Sahade v Owners Corporation SP 62022

History of the proceedings

1. The appellant had originally commenced proceedings in the Consumer, Trader and Tenancy Tribunal (CTTT), being application SCS 11/52841.
2. On 4 September 2012 the CTTT dismissed the application for reallocation. In doing so, it determined that the values of lots 1, 2 and 3 were respectively $3.8 million $3.2 million and $7 million approximately.
3. The CTTT decision was appealed to the District Court. The District Court concluded there was an error of law committed by the Tribunal in dismissing the application. The District Court made an order remitting the proceedings to the CTTT for further hearing: see Sahade v Owners Corporation SP 62022 [2013] NSWDC 95.
4. The appellant appealed the District Court decision to the Court of Appeal of the Supreme Court of New South Wales that delivered reasons on 1 July 2014: see Sahade v The Owners - Strata Plan 62022 [2014] NSWCA 208. The Court of Appeal allowed the appeal from the District Court and set aside the order remitting the matter to the CTTT. Relevantly the Court of Appeal made the following orders: : "(2) In place of that order, order that: (i) the decision of the Consumer, Trader and Tenancy Tribunal (Strata and Community Schemes Division) made on 4 September 2012, dismissing an application for variation of unit entitlements, be set aside; (ii) order that the New South Wales Civil and Administrative Tribunal redetermine so much of the application as concerned - (a) whether the original allocation of unit entitlements was unreasonable; (b) if so, whether the unit entitlements should be reallocated, and (c) 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. (3) Declare that in deciding the questions set out at 2(ii)(b) and (c), 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."
5. In consequence of the orders made by the Court of Appeal, and by reason of the abolition of the CTTT and the establishment of the Civil and Administrative Tribunal of New South Wales, the matter was remitted to the Tribunal. The Tribunal heard the matter on 3 December 2014 and published reasons for decision on 13 January 2015.
6. It is from this decision that the present appeal is brought.

