The Owners - Strata Plan No 87639 v Karimbla Properties

EX TEMPORE JUDGMENT (REVISED)

1. A significant proportion, about half, of the cases in the Technology and Construction List are commenced by owners corporations against the builder and/or the developer of the relevant development alleging the existence of defects in the common property of the building. A regular feature of the Friday Technology and Construction Motions List are applications made by such builders or developers for an order that the plaintiff owners corporation provide security for costs.
2. This is such an application.
3. It is made by the defendant builder by Notice of Motion filed on 14 November 2024, some six years after these proceedings were commenced.
4. The background is set out in my judgment of 13 February 2025, [1] in which I granted the plaintiff Owners Corporation leave to amend its Technology and Construction List Statement. I shall use the same abbreviations here.
5. The plaintiff is an Owners Corporation of a large development in St Ives known as "Alcove", comprising 299 residential units over six buildings and a former monastery on the site.
6. The defendants, Karimbla Construction Services Pty Ltd and Karimbla Construction Services (NSW) Pty Ltd, were the builders. They are members of the Meriton Group. I will refer to them as "the Builder".
7. This was a staged development with interim occupation certificates issued between December 2012 and July 2013.
8. The Owners Corporation commenced these proceedings in August 2019. It alleges that there are structural, fire safety, waterproofing, mechanical, hydraulic and other defects in the building.
9. On this application, the threshold question is whether there is reason to believe that the Owners Corporation will not be able to pay the Builder's costs if ordered to do so. [2]
10. The threshold question requires consideration of whether there is a rational basis for the requisite belief that the Owners Corporation will be unable to pay any future costs of the defendant. [3]
11. The threshold question has been described as setting a "low threshold" and as being "an undemanding test". [4]
12. The Builder seeks security in the sum of $2.405 million. That is a large figure, but there is no question that this is major litigation, likely to occupy many weeks of hearing time, whether in this Court or before a referee.
13. In order to put the Builder's application in perspective, I will deal first with the quantum of any security, assuming that I had been persuaded to order security.
14. The Builder has adduced expert evidence from a solicitor that the Builder's likely actual costs will range from some $2.8 million to $5.1 million. The amount of security sought, $2.405 million, is the exact figure that Meriton's inhouse counsel in November 2024 estimated as being the Builder's likely costs.
15. The Owners Corporation contends, based on the evidence of its solicitor, that a figure in the order of $2 million is more reasonable. There was debate in the submissions as to whether a three week or a six week hearing is likely to be required, as to whether it is reasonable for the Builder to retain three counsel, and as to various other matters raised in the evidence concerning the likely cost of this litigation.
16. The question of what figure should be fixed for security is one which is necessarily impressionistic in nature, requiring a broad-brush approach not susceptible to arithmetical precision. [5]
17. The Builder has emphasised in submissions that the evidence shows that the Owners Corporation's actual costs in these proceedings to November 2024 were in the order of $2.9 million.
18. In these circumstances, and taking the broad brush approach that is necessary, had I been persuaded to order security I would order security in the sum sought by the Builder.

