Bondlake Pty Ltd v The Owners Strata Plan No 60285 [2005] NSWCA 35

What the court decided

Giles JA gave the only reasons, with which Handley JA and McColl JA agreed [1], [41]. The appeal was from Pearlman AJ, who had declared the caretaker agreement void for illegality under section 113(1)(b) of the Strata Schemes Management Act 1996 (NSW), referred to here as the Act [2].

As it then stood, section 113(1)(b) provided that in the initial period an owners corporation must not, unless authorised by an order of the Board under section 182, incur a debt exceeding the amount then available to repay it from its administrative fund or sinking fund [3]. The judgment records that section 113 has since been amended [3]. The initial period ended when owners other than the original owner held at least one third of the aggregate unit entitlement, here on 9 or 10 June 1999 [6]. The original owner was the developer, Parklane, then called D S Parklane Development Pty Ltd [5].

The respondent, The Owners Strata Plan No 60285, referred to here as the owners corporation, was established when the strata plan was registered on 18 May 1999 [4]. On 25 May 1999, while Parklane still owned every lot, the owners corporation resolved to enter into a caretaker agreement with the appellant, Bondlake Pty Ltd [7], [9]. The agreement appointed Bondlake for five years, with three renewal options, for a first year fee of $84,042 payable monthly [9]. There was no money in either fund on 25 or 28 May 1999, and no order of the Board was obtained [10].

Pearlman AJ held that the owners corporation had incurred a debt within section 113(1)(b), that the legislature intended the contract to be void and unenforceable and that the payment obligations could not be severed [13]–[15].

Giles JA found that the owners corporation incurred a debt of at least $7,828.57 on 25 May 1999, when there was nothing in the funds [20]. Parklane had given an undertaking to pay certain of the owners corporation's outgoings and in fact paid that sum [7]–[8], [11]. Giles JA said it was not clear that the undertaking covered that payment, but that did not matter, because as between the owners corporation and Bondlake the owners corporation was obliged to pay [16]. He rejected Bondlake's argument that only performance was affected [19]–[20]. He held it would not matter if the debt was greater, and did not decide its extent or any question of severance [17].

Giles JA agreed that section 113(1)(b) impliedly prohibited entering into the contract by which the debt was incurred, but held that such a prohibition left it open that the contract was valid and enforceable [21]. He treated validity as a matter of statutory construction [23]–[25], [28]. It was not suggested that Bondlake knew that entering into the agreement involved a contravention of section 113(1)(b), or that public policy, beyond giving effect to the Act, required that the agreement not be enforced; the question of construction came first [28]. The Act did not expressly make a debt incurred in breach irrecoverable or a prohibited contract unenforceable, and he did not find either consequence by construction [29]–[30].

First, he reasoned, section 113(2)(a) allowed the owners corporation to recover from the original owner any amount for which it was liable because of the contravention, which presupposed that it was liable to the creditor [31]. Second, the legislature had given a qualified sanction against the original owner, subject to the defence in section 113(4), and was unlikely to have intended the "Draconian sanction of complete invalidity" [33]. Third, persons dealing with an owners corporation would generally not know whether the initial period was running or the funds sufficed, and the legislature did not intend irrecoverability for innocent persons such as a tradesman [34].

Giles JA accepted that section 113 aimed to protect future lot owners from burdensome dealings by the developer before they took control [37]. He gave section 113(5) less significance than Pearlman AJ had [36]. He concluded that the caretaker agreement was not void [39].

The Court allowed the appeal, set aside the declaration and costs order, dismissed the summons and ordered the owners corporation to pay the costs of the summons and the appeal [1], [40]–[41].

Why it matters

On the Act as it then stood, the prohibition in paragraph (b) on incurring a debt did not make the contract by which the debt was incurred void, or the debt irrecoverable [21], [30], [39]. Giles JA said it was unnecessary to go beyond that paragraph [34]. The protection for lot owners lay in the prohibition, supported by the owners corporation's claim over against the original owner, not in avoiding the contract [31], [38]. That claim was qualified by the defence in section 113(4), and the original owner could turn out to be "a man of straw" [33]. The decision did not have to address a counterparty shown to know of the contravention, because no such knowledge was suggested [28].

Readers should check the legislation now in force in New South Wales and, for Victorian owners corporations, the Owners Corporations Act 2006 (Vic), which this decision did not consider.

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.