Grounds of appeal and submissions

1. The appellant filed a notice of appeal on 16 February 2015, following receipt of the reasons for decision on 20 January 2015. The notice of appeal was filed in time. The notice of appeal raised eight grounds of appeal. The orders sought were as follows: "1. Set aside the orders of the Tribunal below. 2. In lieu thereof, reallocate the unit entitlements: (i) Lot 1 - 26, Lot 2 - 23, Lot 3 - 51; Alternatively: (ii) Lot 1 - 27, Lot 2 - 23, Lot 3 - 50; Alternatively: (iii) Lot 1 - 28, Lot 2 - 23, Lot 3 - 49."
2. At the hearing of the appeal, counsel for the appellant confined the appeal to one issue.
3. In essence, the appellant contended the exercise of the statutory discretion by the Tribunal under section 183 of the Management Act miscarried because, having concluded the original unit allocation was unreasonable, the Tribunal ought to have reallocated the unit entitlements and corrected the unreasonableness. In short the decision of the Tribunal to do nothing was wrong.
4. In relation to the orders which the Tribunal should make, the appellant contended that the unit allocation should be 27, 23 and 50 for lots 1, 2 and 3 respectively or alternatively 26, 23 and 51 for lots 1, 2 and 3 respectively. The primary position was alternative 1 (23, 27 and 50).At the hearing of the appeal the appellant did not contend for an allocation less than 50%.
5. Counsel for the appellant indicated that it was agreed between the parties that it would be inadequate for the appellant to persuade the Appeal Panel that it may have exercised the discretion in a different manner to the Tribunal. The appellant said that the principles to be applied to this appeal are those set out by the High Court in House v The King [1936] 55 CLR 499.
6. In this regard the question was whether or not the Tribunal took into account an irrelevant consideration or misdirected itself at law. Alternatively, the appellant submitted that the principles in House v The King mean that there will be a relevant error in the exercise of the discretion if the Appeal Panel forms the opinion that the decision of the Tribunal "must be wrong" even if the Appeal Panel is unable to identify the precise error which has been made.
7. The appellant also referred to the decision of Sharpe v Wakefield [1891] AC 173 and submitted that the proper exercise of a discretion requires that it be exercised according to the rule of reason.
8. The submissions of the appellant can be summarised as follows: 1. section 183 of the Management Act requires a two stage process before the Tribunal can make an order reallocating unit entitlements. The first stage is a determination of the jurisdictional fact, namely that the initial unit allocation was unreasonable. The second stage is the exercise of the discretion provided in section 183. 2. the Tribunal concluded that the original unit allocation was unreasonable. While the valuation of the lots was as determined by the CTTT in its original decision (a matter confirmed by the orders of the Court of Appeal) the Tribunal was still required to determine this jurisdictional fact. 3. in relation to the first stage assessment, the appellant pointed to the reasons of Sackville JA in the Court of Appeal and said that the determination of unreasonableness at the first stage may not be limited to a question of valuation of the property: see for example at [87] of the Court's reasons. 4. having determined that the initial unit allocation is unreasonable, the statutory purpose of section 183 of the Management Act is to address the mischief by retrospectively correcting any unreasonable unit allocation. 5. once it is determined that the initial unit allocation was unreasonable, absent other factors, the proper exercise of the discretion requires that an adjustment to the unit entitlements be made. 6. in relation to the issue of control as referred to by the Court of Appeal, this expression had been used to reflect both the power to block a particular voting outcome at the relevant meeting of the owners corporation as well as the power to positively pass a resolution. 7. in so far as the Tribunal was concerned with the possibility of deadlock, the spectre of deadlock incorrectly drove the exercise of the discretion by the Tribunal. In this regard the appellant submitted that the possibility of deadlock was not something to be avoided. 8. on the other hand, the Tribunal failed to provide any reason as to why it should not make an order reallocating units, having found that the initial unit allocation was unreasonable.
9. In making these submissions the appellant conceded that the submissions came close to saying that the proper exercise of the discretion required reallocation where the initial allocation of unit entitlements was found to be unreasonable. However the appellant made clear that such an extreme submission was not being made.
10. The appellant also made clear that she was not submitting that the decision of the Tribunal was not careful and thorough nor was the appellant submitting that there was a deficiency of reasoning or understanding. Rather, the submission was that the decision was in effect perverse "or must be wrong" in the sense explained in House v The King.
11. In reply, the respondent said that the critical question concerned the second step required under section 183 of the Management Act, namely whether or not the discretion had been properly exercised in the Tribunal deciding not to reallocate the unit entitlements.
12. The respondents' submissions can be summarised as follows: 1. the Tribunal analysed what would be the consequences of allocating to the appellant a unit entitlement equivalent to 50% of the total units and that such an allocation gave rise to the foreseeable risk of deadlock. The respondents also pointed to the fact that a reallocation of 51% in favour of the appellant would result in the appellant gaining voting control, at least on ordinary resolutions; 2. making no reallocation was an available option and the decision not to reallocate the unit entitlements cannot be categorised as an irrational decision. 3. the case as originally run by the appellant only required the Tribunal to consider a narrow range of possibilities. Further, even without the concession made as recorded at paragraph 49 of the reasons, it was open to the Tribunal to do nothing in the present circumstances. 4. the Tribunal did not consider the particular personalities involved but rather had regard to the consequences of the reallocation in the manner proposed by the appellant. In this regard the respondents contended that it was appropriate for the Tribunal to exercise the discretion in a manner that avoided giving to one lot owner a "blocking power" and for the Tribunal to give weight to the risk that changing control of the strata scheme in such a way may give rise to future management problems.
13. Finally, the respondents submitted that the appellant did not identify any harmful consequences arising by reason of the Tribunal exercising its discretion by not making an order reallocating the unit entitlements.
14. In reply submissions, the appellant said that the potential deadlock was not a sufficient reason to do nothing.
15. In this regard the appellant submitted that it would have been pointless for the Court of Appeal to remit the matter if the potential for deadlock was determinative and that having found the initial unit allocation was unreasonable, it was not logical to exercise a discretion in a manner that maintained the original allocation.
16. When questioned by the Appeal Panel concerning the reasons of the Tribunal at paragraphs [40] - [47] the appellant submitted that: 1. the conclusions in paragraphs [41] - [43] were simply arithmetical matters. 2. In relation to the conclusion at [44] the appellant submitted that the Tribunal was in error in its statement of the legislative intent and that there was no statutory prohibition on the possibility of deadlock. 3. in relation to paragraph [45] the appellant says that the issue in the present dispute was not a question of onus and that it was perverse or illogical to say that because a change may result from reallocation, that a discretion should be exercised in a manner to maintain the existing unit allocation. 4. in relation to paragraphs [46] and [47] the appellant submitted that the Tribunal was bound to adjust the unit allocation having found the original unit allocation to be unreasonable.