Owners corporations generally

1. The operation of owners corporations is governed by the Strata Schemes Management Act 2015 (NSW) ("the Act").
2. An owners corporation is a body corporate, but not one that is not subject to the Corporations Act 2001 (Cth) or the Australian Securities and Investments Act 2001 (Cth). [6]
3. An owners corporation does not own property, but must manage, control, maintain and repair the common property of the relevant strata scheme, [7] and may grant a licence to the owners and occupiers of a lot in the strata scheme to use the common property. [8]
4. An owners corporation is obliged to establish an administrative fund and capital works fund. [9]
5. The Act provides a mechanism by which an owners corporation must raise funds by way of levy on lot owners when faced with expenses that it cannot meet from those two funds. [10]
6. An owners corporation may take action in the New South Wales Civil and Administrative Tribunal ("NCAT") to recover levies from recalcitrant lot owners. [11]
7. There are significant differences between owners corporations generally and ordinary corporations. Those differences were summarised in the submissions of Mr Corsaro SC and Mr Chiam, who appeared for the Owners Corporation, as follows: "A defendant in litigation commenced by an owners corporation has means to recover costs against the individual lot owners which are not available in respect of other corporations. The starting point is that if an owners corporation faces expenses it cannot meet (such as a costs order), then it 'must' impose levies to meet those expenses: [s 81(4) of the Act] . Those levies are payable by lot owners, who stand to benefit from the litigation. That is different from other companies, which cannot turn to their shareholders to meet an adverse costs order. Furthermore under s 237(1) of the [Act], the Tribunal may appoint a person as a strata managing agent to exercise all the functions of an owners corporation. That order can be sought by a judgment creditor of the owners corporation: ss 237(3)(d) and (8)(d). Therefore if an owners corporation refuses to impose a levy to meet a costs order, then the defendant can seek to enforce that judgment debt by appointing a managing agent who can then raise levies against the lot owners to meet that judgment debt. There is no need for that managing agent to seek approval to raise that levy pursuant to s 81(4): see The Owners - Strata Plan 5709 v Andrews [12] dealing with the predecessor legislation. Importantly, a judgment creditor against an ordinary corporation does not have an equivalent power. While a judgment creditor can commence proceedings to have a company wound up, that liquidator cannot then turn to shareholders to raise funds to meet the judgment debt. … Moreover, lot owners in a strata scheme are compulsorily bound by the provisions of the [Act], which provides that the lot owners constitute a body corporate: [s 8(1)of the Act] … Thus, unlike an individual who many choose to take advantage of a corporate vehicle for commercial reasons (namely avoiding unlimited liability), an owners corporation is imposed on a strata scheme by way of statute."

The authorities

1. Mr Sirtes SC and Ms Steinhoff, who appeared for the Builder, submitted that the "state of law" to be applied when considering an application for security for costs in an owners corporation was "disparate".
2. I think that overstates matters.
3. Many of the cases concerning the considerations that arise when security for costs are sought from an owners corporation were recently reviewed by Wilson J in Great Barrier Reef Yacht Club Villas Pty Ltd v Insurance Australia Limited. [13]
4. What those cases show is that the threshold question of whether there is reason to believe that an owners corporation will be able to meet its costs order gives rise to a factually intensive enquiry.
5. The cases show differing levels of emphasis, but the following factors emerge: 1. An applicant for security must show that the levies it seeks to raise, in order to meet an order for costs, would not be paid. [14] 2. The burden of an applicant for security is not satisfied if there is no evidence of any recalcitrance on the part of unit owners to pay a levy. [15] 3. A relevant factor is whether the costs are likely to be paid within a reasonable time. [16] 4. Because of the nature of owners corporations, some delay in the payment of an adverse costs order is likely, if not inevitable and to be expected, but can be compensated for with interest. [17] 5. A factor weighing against ordering security is a demonstrated ability on the part of the owners corporation to raise funds by way of a special levy from the unit owners. [18] 6. A factor weighing in favour of ordering security costs is an absence of an undertaking from lot owners to pay any levies when imposed on them and to do so within a reasonable time. [19]
6. A further factor that has been held to be relevant is that it has been said that a party, in the position of the Builder here, seeking to enforce a costs order "could not enforce any right and duty of the [Owners Corporation] to raise an additional levy from unit [owners]" unless the Owners Corporation cooperated or was wound up. [20]
7. That observation appears to overlook s 237 of the Act, which, as is set out in the passage from the Owners Corporation's submissions that I have set out, [21] gives a judgment creditor of an owners corporation the right to approach NCAT for the appointment of an independent strata manager, who could themself raise a levy.
8. That process may take some time and effort by the party seeking to enforce a costs order. But it does provide a means by which the Owners Corporation's "right and duty" could be enforced.

