Legal Update Owners Corporation Act 2006

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The Owners Corporation Act (the ‘Act’) was passed on 14 September 2006 and received assent on 19 September 2006. The Act, in effect, replaces and enlarges upon the regulations under the Subdivision Act 1988 with regard to bodies corporate (now called ‘owners corporations’).

The Act changes the structure, function, rights and obligations of bodies corporate and will affect property owners, managers, and property developers of residential properties, commercial properties, retirement villages, shopping complexes, office space, industrial complexes and mixed-use developments.

The Act comes into operation on 31 December 2007.

The Act will directly affect the one in five Victorians who own, live in, manage or develop bodies corporate. Here we examine the Act and highlight the Act’s key provisions.

Why the act has been passed.

The Act is intended to address the inadequacies in the Subdivision Act 1988 in an environment of increasing numbers of bodies corporate and increasing complexity in the way they are structured and managed.

The Act :

* addresses both the obligations and rights which are common to all OCs, and recognises the different requirements of two-lot, general and large OCs; and

* outlines the structure, function, rights and obligations of lot owners, OCs, managers and committees.



Existing Legislation: Subdivision Act 1988

At present, bodies corporate are created and managed largely under a regime established by the Subdivision Act 1988. However since that legislation was enacted the number and complexity of bodies corporate has increased dramatically. It is estimated that in 1988 there were 35,000 bodies corporate covering 200,000 people, and that now there are 480,000 lots, 65,000 bodies corporate and that 1 million people live or work in a building that is covered by a body corporate. The estimated capital improved value of lots affected by bodies corporate is $40 billion. The law relating to bodies corporate has been under review since 2003.

The Act is intended to address inadequacies in the Subdivision Act 1988 regime. In the second reading speech for the Act, Attorney-General Mr Hulls stated that:

‘The current regulatory scheme for bodies corporate is not serving Victorians well. The regulatory scheme is sparse and limited in the guidance it provides to bodies corporate and lot owners. Parts of it are not clear or appear contradictory, and in many areas little guidance is provided to individuals trying to run these community organisations we call bodies corporate. At a minimum this Act will fix this situation.’

r Hulls outlined the main themes emerging from the review process as:

* the need for better access to dispute resolution;

* clearer rights, duties and responsibilities of members and the body corporate;

* giving sufficient powers and flexibility to bodies corporate and body corporate committees to allow them to operate effectively;

* improved financial management and protection of body corporate funds;

* long-term maintenance planning; and

* the promotion of more professional standards in the body corporate management industry.

Creation of Owners Corporations

An Owner’s Corporation (‘OC’) is created under the Subdivision Act 1988 (which the Act amends) in the same way that a body corporate was created i.e. a plan of subdivision may provide for the creation of one or more OCs, and a plan of subdivision which contains common property must provide for the creation of one or more OCs. An OC will automatically come into existence upon the registration of a plan of subdivision.

The Act outlines the functions of the OC, which include an obligation to repair and maintain the common property and equipment and services, take our insurance as required by any Act, keep an OC register and provide an OC certificate, and any other function conferred by any law. These functions are substantially similar to the functions of a body corporation under the Subdivision Act 1988. However the Act substantially expands and regulates the conduct of these functions.

In carrying out its functions and powers, an OC must act honestly and in good faith and exercise due care and diligence.

An OC may delegate by instrument any power or function of the OC to the Committee, Chairman, Secretary, member, manager or employee of the OC. An instrument of delegation must be issued at the AGM.

Existing Bodies Corporate

Under the Act:

* existing bodies corporate will become OCs and will be subject to the new legislation;

* existing body corporate rules will continue to the extent that they are not inconsistent with the new legislation; and

* any body corporate certificate issued immediately before the commencement day of the new legislation will be deemed to be an owners corporation certificate.

Tiers of Owners Corporations

Under the Act there are three tiers of OCs:

* OCs over two-lot subdivisions: these OCs are exempted from compliance with a number of requirements under the new legislation;

* OCs generally;

* Prescribed OCs: certain OCs (as prescribed in regulations which are not yet available) will have additional obligations. Prescribed OCs are expected to be the larger OCs.



