What you MUST know before buying a duplex

Many duplexes are set up as a strata plan, with only 2 units. This can work well, but problems can arise if one owner tries to bully the other. In the recent decision of Bradshaw v Cooke and The Owners - Strata Plan No 91905 [2021] NSWCATAP 156, the NCAT Appeal Panel described the case as “yet another cautionary tale for persons contemplating or living in a two lot strata scheme”. 

Purchasing a duplex can be a good compromise between the upfront costs of purchasing a house and the on-going costs of purchasing a unit in an apartment building, especially buildings that have facilities such as a lift, pool or gymnasium. However, if you are considering buying a duplex, you need to know what can happen if the duplex is strata title.

In a strata title duplex, there will be an owners corporation, which is a separate body constituted by the owners of both lots. The owners corporation has control over many important things, including managing and repairing the common property, raising strata levies, borrowing money, authorising renovations and choosing to commence or defend legal proceedings (including against one of the owners).

Like any strata scheme, the owners corporation makes decisions by passing motions at meetings, and many of those decisions will only require a simple majority. However, as there are only 2 units, if one owner votes “yay” and the other votes “nay”, there will be a deadlock and the motion will be defeated, unless one owner demands a “poll”. Once a poll is demanded, the motion will be decided according to unit entitlements, which are generally in proportion to the value of each lot. So, whoever has the higher valued lot probably has more unit entitlements, which means they have more voting power. In other words, for decisions that only require a simple majority, whoever has more unit entitlements can demand a poll and make whatever decision they like. It is the same for a political party who holds a majority of the seats in parliament or a company where one shareholder has more than 50% of the shares. No decision can be made without their approval, yet many decisions can be made with their approval only.

Case example

We had a recent case where our client had purchased a strata title duplex, where she had more unit entitlements than the other owner. The common property needed urgent repairs, but the other owner was not willing to pay for the repairs. However, as our client had the most unit entitlements, she could easily raise a levy without the other owner’s approval. The other owner threatened that if a motion were passed to carry out the repair and maintenance works, and raise a levy to meet that expense, it would constitute “fraud on the minority” (which means using your voting power for an improper purpose).

We advised our client that, firstly, a motion does not need to be passed to carry out maintenance and repairs to the common property, because this is a statutory duty under section 106 of the Strata Schemes Management Act. Indeed, in Stolfa v Hempton [2010] NSWCA 218, the Court of Appeal confirmed that section 106 “should not be construed so as to require the owners corporation to act, but then to place a voting barrier in its path”. But secondly, raising a levy to meet expenses for repairs is well within the scope of the owners corporation’s power to raise levies, so there is no chance that this could constitute fraud on the minority.

In fact, if the shoe were on the other foot and the other owner had more unit entitlements, but refused to raise a levy to cover the costs of the repairs, then that would constitute a fraud on the minority. If that were the case, we would have advised the client to apply to the Tribunal known as NCAT for the compulsory appointment of a strata manager. NCAT has the power to appoint a strata managing agent to exercise all of the functions of the owners corporation, effectively taking complete control of the strata scheme out of the hands of the owners, if it is found that the strata scheme is not functioning satisfactorily.

This is precisely what happened in the recent decision of Bradshaw v Cooke and The Owners - Strata Plan No 91905 [2021] NSWCATAP 156 (lo and behold, the unit entitlements were not equal in that case – lot 1 had 56% and lot 2 had 44%). Whilst the compulsory appointment of a strata managing agent might be a good outcome for a minority owner (in comparison to being oppressed by the majority owner), it will probably involve legal costs to make the NCAT application. It will also involve ongoing costs to pay the strata manager’s fees, but this cloud has a silver lining – if you have less unit entitlements and hence less voting power, you pay less strata levies.

The result is that in a strata title duplex, the unit owner with more unit entitlements can win every vote relating to the running of the strata scheme that only requires a simple majority. However, if they use this power unfairly, NCAT can come to the aid of the oppressed minority owner and can appoint a managing agent to take the disputes out of their hands.

For more information contact Jackson O'Keeffe  - jokeeffe@somervillelegal.com.au (02) 9923 2321

 

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