This case

1. In this case, the financial position of the Owners Corporation is set out in its balance sheet and statements of income and expenditure.
2. The most recent balance sheet before me is that dated 7 February 2025, which shows that the Owners Corporation has assets of some $700,000 including cash at bank and money on term deposit of some $610,000.
3. The 7 February 2025 statement of income and expenditure shows that the administrative account and the capital works account are in surplus.
4. It is true that levies are in arrears in the sum of some $82,000. However, of the 53 lots in arrears, 15 are in arrears for amounts less than $100 and some for as little as 29 cents.
5. On the other hand, there is a liability in the balance sheet for "levies in advance" of some $138,000, showing that, although there are some unit owners in arrears, there are unit owners who have paid levies in advance.
6. Further, this Owners Corporation has been able to raise significant funds by levy in the past. As Mr Corsaro and Mr Chiam submitted: "That evidence demonstrates that in previous financial years, the Owners Corporation has been able to raise significant amounts to meet unexpected financial obligations in addition to the ordinary levies which it imposed. There is no reason to believe that the Owners Corporation would not be able to levy similar amounts in the future if it were obliged to meet an adverse costs order. There is also no reason to believe that the Owners Corporation would not be able to collect these sums from lot owners. The property comprises 299 units. Mr Holgersson's affidavit gives evidence of two special levies which were imposed and raised in the previous financial year. The first instance is a special levy of $750,000, which was imposed for the replacement of lifts in the strata scheme, has been paid in full … The second instance is of another special levy of about $1.6m which was imposed in the most recent financial year."
7. Mr Sirtes and Ms Steinhoff pointed out that no provision has been made in the Owners Corporation's balance sheet for the costs of rectifying the defects of which it complains in these proceedings.
8. Section 106(1) of the Act obliges an owners corporation properly to maintain and keep in a state of good repair the common property.
9. Section 106(4) of the Act permits an owners corporation to defer complying with that obligation if it has "taken action" against a party, such as the Builder here, in respect of damages to the common property; but only "if a failure to comply with [s 106(1) of the Act] will not affect the safety of any building, structure or common property in the strata scheme".
10. Mr Sirtes and Ms Steinhoff submitted that many of the defects of which the Owners Corporation complains in these proceedings bespeak an absence of such safety and that the Owners Corporation is not entitled to defer keeping the common property in good and serviceable repair merely because it has commenced and is maintaining these proceedings.
11. I will refer to this submission when considering whether as a matter of discretion I should order security, but see it as being beside the point on the threshold question.
12. Even if it is the case that the Owners Corporation should have itself effected repairs to some of the defects of which it complains in these proceedings, and that its liability to do so means it has a liability not accounted for in its balance sheet, as there is no suggestion that the Owners Corporation in fact proposes to take these steps, this, it seems to me, has no bearing on whether there is reason to believe it could not meet the adverse costs order.
13. Turning now to that threshold question, and assuming for this purpose that the costs ultimately awarded in favour of the Builder were in the amount of the security sought, $2.405 million, there is no suggestion that the Owners Corporation's current assets would be sufficient for this purpose.
14. It would be necessary for the Owners Corporation to impose a levy on its 299 unit owners to raise such a sum.
15. The levy necessary to meet the Builder's costs in this sum in this hypothetical circumstance would be in the order of some $8,000 per unit owner. On the evidence before me, there is no reason to think that levies in this order of magnitude could not be raised. This may take some time, but any delay would be compensable by interest. There is no reason to believe that there would, in any event, be undue delay.
16. If all else failed, the Builder could move NCAT to appoint a managing agent under s 237 of the Act.
17. Overall, I am not satisfied that there is reason to believe that the Owners Corporation could not, within a reasonable time of being visited with a costs order by the Builder, pay those costs.
18. In any event, as a matter of discretion, I see two reasons to deny the Builder's application.
19. The first is the delay in making this application.
20. The proceedings commenced in August 2019. This application was made in November 2024, more than five years later.
21. Delay by a defendant in bringing an application for security of costs is a relevant factor in the exercise of the Court's discretion. [22]