Consideration

1. The parties agree that the applicable legal principles to be applied by the Appeal Panel are found in House v The King. At pages 504-505, Dixon, Evatt and McTiernan JJ said: "The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred."
2. In deciding to dismiss the application, the Tribunal made the following findings: 1. that it would have been clear to the appellant when purchasing lot 3 that she was not acquiring a controlling interest and that the then existing unit allocation was such that no single owner would acquire a controlling vote: reasons [41]. 2. if a 50% unit entitlement was allocated to the appellant, control of the scheme would change fundamentally in that lot 3 would have the capacity of blocking any ordinary resolution or bringing about a deadlock which may affect the proper functioning of the strata scheme: reasons [42]. 3. a reallocation of 51% or more to lot 3 would enable that lot owner to pass any ordinary resolution and this would be an inappropriate change in control: reasons [43]. 4. in the event of deadlock, brought about by reallocation of 50% to lot 3, it was not unreasonable to assume the scheme may come under compulsory management from time to time by appointment of a strata managing agent pursuant to section 162 of the Management Act. Such an outcome to have a strata scheme managed in this fashion is not the intent of the legislation and is very costly: reasons [44]. 5. a reallocation in the manner sought by the appellant would fundamentally change the structure and control of the scheme enabling one party to block or vote without recourse to other lot owners: reasons [45]. 6. there is no presumption that units must be reallocated merely because the Tribunal has found the initial unit allocation to be unreasonable. Such a finding does not reverse the onus and make it incumbent upon an opposing party to show why it should not be reallocated: reasons [45]. 7. the onus remains on the applicant to persuade the Tribunal why, given existing unit entitlements prevent any one lot owner blocking a particular vote, a reallocation should be made providing for an entitlement to allow this to occur or why an allocation should be made in these circumstances to give to the owner of lot 3 a voting entitlement greater than 50% which would enable that owner to pass an ordinary resolution: reasons [46]. 8. having regard to the significant changes in control as outlined above a reallocation should not be made: reasons [47].
3. The reasons record one further significant matter in paragraph 49. It is appropriate to set out these reasons in full. "49. 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."
4. On appeal, the parties confirmed to the Appeal Panel that paragraph 49 of the reasons was a correct statement about the manner in which the parties had conducted the proceedings before the Tribunal.
5. A fair reading of the reasons for Tribunal show that the Tribunal effectively weighed up five factors in considering how to exercise its discretion: 1. that the original unit allocation was unreasonable; 2. that to reallocate unit entitlements on the basis that Lot 3 was allocated 50% of the units would enable that lot to "block" the passing of resolutions; 3. that to allocate the owner of Lot 3 greater than 50% would give the owner of Lot 3 a controlling vote to pass ordinary resolutions, 4. that change of the existing unit entitlements to the level proposed would effect a substantial alteration of the voting power and the rights between individual lot owners including those of Lot 3. 5. that a reallocation of less than 50% (but greater than the existing 40%) would impose an increased financial burden on the owner of Lot 3.
6. Having regard to the declarations of the Court of Appeal, it is clear that when exercising the statutory discretion whether or not to reallocate unit entitlements the Tribunal was entitled to take account of the following: "(a) if a variation in the unit allocation will effect the level of control of the owners corporation currently enjoyed by each lot owner, 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."
7. It is also clear from the Tribunal's reasons that, those are some of the factors which the Tribunal took into account in exercising its discretion. They affected issues of control and the respective obligations of lot owners to pay levies.
8. These issues were not merely mathematical consequences of any reallocation. To the extent that the Tribunal considered these issues, they were not "extraneous or irrelevant matters" and were, having regard to the existing unit allocations and the proposed reallocation, "material considerations" in the exercise of the discretion.
