Owners Corporation update: Recent VCAT decision highlights the need for further legislative change

Owners Corporation PS738539K v Ka-Po was heard by the Victorian Civil and Administrative Tribunal (VCAT or the Tribunal) where the applicant, Owners Corporation PS738539K (the OC), sought orders pursuant to section 34D of the Subdivision Act 1988 (Vic) (the Act) to alter title boundaries in Plan of Subdivision PS738539K (Ka-Po case).

The outcome of the decision is, on its face, not remarkable. Pursuant to section 32(c) of the Act, a unanimous resolution of the members of an owners corporation is required to alter title boundaries of land affected by the owners corporation. In the Ka-Po case, a minority of members of the OC did not consent to a proposed resolution to alter the boundaries of certain lots within the plan of subdivision. As a result, VCAT was asked to, and made, orders consenting to the proposed resolution on behalf of the owners who had not given consent. However, rather than making orders pursuant to section 34D(1)(b) of the Act, the Tribunal member was ultimately required to exercise his discretion to make orders pursuant to section 34D(6).

What is notable is the method by which the Tribunal member was forced to make the order as a result of the changes made to section 34D of the Act, which came into effect on 1 December 2021. Our article explaining the changes to section 34D and the unsatisfactory position that arose from these changes is set out in the attached article.

Prior to the amendments to the legislation, the Tribunal member would have had a simple decision to make as to whether the requirements of section 34D(3)(c) had been satisfied and therefore an order could be made consenting to the resolution on behalf of the minority non-consenting members pursuant to section 34D(1)(b). Due to the changes made to the legislation, the Tribunal member was forced to use his discretionary power under section 34D(6) of the Act merely because the members who had not consented to the resolution did not own more than half of the total lot entitlement.

The previous version of section 34D(3) stated:

3.  The Victorian Civil and Administrative Tribunal must not make an order on an application under subsection (1)(b) unless it is satisfied that—

(a) the member or group of members cannot vote because the member is or the members are dead, out of Victoria, or cannot be found; or

(b) for any other reason it is impracticable to obtain the vote of the member or members; or

(c) the member has or members have refused consent to the proposed action and—

(i) more than half of the membership of the owners corporation having total lot entitlements of more than half of the total lot entitlement of the members of the owners corporation consent to the proposed action; and

(ii) the purpose for which the action is to be taken is likely to bring economic or social benefits to the subdivision as a whole greater than any economic or social disadvantages to the members who did not consent to the action.

Section 34D(3) has now been altered to change 34D(3)(c) as follows:

(c) the member has or the group of members have refused consent to the proposed action and—

(i) the member owns or the group of members own more than half of the total lot entitlement; and

(ii) all other members of the owners corporation consent to the proposed action; and

(iii) the purpose for which the action is to be taken is likely to bring economic or social benefits to the subdivision as a whole greater than any economic or social disadvantages to the member or the group of members who did not consent to the action.

The previous version of section 34D(3)(c) could be applied to a situation where a majority of members are being frustrated by a minority of members who are apathetic or indifferent to a resolution that requires unanimous support, and which is plainly bringing economic and social benefit to the subdivision as a whole.  The new section 34D(3)(c) has flipped the previous version on its head and now provides that VCAT must not make orders consenting on behalf of non-consenting members unless the member or members that have refused consent own more than half of the total lot entitlement.

The previous version of section 34D(3)(c) was deleted from the legislation and replaced without adequate explanation and without a proper mechanism for dealing with an all too common situation where there are a minority of apathetic or indifferent members who fail to participate in a proposed resolution.

Urgent reform to the Act is required by reinstating the previous version of section 34D(3)(c) to enable proceedings to be commenced in VCAT seeking orders consenting to a proposed resolution on behalf of minority owners who have failed to consent, in circumstances where the balance of requirements in section 34D(3)(c) are satisfied.

If reforms are not made, future matters which are similar to this case will also force a Tribunal member to exercise discretionary power in circumstances where the legislation should prescribe a clear pathway to resolve the matter.

Facts

The OC had received a Building Order from Whitehorse City Council which required works to maintain an unobstructed path of travel to the internal fire isolated stairs within the basement of the building. The Building Order specified that the path of travel must be protected from obstruction by vehicles and bollards.  Unfortunately, this meant that some car park lots and storage lots owned by lot owners needed to be moved.

To comply with the Building Order, the OC had discussions with the affected lot owners who agreed to car park swap agreements.  This meant that some car park lots and storage lots were to be transferred to the common property and parts of the common property were to be transferred to the lot owners who had been deprived of their car park or storage lot due to the Building Order.

In order to effect the rearranged lots and common property an application under section 32 of the Act was required to alter the boundaries of the affected lots and the common property.

The OC attempted to seek a unanimous resolution from all lot owners to alter the boundaries of the land affected by the OC, but the resolution was not achieved due to many of the lot owners not voting.  The OC Manager stated that he was not surprised about the extent of non-voting by lot owners because investment owners often do not care about voting in circumstances where the investment owner’s lot was not affected and there were no adverse fee issues.  (For the record, 73.21% of lot entitlement voted in favour of the resolution but 26.79% of lot entitlement abstained.  No lot owner voted against the resolution.)

Tribunal Orders

The Tribunal authorised the OC to apply to the Registrar of Titles to alter the Plan of Subdivision by converting certain car parks and storage cages to common property and, conversely, converting some common property to car parks and storage cages.

The Tribunal member had to carefully consider the legislation and recent case law which required analysis of Real Estate Victoria Pty Ltd v Owners Corporation No.1 PS 332430W [1] REV) and Owners Corporation 1 PS331627G v Pacific Rim [2].

The REV case considered the criteria for exercising the discretionary power in section 34D(6) (noting that the REV decision was handed down before the changes to Section 34D in December 2021).  Richards J. in the REV case had concluded that section 34D does not empower the Tribunal to make an order unless the requirements under the old form section 34D(3) were met.

Her Honour also observed that the discretionary power under section 34D(6) does not authorise the Tribunal to make ad-hoc decisions and the power must be exercised reasonably and in good faith.  Her Honour remarked that the alteration of property rights is no small thing and therefore the discretionary power under section 34D(6) should only be made subject to the specific requirements under section 34D(3).

The Tribunal member found that although section 34D(3)(c)(i) was not satisfied, it was reasonable and appropriate to exercise the discretionary power under section 34D(6) because the criteria regarding the provision of economic or social benefits to the subdivision under section 34D(3)(c)(iii) had been met. Noting that the Tribunal member has specified that the requirements of section 34D(3) were not satisfied, his reasoning is strictly at odds with the comments of Richards J in the REV case.

As such, the Tribunal member found himself in a situation where he did not have a clear pathway under the Act which could assist him in making an order in circumstances where it was imperative that an order be made consenting on behalf of the minority group of members who had failed to vote.

The Tribunal member was forced to use the discretionary power under section 34D(6) in circumstances where he would not have needed to do so if the legislation adequately provided for the common situation where a minority group of lot owners fail to participate in a proposed resolution.

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Authored by:
Tony Greenaway, Partner
Natalie McCabe, Special Counsel

[1] Real Estate Victoria Pty Ltd v Owners Corporation No.1 PS332430W [2021] VSC 373

[2] Owners Corporation 1 PS331627G v Pacific Rim [2022] VCAT 657