Break in Case of (Special Resolution) Emergency - Lot Owner Derivative Actions

Owners Corporations: 10 October 2021

Aitken Partners' Owners Corporations Team, who regularly act for lot owners and committees in various Owners Corporation matters, are noticing a recurring issue for clients when the Owners Corporation fail to bring legal actions, particularly when the Owners Corporation is controlled by the Developer or because the OC and/or its committee cannot be bothered dealing with the issue at hand.

Whilst there are certainly hurdles that lot owners and committees must first 'jump' to do so, there are under-utilised mechanisms within the legislative framework which enable them to bring proceedings in cases where a special resolution authorising the bringing of such a proceeding cannot be passed.

The Law

Owners Corporations in Victoria are primarily governed by the Owners Corporations Act 2006 (Vic) (Act) and the Owners Corporations Regulations 2018 (Vic).

Pursuant to section 96 of the Act, a special resolution requires:

• 75% of the total lot entitlements of the Owners Corporation to vote in favour of the motion if the vote is taken by poll or ballot; or
• 75% of the total votes for all of the lots affected by the Owners Corporation in favour of the motion if the vote is taken at a meeting or in any other case.

The Victorian Civil Administrative Tribunal (VCAT) has the jurisdiction for hearing and determining disputes about the management and use of common property and areas within subdivided land, such as apartments or units, formerly known as 'body corporates'.

The Issue

Section 18 of the Act requires that an Owners Corporation must not bring legal proceedings unless it has been authorised by special resolution to do so unless the application to VCAT is brought pursuant to Part 11 of the Act and in respect of:

• the recovery of fees or other monies owed to the Owners Corporation; or
• enforcing a breach of the Owners Corporation's rules.

Whilst this section of the Act may be designed to prevent Owners Corporations from litigating without the support of a significant majority of lot owners, which is a good general principle, there are instances where it is appropriate for an Owners Corporation to litigate matters without the support of a special resolution.

For example:

• An Owners Corporation which has over 100 lots may not be able to achieve a special resolution because the majority of lot owners are investors who do not actively participate in the Owners Corporation and do not provide their proxy to a third party when meetings or ballots are convened; and
• As the OC Act currently stands, a developer who retains lots in an Owners Corporation has the ability to vote on a motion seeking to authorise the Owners Corporation to bring a proceeding in respect of issues about the development or construction of the development that has arisen years later. It is likely that any such resolution will fail in circumstances where the developer retains the majority of lots or has an influence on enough lot owners to create a combined majority, because undoubtedly they will vote against the resolution.

The Solution

Section 165 of the Act provides a legal mechanism - a 'break in case of a special resolution emergency' provision - known as a derivative action.

Specifically, section 165(1)(ba) of the Act enables VCAT to make an order authorising a lot owner to institute, prosecute, defend or discontinue specified proceedings on behalf of the owners corporation.

In terms of putting this mechanism into action, a lot owner or Owners Corporation is required to make an application to VCAT for such orders, which ordinarily should be supported by evidence setting out the reasons as to why the special resolution cannot be passed and why the lot owner(s) should be authorised to bring the action.

Amendments to the Act as of 1 December 2021

As of 1 December 2021, various amendments to the Act will come into force. Relevantly:

1. New section 18(2) will give the Owners Corporation the power to commence legal proceedings in the following jurisdictions by passing an ordinary resolution instead of a special resolution, provided that the nature of the proceeding is within the civil jurisdictional limit of the Magistrates' Court, i.e. up to $100,000.00:
   1. The Magistrates' Court of Victoria;
   2. VCAT; and
   3. An interstate equivalent of the Magistrates' Court of Victoria.
2. New section 68(4A)(b) will preclude the initial owner (usually the Developer) who retains lots in an Owners Corporation from voting on any resolutions in respect of building defects;
3. New section 169I(2) will provide that at the hearing to determine an application for a derivative action
   1. The applicant lot owner will have the burden of proving why VCAT ought to grant the application if:
      1. The Owners Corporation did not vote on a special resolution in respect of the matter subject of the application; or
      2. The Owners Corporation was unable to achieve the special resolution in respect of the matter subject of the application, and an ordinary resolution would have also failed.
   2. Any other party to the application will have the burden of proving why VCAT ought to dismiss the application if the Owners Corporation was unable to achieve the special resolution in respect of the matter subject of the application, and an ordinary resolution would have succeeded.

The amendments outlined above are significant in respect of derivative action because:

1. The committee will have the power to bind the Owners Corporation to legal action where a special resolution is not necessary, i.e. the cost of the claim is $100,000.00 or less; and
2. The initial owner will no longer have any voting rights where the Owners Corporation seeks to pass any resolutions in respect of building defects.

Lot Owner Indemnity

A subsequent issue of derivative actions is who ought to pay for legal fees and any adverse costs orders associated with the proceeding - the applicant lot owner(s) or the Owners Corporation?

Generally, lot owners are not willing to bring a proceeding on behalf of an Owners Corporation and be exposed to the financial costs and risks of litigation.

Accordingly, another important aspect of seeking leave from VCAT to bring a derivative action is seeking orders from VCAT that the lot owners be indemnified by the Owners Corporation for the costs associated with the proceeding. This can be done by way of a deed of general indemnity between lot owners and owners corporations in respect of the derivative action.

Considerations

As with any legal matter, making an application for leave to bring a derivative action is not certain to be successful.

In making such an application, lot owners and Owners Corporation committees should seek legal advice as to the merits of doing so and legal assistance with the preparation of the documents in support of the application, namely affidavit material in support. This will ensure that any application to bring a derivative action has the best chance of obtaining leave from VCAT.

How We Can Help

Aitken Partners' Litigation and Property Law teams are experienced in assisting clients in making successful applications for leave to commence derivative actions and are here to assist and advise lot owners and owners corporation committees in doing so.

If you need legal assistance with such matters, please contact any of our experienced team:

• Deb Andronaco
• Paolo Tatti
• Sam Merrylees