9. In this sense there has been no miscarriage in the exercise of the discretion of the type established by the principle in House v The King.
10. The appellant, through careful submissions, also sought to suggest that having found the initial unit allocation was unreasonable; 1. it was, in effect, necessary for the Tribunal to alter the unit allocation; and 2. that the failure to do so was of itself a manifestation of the error in exercising the discretion.
11. This submission must be rejected for several reasons.
12. Firstly, in its simplest form the submission suggests that whenever the initial unit allocation is found to be unreasonable it must be adjusted unless other factors are established that weigh against a reallocation. Such an approach is inconsistent with the language of the Management Act and ignores the need to consider the consequence of adjustment which, at least, will always alter the financial responsibility for levies of individual lot owners and relative voting rights.
13. Secondly, it pays no regard to the need to consider the degree of unreasonableness. This is a question of fact based upon a consideration of the original unit allocations, the disparity arising from the valuation of each Lot and the relative positions of the Lot owners affected.
14. Thirdly, there is a need to consider what alternative allocations are proposed and the extent to which adjustment is required.
15. Fourthly, this submission would lead to the conclusion that the only relevance of the factors identified in declarations 3(a) and 3(b) of the Court of Appeal orders is to determine by what margin particular unit allocations should be adjusted. That is, these factors are not, on the appellant's submission, factors which might be permissible considerations in deciding to maintain the status quo.
16. This submission is contrary to the declaration made by the Court of Appeal. The Court stated that these factors were relevant to determine: 1. the question "whether the unit entitlements should be reallocated" (see Orders 2(b) and 3); and 2. what the appropriate allocation should be (see orders 2(c) and 3).
17. Finally, having regard to the parties' positions adopted before the Tribunal , as recorded in paragraph 49 of the reasons, it is clear that neither party was submitting to the Tribunal that there should be an allocation of Lot 3 below 50% but close to that allocation based on the assessed value.
18. Such an outcome would have significantly increased the burden of levies upon the appellant without any corresponding benefit of gaining control in the sense used in these reasons. This is a reason supporting a decision not to reallocate the unit entitlements, at least from the position of the owner of Lot 3 who had purchased her unit with a unit allocation of 40%.
19. In circumstances where: 1. no Lot owner made submissions to the Tribunal proposing a unit allocation of less than 50% in favour of Lot 3 and where to impose such a result would have significantly increased the financial burden upon Lot 3, and 2. the Tribunal considered the factors of control and the possibility of deadlock that would arise from the reallocations proposed by the appellant at or above 50% in her favour, the Appeal Panel is not satisfied that the decision made by the Tribunal was "unreasonable or plainly unjust" or that the Appeal Panel should "infer that in some way there has been a failure properly to exercise the discretion" provided in section 183 of the Management Act.
20. Accordingly, the Appeal Panel is not satisfied that the exercise of the discretion by the Tribunal miscarried and no error of law is established.

Orders

1. The Appeal Panel makes the following orders: 1. Appeal dismissed. 2. Any application for costs is to be filed and served within 14 days from the date of these orders. Any application is to include written submissions and any other material to be relied upon in support of the application. 3. The party against whom any application for costs is made must file and serve any submissions and material in reply within 28 days from the date of these orders. 4. The applicant for costs is to file any submissions in reply within 35 days from the date of these orders. 5. The submissions by the parties are also to address the question of whether or not any application for costs should be dealt with on the papers and whether the Tribunal should make an order to allow this to occur.

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: 21 July 2015