22. As I explained in my 13 February 2025 judgment, in 2020 and 2021 the Owners Corporation served expert evidence based on inspection of some, but not all, of the units in the development, but alleged that the defects there observed were likely to be systemic. The Owners Corporation also served a Scott Schedule identifying some 5,445 defects. The Owners Corporation's evidence at that stage was to the effect that the costs to rectify the defects would be in the order of $23 million.
23. Settlement discussions then ensued over a number of years. When those discussions failed, the Owners Corporation, with the consent of the Builder, served further extensive evidence based on the inspection of all or most units and asserted a quantitatively a largely increased claim in the order of $123 million.
24. The Builder's stated reasons for not bringing an application for security for costs before now are set out in these passages from Mr Sirtes's and Ms Steinhoff's submissions: "Once the Defendants were made aware of the expanded claim now intended to be brought by the Plaintiffs, the Defendants acted without delay to bringing this application, just over a month after the further tranche of expert evidence was served on the Defendants. Plainly, any perceived delayed [sic] in bringing this application on the part of the Defendants is wholly as a result of the Plaintiff's significant delays in bringing this further evidence. In any event, such potential perceived delay in bringing the application weighs less significantly in the present circumstances, given that a hearing is not imminent."
25. I do not find this explanation convincing.
26. It is true that the hearing date does not appear to be "imminent". But the Owners Corporation's claim has always been for a very large sum. The Builder appears to have stood by while, with its consent, the Owners Corporation adduced the further evidence to which I have referred, and only once the Owners Corporation had gone to what must have been a considerable expense in adducing that further evidence, chose to make this application. I find that to be a factor weighing against ordering security.
27. Perhaps more importantly, the Builder does not suggest that the Owners Corporation's claim is without merit. The Builder accepts that the Owners Corporation's case is arguable, although submits that its prospects of success are not strong.
28. I see a tension between the latter submission and the Builder's submission, to which I have referred above, [23] that the Owners Corporation is in breach of its obligations under s 106 of the Act by reason of its asserted failure to rectify some of the defects of which it complains in these proceedings, by reason of those defects affecting the safety of the property.
29. Mr Sirtes submitted orally that the Owners Corporation's financial statements "cannot be considered to be correct" and "quite simply cannot be correct".
30. Mr Sirtes submitted that the Owners Corporation's balance sheet is a "distorted view" of the Owners Corporation's financial position, and that the defects the Owners Corporation alleges "are matters which the Owners Corporation had an obligation to fix immediately" and that the Owners Corporation had an "immediate and direct obligation" to rectify those defects.
31. In written submissions circulated a short time later, Mr Sirtes and Ms Steinhoff submitted: "It is indisputable that the Plaintiff's Balance Sheets have completely disregarded the substantial financial burden with which the Plaintiff will be saddled in order to comply with its statutory obligation to rectify the safety defects in the Property. The Plaintiff's Balance Sheets paint a false representation of the true state of its financial affairs. The Plaintiff's failure to make appropriate provisions for this considerable burden in its Balance Sheets is a factor which this Court ought take into account in determining the threshold question as to whether the Plaintiff will be unable to pay the costs of the defendant if ordered to do so."
32. Thus, the submission is that, as a matter of fact, the Owners Corporation's balance sheet misstates the true position. It is implicit in that submission that this misstatement arises because, also as a matter of fact, there are defects in the building affecting its safety. That is, of course, the very matter of which the Owners Corporation complains in these proceedings.
33. As I have said, I do not find these matters to be relevant to the threshold question, but, as I put to Mr Sirtes in argument, they are relevant to the question of discretion.
34. Mr Corsaro and Mr Chiam put the matter this way in their submissions in response: "If the property is riddled with defects such that it requires immediately spending 'tens of millions of dollars' on rectification costs, then it would follow the Defendant is liable for those rectification costs. The current form of the Defendant's list response does not disclose any basis on which they argue that, even if the defects exist in the property, they are not liable. It follows that on that premise, it is unlikely that the Defendants would obtain a costs order in their favour."
35. I see force in that submission. I think it follows from this that it can be said, even at this remove, that it is unlikely that the Owners Corporation will altogether fail and no more than a matter of speculation that the Builder will in fact obtain an order that the Owners Corporation pay all of its costs; this being the premise on which the Builder's application for security is brought.
36. I find this to be a powerful reason why, as a matter of discretion, I should decline to order security.

