New South Wales law mandates that owners corporations maintain common property in good and serviceable repair. However, negligence in this duty frequently occurs, causing financial harm to lot owners and indirectly to the owners corporation. While state legislation allows lot owners to seek damages, such claims must meet specific criteria of foreseeability and mitigation.
This article examines a 2022 Supreme Court case that reinforces these requirements when pursuing compensation from owners corporations. The ruling in Smith v Owners – Strata Plan No. 3004 [2022] NSWSC 1599 provides crucial insights into the legal landscape surrounding common property maintenance disputes in NSW strata schemes.
By exploring this judgement, we aim to clarify the conditions under which lot owners can recover damages for neglect of common property upkeep. Understanding these legal principles is essential for both lot owners and owners corporations navigating the complexities of strata living in New South Wales.
Case Background: Strata Dispute over Damage to Lot Property
The legal dispute in Smith v Owners – Strata Plan No. 3004 centred on an investment property owned by the Smith family within a strata scheme. As the existing tenancy concluded, the Smiths planned to refresh the unit’s carpeting before seeking new occupants. During this process, they uncovered damage to the magnesite flooring in the living area, near the balcony’s sliding glass door.
Upon further inspection, which involved removing a portion of the compromised flooring, water infiltration from beneath the sliding door was identified as the root cause. Concerned about safety and habitability, the Smiths opted not to lease the unit. They subsequently sought compensation from the Owners Corporation for rental income lost over the 3.5-year period during which the unit remained vacant, pending repairs to the common property.
The initial ruling in the Local Court granted the Smiths damages for lost rent, but limited to a three-month timeframe. The court reasoned that while some rental loss was a foreseeable consequence of the Owners Corporation’s failure to address common property damage, an extended 3.5-year vacancy was not reasonably anticipated. Moreover, the Smiths failed to demonstrate that the unit was genuinely unsafe for occupation.
The court determined that the decision to keep the property vacant for an extended period was a commercial choice made by the Smiths, for which the Owners Corporation could not be held liable. This verdict was later upheld by the Supreme Court of New South Wales upon appeal.
Legal Principle #1: Statutory Duty of Owners Corporations to Maintain and Repair Common Property
The primary legal consideration for lot owners seeking damages from owners corporations is the latter’s stringent statutory obligation to maintain and preserve common property in good working order. Section 106 of the Strata Schemes Management Act 2015 stipulates that owners corporations must not only maintain and repair common and personal property vested in the owners corporation but also replace or renew any fixtures or fittings that have deteriorated.
Legal precedent establishes that a breach occurs the moment any element of common property ceases to function effectively or falls into disrepair. This interpretation favours lot owners’ interests by imposing an absolute duty on owners corporations, ensuring their accountability for all maintenance and repairs within common areas.
In the case at hand, the Owners Corporation was found to have breached its duty by failing to maintain the balcony’s waterproof membrane in proper condition. The deterioration of this membrane led to water ingress and subsequent damage to the unit’s flooring, clearly demonstrating the Owners Corporation’s failure to uphold its statutory obligations.
This principle underscores the importance of proactive maintenance and timely repairs by owners corporations to prevent damage to individual lots and preserve the integrity of the entire strata building.
Legal Principle #2: Lot Owners’ Right to Recover Damages for Reasonably Foreseeable Loss
Under Section 106(5) of the Strata Schemes Management Act 2015, lot owners may claim damages for losses that are reasonably foreseeable and result from an owners corporation’s failure to maintain and repair common property. This right hinges on two key factors: the loss must be classified as “reasonably foreseeable” and must directly stem from the owners corporation’s breach of duty.
Damage assessment in these cases focuses on:
- The foreseeability of the loss
- The causal link between the loss and the owners corporation’s breach
It’s crucial to note that the type of damage, rather than its extent or precise occurrence, is the primary consideration. Compensation may still be awarded if the damage category was foreseeable, even if its severity or exact manifestation was not.
Limitations on Recovery
Damages cannot be claimed for:
- Losses that could not be reasonably anticipated as a result of the owners corporation’s breach
- Losses arising from unreasonable actions taken by the owner
However, an owner’s actions are not automatically deemed unreasonable simply because the owners corporation suggests an alternative approach. If the owner’s conduct is fundamentally reasonable, damages may still be recoverable.
In the case at hand, the court determined that while some rental loss was foreseeable due to the Owners Corporation’s failure to repair common property, it was not reasonable to expect the unit to remain vacant for the entire repair period. The court also found the Smiths’ decision to remove the magnesite flooring themselves and refrain from pursuing repairs to be unreasonable.
Furthermore, the Smiths’ “commercial choice” to keep the property unoccupied until floor repairs were completed was deemed unreasonable, especially given the lack of genuine safety concerns. Consequently, the Owners Corporation was not held liable for the entire duration of lost rent, but only for a limited period deemed reasonably foreseeable.
Legal Principle #3: Limitations on Damage Recovery Due to Failure to Mitigate Losses
It’s crucial to understand that a lot owner’s right to recover damages is not absolute. Owners are expected to take reasonable steps to minimise their losses. This includes making efforts to relet the property to mitigate rental income loss when appropriate.
Importantly, the burden of proving a failure to mitigate lies with the owners corporation, not the lot owner. However, when determining the appropriate amount of damages, the owner’s conduct is a key consideration. Failure to mitigate can significantly reduce the recoverable amount.
Actions Constituting Failure to Mitigate
Failure to mitigate losses typically involves inaction or inappropriate action that exacerbates damages. Examples include:
- Delaying notification to the owners corporation about common property defects
- Neglecting to make temporary repairs or attempts to re-let the property
- Taking unreasonable actions that worsen damage or render the property uninhabitable
- Conducting unauthorised alterations to common property, causing further damage
In the case at hand, the court found that the Smiths failed to mitigate their losses by not renting out the property while awaiting repairs, despite the absence of safety concerns. Moreover, their decision to remove a substantial portion of the magnesite flooring was deemed unreasonable and commercial in nature, directly contributing to the property becoming unlettable.
These factors led the court to limit the recoverable damages to just three months of rent. This ruling underscores the importance of lot owners taking proactive and reasonable steps to minimise losses, even when faced with issues stemming from owners’ corporation negligence.
The case serves as a reminder that while lot owners have the right to seek compensation for losses due to common property neglect, they also bear a responsibility to mitigate those losses to the best of their ability.
Conclusion
The right of lot owners to seek compensation when owners corporations fail to repair common property is well-established, but it comes with important caveats. Recoverable damages are limited to those reasonably foreseeable as a consequence of the owners corporation’s breach of statutory duty. While the exact extent or manner of damage need not be predictable, the type of damage should be anticipatable.
Moreover, lot owners bear a responsibility to take reasonable steps to mitigate their losses. This duty to mitigate significantly impacts the amount of recoverable damages. Owners corporations can argue for reduced compensation if they can demonstrate that lot owners failed to take appropriate measures to minimise their losses.
Navigating the intricate landscape of strata law can be challenging for all parties involved, including individual lot owners, strata managers, owners corporations, and strata committee members. Given the complexities of these legal matters, seeking expert legal advice is often crucial for effectively managing disputes and enforcing legal rights within the strata scheme framework.
Understanding these principles is essential for all stakeholders in strata schemes. It ensures fair outcomes in disputes over common property maintenance and helps maintain the delicate balance between the rights and responsibilities of lot owners and owners corporations.
