COST RECOVERY BY-LAWS –
ARE THEY ENFORCEABLE?

Article by James Moir

We are often asked to prepare “cost recovery” by-laws to recover costs that an owners corporation incurs as a result of by-law breaches. The costs sought to be recovered usually relate to:

• false fire alarms which incur a cost to the owners corporation,
• the dumping of rubbish,
• damaging common property,
• the cost of re-arranging access for fire inspections,
• costs flowing from breaches of by-laws generally, and
• costs flowing from breaches of the SSMA (Strata Schemes Management Act 2015).

Liu case on validity of by-law including cost recoveries – background

A 2022 Appeal Panel case considered whether a short-term letting by-law is enforceable, and in that consideration looked at whether and if so how an owners corporation can recover the costs flowing from a breach of that by-law.

That case was The Owners – SP No.91684 v Liu; The Owners – SP No.90189 v Liu [2022] NSWCATAP 1, and the background is below:

1. The decision was by 2 Senior Members sitting as the Appeal Panel, so will be binding on all single Tribunal Members.
   
2. There were 2 similar cases involving the same lot owner (Liu), the same short-term letting by-law, and adjoining schemes (2 adjoining towers at Sydney Olympic Park with 391 and 447 lots). The owner owned lots in both schemes.
   
3. The original Tribunal decision was by Senior Member Christine Paull. These appeal cases ran together because the 2 owners corporations had the same lawyers, the by-laws were the same and the owner was the same.
   
4. The parts of the by-law that banned short-term letting by non-residents (under section 137A of the SSMA) were not the issue. The problem with the by-law was twofold:
   
   • Clause 10(b) allowed the owners corporation to deactivate the fob key of any owner/occupier in breach of the by-law; and
     
   • Clause 10(e) allowed the owners corporation to recover its expenses of enforcing a breach as a levy debt.

Liu case – most relevant findings

The most relevant findings of the Appeal panel in this case were:

1. From the Court of Appeal Cooper case – “Access [to all common property for owners and occupiers] is an inherent property right”, so as a result allowing the decoding of fob keys in the event of a breach makes the by-law harsh, unconscionable or oppressive.
   
2. Levies are struck under ss81 & 83 of the SSMA, and are payable based on unit entitlements, subject to one statutory exemption (where insurance premiums are increased by a lot’s use). There was no power to characterise the expenses to be recovered as a levy or to recover them as a levy debt. A by-law allowing an owners corporation to recover expenses incurred as a levy debt is beyond power, because levies are struck only as set out in the SSMA.
   
3. You could not remove the offending parts of the by-law and allow the rest of it to remain, because a by-law in that modified form was not approved by special resolution.
   
4. The owners corporation unsuccessfully ran the argument that this wording (recover as a levy debt) was a mechanism for billing and recovery only.
   
5. At [70]: The issue is not whether the owners corporation can recover a debt from a lot owner, it is the characterisation of that debt “as if it was a levy debt” which is without power

Takeaways

The most important takeaways of this case are:

1. Decoding fobs – all owners and their tenants have this inherent right of access to common property. Decoding fobs (which could deny access to their car space, which is part of their lot) is not a valid enforcement option for a breach of by-law and including this in a by-law is likely to make the whole of the by-law (even any valid parts) unenforceable.
   
2. The case does not outlaw cost recovery by-laws. Instead, it says the costs to be recovered cannot be sought as outstanding levies. That quoted comment at paragraph [70] of the decision seems to be Appeal Panel support for cost recovery by-laws being valid, but only if done the right way.
   
3. An owners corporation has 2 choices with owner ledgers. They can be (A) solely for levies and interest and called a “levy ledger”, or else (B) they can be a ledger of all amounts owed by an owner, and include these other expenses. If it is (B), it should not be called a levy ledger or contribution ledger, but clearly described as all amounts owing by an owner to the owners corporation. It is important to note here:
   
   • A ledger solely for levies and interest (Option A) records what needs to be paid on any sale of a lot, given section 84(1) of the SSMA says future owners are liable only for levies and interest on levies, not recovery costs or other costs; and
     
   • Ledger Option B helps with the definition of unfinancial owner in section 4 of the SSMA, which is important for voting purposes: “unfinancial owner means an owner of a lot in a strata scheme who has not paid all contributions levied on the owner that are due and payable, and any other amounts recoverable from the owner, in relation to the lot”.
     
4. It is confirmed that section 137A allows owners corporations to pass a by-law banning short-term letting, but only by people who do not live in that lot.
   
5. Needless to say, make sure your by-laws are up to date with the latest cases and legislation, to ensure that they are enforceable.