted that Ms Bischoff's understanding that the unit allocation as at the date of registration was specifically designed to prevent lot 3 from building in a way to obscure the views of lots 1 and 2 without the support of least one or other of the lot owners.
The evidence is problematic as the statement is hearsay and although the rules of evidence do not apply, some allowance must be made for the weight I give to such a statement. The statement was tendered by consent and without objection. Whilst I accept the statement into evidence, as it is the only evidence tendered that may weigh against the "mandatory and primary consideration of value", I cannot arrive at a finding that the evidence of Ms Bischoff's mother's concerns displaces the disparity between value and unit entitlement.
Having regard then to the mandatory and primary consideration of value, and considering the absence of evidence as to other factors I find that the existing unit entitlements did not reflect the proportionate market values at the time of registration and am therefore satisfied that the original unit allocation was unreasonable as at 5 April 2000.

Discretion

If the Tribunal finds that the original allocation of unit entitlements was unreasonable it has power under section 183(1) to vary the allocation, but is not bound to do so.
The current allocation of unit entitlements in the three lot strata scheme does not permit any one unit holder to overpower the wishes of the other two unit holders; it recognises that each unit holder has an equal entitlement to the use of common property and the owner of Lot 3 bears a proportionate burden of the levies. It was submitted by Mr Williams SC on behalf of the respondents that it cannot be said that when all factors are taken into account, in this case value and control, that the original allocation requires any adjustment.
I am satisfied that the allocation at 30, 30, 40 unit entitlement, regardless of the value of the lots, leads to a specific desired outcome, namely that no one unit holder, can either block a vote or compel a vote without the agreement of at least one other lot owner. In the exercise of my discretion I have taken the Bischoff affidavit into account, particularly that it was a desired result of the original developer, Ms Bischoff's mother, that the unit allocation was brought about in a way that prevented Lot 3 from making decisions and bringing about change without the support of at least one unit holder. Whilst I acknowledged the limitation of this evidence in the paragraphs above, it is still, in the exercise of my discretion, evidence I may take into account as it is untraversed and unopposed.
I note that the applicant has not tendered evidence in its case and that the onus of proof rests at all times with the applicant.
The evidence further supports the proposition that the current applicant bought into the development in 2005 (affidavit of Mrs Bischoff) in the full knowledge that she did not have the requisite unit entitlement to either block or force a particular voting outcome. This was outlined as a factor to be taken into account on the "control issue" per Basten JA at [27] "unit entitlements constitute a right attaching to property, that fact might provide a significant reason not to interfere with such rights, at least when units have been sold and purchased on known allocation".
By purchasing a unit entitlement of 40 out of an aggregate of 100 it was clear to the purchaser that he or she was not acquiring a controlling interest. The strata scheme was designed so that no one single lot owner would acquire proprietary rights that would bring with it control over common property. It has operated in this fashion for 14 years and for 9 years since the applicant purchased Lot 3.
If 50% of unit entitlement was reallocated in favour of Ms Sahade, the control of the scheme would change fundamentally. Lot 3 would have the capacity of blocking or enabling a deadlock to every ordinary resolution of the strata scheme. In doing so the strata scheme may become unable to function (be deadlocked) or be prevented from exercising its statutory obligations to repair or maintain common property (s62), authorise changes to common property (s65A), raise levies (s76) or vote for an executive committee unless Lot 3 has the support of at least one of the other unit holders.
By reallocating 51% (or more) to Lot 3, Lot 3 could pass any ordinary resolution without recourse to another lot owner and this would be an inappropriate change of control.
In the case of a deadlock (brought about by a reallocation of 50% to Lot 3) it is not unreasonable to assume that the scheme may come under compulsory management from time to time and have its decisions and functions performed by a compulsory manager pursuant to section 162 of the Act who makes decisions on behalf of the unit holders. This is clearly not the legislative intent of the Act to have a scheme managed in this fashion. It is also very costly.
For these reasons I am satisfied that an allocation in a manner sought by the applicant would fundamentally change the structure and control of the scheme enabling one party to block or vote without recourse to other lot owners. I have considered the value of the respective lots and they were found to be unreasonable. However, that finding of itself does not create a presumption that the units must be reallocated as is made clear by the wording of section 183(1). Nor does a finding of unreasonableness reverse the onus and make it incumbent upon the respondent to prove why the unit allocation should not be reallocated in the applicant's favour.
The onus remains with the applicant to persuade the Tribunal why, given the existing format whereby no one unit holder can block any particular vote, the current unit entitlement should be replaced with a 50% entitlement in favour of Lot 3, with the possibility of frustrating the management of the scheme, or at an allocation of above 50% provide a carte blanche to pass ordinary resolutions.
Having regard to the significant changes to the control of the strata scheme that would be brought about by a reallocation of unit entitlement and in the absence of any evidence (other than the finding of value) why the discretion should be exercised in the applicant's favour I am not persuaded that the unit entitlement should be reallocated.
In summary and addressing the determinations as posed by the Court of Appeal at paragraph 5a above, I am satisfied that the original unit entitlement was unreasonable; b. for the reasons set out above the unit entitlement shall not be reallocated; c. in light of the answer to b. above, c. does not need further consideration. As a result of these findings the application is dismissed.
I note that the parties did not seek a variation below 50%. Indeed the applicant states that an allocation below 50% would be absurd. I have declined to consider allocation below 50% as this would bring about a result in which the applicant would bear a significantly higher burden of levies without gaining control. In the absence of either party agitating for this course I have not considered such an order.
To give effect to my findings I make the order in paragraph one above and dismiss the application. S Thode Senior Member Civil and Administrative Tribunal of New South Wales 13 January 2015

I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 19 March 2015

Rita Sahade v The Owners - Strata Plan No 62022 and Ors

At a glance

Court

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Judgment (10 paragraphs)

Parties

Cases Cited (1)

Cited By (3)