Conclusion

1. I decline to make any order for security for costs and my order today is that the defendants' Notice of Motion of 14 November 2024 is dismissed with costs.

Endnotes

1. The Owners - Strata Plan No 87639 v Karimbla Properties (No4) Pty Ltd [2025] NSWSC 58 ("13 February 2025 judgment").
2. Uniform Civil Procedure Rules 2005 (NSW) ("UCPR"), r 42.21.
3. Cornelius v Global Medical Solutions Australia Pty Ltd; Farag v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 at [59] (Ward JA, as the President then was, Tobias AJA agreeing); In the matter of Felan's Fisheries Pty Limited [2016] NSWSC 1351 at [10] (Black J); Green Camel Pty Ltd v Urban Ecological Systems Ltd [2017] NSWSC 362 at [21] (Ward CJ in Eq, as the President then was).
4. In the matter of Felan's Fisheries Pty Limited (supra) at [10].
5. In the matter of Felan's Fisheries Pty Limited (supra) at [40]; Cody v Live Board Holdings Pty Ltd (No 2) [2017] NSWSC 308 at [165], [174] (Robb J); Broadway Plaza Investments Pty Ltd v Broadway Plaza Pty Ltd [2019] NSWSC 1082 at [206] (Ward CJ in Eq, as the President then was).
6. The Act, s 8(2).
7. Ibid, ss 9(2)(a), 9(3)(c).
8. Ibid, s 112.
9. Ibid, ss 73-74.
10. Ibid, s 81(4).
11. Ibid, s 86.
12. [2009] NSWCA 189 at [69].
13. [2024] QSC 320 at [63]-[110].
14. Owners-Strata Plan No 50530 v Walter Construction Group Ltd [2001] NSWSC 820 at [36]-[38] (Bergin J).
15. Owners Corporation Strata Plan 64970 v Austruc Constructions Limited [2007] NSWSC 778 at [9(b)], [17] (Einstein J).
16. The Owners - Strata Plan 64415 v Serman [2017] NSWSC 806 at [151] (Walton J).
17. Strata Plan 94417 trading as The Owners-Strata Plan 94417 v TC Build [2021] NSWSC 1284 at [9] (Ball J).
18. The Owners - Units Plan No 1917 v Koundouris [2014] ACTSC 269 at [131] (Mossop M).
19. The Owners - Strata Plan 64415 v Serman (supra) at [47(3)], [156(5)].
20. See In the matter of Eastmark Holdings Pty Limited (receivers and managers appointed) and 1 Denison Street Holdings Pty Ltd (receivers and managers appointed); In the matter of Eastmark Holdings Pty Limited (receivers and managers appointed) (subject to a deed of company arrangement) [2015] NSWSC 2071 at [6] (Brereton J) by analogy with authorities regarding actions against trustees with rights of indemnity; see, for example, Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40-584; The Owners - Strata Plan 64415 v Serman (supra) at [134]-[135]; cf Great Barrier Reef Yacht Club Villas Pty Ltd v Insurance Australia Limited (supra) at [67]-[68].
21. See above at [25].
22. Idoport Pty Limited v National Australia Bank Limited; Idoport Pty Limited & Market Holdings Pty Limited v Argus; Idoport Pty Limited "JMG" v National Australia Bank Limited [2001] NSWSC 744 at [68], [70], [81] (Einstein J).
23. At [41]-[43]. 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: 25 February 2025