Financial management

An OC (other than a two-lot OC) must keep proper accounts and prepare a financial statement for the annual general meeting. An OC may, and a prescribed OC must, have the financial statement audited.

An OC may, and a prescribed OC must, prepare a maintenance plan setting out certain information including anticipated major capital expenses within the next 10 years. A maintenance plan does not have effect unless it is approved by the OC. An OC with an approved maintenance plan must establish a maintenance fund into which certain funds must be paid.

Asset management

An OC must repair and maintain the common property and all related chattels, fixtures, fittings and services, and any service which is for the benefit of more than one lot and the common property.

Lot owners are required to maintain any part of the lot that affects the outward appearance of the lot, and maintain any service that serves that lot exclusively. Lot owners must not permit the common property to be damaged or to deteriorate. In some circumstances, lot owners are responsible for cleaning and maintaining overhanging eaves and gutters that are common property. Lot owners can decorate and attach fixtures to their lots, but must give notice to the OC of any application by the lot owner for a building or planning permit.

Insurance

A lot owner can insure their lot and their interest in the common property. Section 11 of Sale of Land Act 1962 remains in effect: a lot owner cannot sell a lot if insurance required under the Act is not in place. If the insurance has not been taken out, the purchaser may avoid the sale at any time before the contract is completed.

All OCs (except two-lot OCs) are required to obtain reinstatement and replacement insurance and public liability insurance for common property, and for any multilevel developments.

Not less than every five years a prescribed OC must obtain a valuation of all buildings that it is liable to insure. The OC must present the valuer’s report at the next general meeting.

Developers

The Act imposes a number of obligations on the applicant for registration of the plan of subdivision (other than a two-lot subdivision):

* the applicant must provide (amongst other things) at the first meeting of the OC (which must occur within six months of the registration of the plan of subdivision) an OC register, any accounts or records made on behalf of the OC, the maintenance plan (if any), any contracts, leases and licences binding on or benefiting the OC, insurance policies, the names of the companies, tradespeople or suppliers who provided a warranty or other guarantee on any matter for which the OC is responsible, and copies of those warranties and guarantees;

* within the first five years following registration of the plan of subdivision and while the applicant owns a majority of the lots affected by the OC, the applicant must:

* act honestly and in good faith and with due care and diligence in the interests of the OC in exercising any rights under the new legislation; and

* take all reasonable steps to enforce any domestic building contract entered into for any breach of contract which affects the common property and of which the applicant is aware or ought reasonably to be aware; and

* the applicant must establish an OC register which includes information regarding lot liability, insurance policies, notices or orders served on the OC and details of contracts, leases and licenses entered into by the OC.

Proxies and Powers of Attorney

The Act makes it an offence for a person to require or demand that a lot owner of any subdivision provide a power of attorney or proxy for the purpose of voting at a meeting or in a ballot of an OC.

A person is not entitled to exercise a power of attorney for more than one lot (unless the lot owners are members of the same family).

A proxy holder must act honestly and in good faith and exercise due care and diligence. A person can hold any number of proxies, however any proxy is revocable, and lapses after twelve months of being given. A proxy holder who is not a lot owner may not vote on matters which affect that person relating to the delegation of functions and powers (e.g. to a manager or committee), or the appointment, payment or removal of a manager. Any contract appointing a manager in breach of the new legislation is voidable unless affirmed by the OC by special resolution.

Committees

Any OC with thirteen or more lots must elect a Committee. The Committee can do all things that an OC can do by ordinary resolution, unless the OC decides to limit the Committee’s powers. The procedure by which Committees must operate is clarified. The Committee must also present a report of its activities to the annual general meeting.

Each member of a Committee or sub-committee must act honestly and in good faith and exercise due care and diligence in the performance of his or her functions, and must not make improper use of his or her position as a member to gain, directly or indirectly, an advantage for himself or herself or for any other person.

Each OC must have a Chairman, and may have a Secretary. The functions of Chairman and Secretary must now be undertaken by members, rather than a manager. A manager cannot be a Secretary unless there is no Committee and no Secretary.

Sub-Committees can be set up in accordance with the rules, which may provide for the role and functions of the sub-committee.

Managers

An OC may appoint a person to manage the OC. A manager must act to the same standard as is prescribed for Committee members.

A manager must submit a report to each annual general meeting, which must include details of the manager’s professional indemnity insurance.

Every paid manager must carry professional indemnity insurance and be registered with the Business Licensing Authority. The Licensing Registrar will keep a register of managers which will contain certain information including contact details, insurance details, and orders of VCAT relating to the person as a manager. Any existing manager will have three months in which to register. Any person, in accordance with the regulations (not yet published), can inspect the register.

Within 28 days of ceasing to be a manger, the manager must return all records relating to the OC to the OC.

An OC can revoke the appointment of a manager. As an OC can delegate its power, a delegatee of the OC can revoke a manager.

Records and Register

An OC must keep:

* a register (as established by the application for registration); and

* (for 7 years) records regarding each OC, including copies of resolutions, financial statements and accounting records, contracts and agreements entered into by the OC and leases and licences to and from the OC.

The OC must make the records and register available to a lot owner, mortgagee of a lot and purchaser of a lot (or any of their representatives), and those people can copy the documents for not more than the prescribed fee.

A person can apply to VCAT to restrict access to personal information in exceptional circumstances.

OC Certificate and Vendor’s Statements

The OC must provide within 10 days of a request, an OC certificate containing certain information including information relating to the manager, all contracts, leases, licences and agreements affecting the common property, legal proceedings and liabilities and contingent liabilities of the OC, and accompanied by certain documents.

The OC Certificate (including all documentation) must be attached to a Vendor’s Statement for the sale of any lot.

Dispute Resolution

The Act outlines a number of dispute resolution procedures. These include:

* Complaint to the OC – A lot owner, occupier or manager may complaint to the OC about an alleged breach of an obligation by a lot owner, occupier or manager. The OC must have a dispute resolution process or the dispute resolution process of the model rules will apply. An OC must follow the dispute resolution process as set out in the rules before making an application to VCAT;

* Application to the Director – On application to the Director of Consumer Affairs Victoria (CAV) by any person, the Director may refer a matter to an employee of CAV for conciliation or mediation; and

* VCAT – VCAT has powers to resolve a dispute arising under the Act or regulations or rules with regard to the operation of an OC, breach by a lot owner or occupier of the Act or regulations or rules, and exercise of a function by the manager. VCAT can dismiss an application by an OC if the dispute resolution process set out in the rules has not been followed.



Adverse Possession

The Act amends the Limitation of Actions Act 1958 so that the right, title and interest of an OC in common property is not affected by reason only of any adverse possession, irrespective of the period of that possession.

Concerns which have been raised in regard to the Act

Although there were a large number of submissions regarding amendment to the Act, and it was accepted that the Act was not without flaws, the Act passed through both houses of Parliament without amendment.

Some of the concerns raised, which may be addressed in the regulations or in future amendments to the Act, include:

* that the Chairman and Secretary must be members of the OC, rather than these roles being undertaken by a manager as occurs in most bodies corporate at present;

* that in attempting to address the issues of larger OCs, the Act imposes a burden on the 30% of OCs which consist of 5 lots or less, and the 45% of OCs which consist of between 5 and 100 lots which may result in additional expense, such as the employment of a manager where one was not previously required;

* that the Act does not address the problem of obtaining a quorum of lot owners, and particularly of obtaining a special resolution of the lot owners (75%). Further, the legislation does not provide that meetings can be conducted by ballots in addition to in person;

* that a special resolution is required in order to commence legal proceedings, thereby reducing the availability of this dispute resolution mechanism;

* that a unanimous decision is required to increase the lot entitlement and liability of a lot, and it is unlikely that a lot owner will vote to increase its lot liability;

* that the status of contracts entered into prior to the Act becoming operational is uncertain;

* that there is no minimum standard imposed on managers;

* that the register of managers will reveal each managers’ client base; and

* that there is inadequate provision for the protection of OC funds (including the maintenance fund).

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