By Mike Roberts, Partner and Julia Racheha, Associate

This decision is the first of two important decisions for Strata Insurers, made on 21 June 2024. It delves into owners corporations, mitigation defences, damage assessment and disputes regarding scopes of works.

Key Takeaways

• It is open to an owners corporation to run a mitigation defence to s. 106 Strata Schemes Management Act NSW (2015).
• Assessing damages under s. 106 which flow “as a result” of a breach of s. 106 (1) and/or (2) need to be assessed in a practical way, with regard to the common law elements of causation.
• Owners corporations should refer disputes with lot owners regarding scopes of works to rectify a s.106 breach to the Tribunal under s 232.

Background

The Defendant is a lot owner within Strata Plan 2661, a brick multi-story apartment complex in Darling Point that was built circa 1920.
On 30 November 2020, a failure in the waterproofing membrane of the lot owner’s bathroom resulted in the flow of water into the Lot immediately below. Within a month or so of being notified of the issues, the Owners of Strata Plan 2661 obtained scopes of works to investigate the failure of the waterproofing membrane and undertake the necessary remedial works.

The lot owner rejected the Owners Corporation’s proposed works on the basis that the investigative works would cause damage to the tiling pattern in the bathroom and that due to the building’s age, it would be impossible to source matching tiles. The lot owner then refused to accept the Owners Corporation’s proposal for remedial works and stated that replacement of all the bathroom tiles was necessary. The lot owner made a Property damage claim on the Owners Corporation’s strata insurer who rejected the claim at first instance, on IDR and EDR at AFCA, where the complaint was dropped.

NCAT Proceedings

Proceedings were then commenced in the Supreme court but then transferred to NSW Civil and Administrative Tribunal NCAT seeking orders for a full bathroom tile replacement and for damages under s. 106 (5) for loss of rental income as a result of the common property defect. Mills Oakley acted for the Owners Corporation.

The NCAT Application was heard by Senior Member Tyson who ultimately found that:

• The Tribunal was not satisfied that there was persuasive evidence to base an order requiring the specific work by the lot owner. Senior Member Tyson held that it was the lot owner who bears the onus of persuading the Tribunal of her entitlement to the order advanced in her points of claim and that the lot owner had failed to discharge that burden.
• Despite finding there was not breach of s.106, the Tribunal went on to consider whether and to what extent the lot owner would be entitled to the damages. It was not enough to show the property was vacant and the market rent. While the Tribunal accepted that some loss of rent was foreseeable, it was not satisfied that the lot owner had established that her lot was unusable or uninhabitable after the leak was discovered.
• The Applicant’s unreasonable behaviour was the cause of her loss rather than the breach of s.106 and she was not entitled to damages.

NCAT Appeal Panel

The lot owner then successfully appealed the decision of Senior Member Tyson to the NCAT Appeal Panel.
With respect of damages sought under s.106 (5) for breaches of s. 106 (1) and/or (2), the Appeal Panel found that certain types of losses that flow from events such as the failure of waterproofing make a claim for loss of rent “self-evident.”
The Appeal Panel emphasised the strictness of the duty owned under s. 106 (1) and (2) and ruled out the potential for a mitigation defence based on the conduct of a lot owner.

Supreme Court Decision

The Supreme Court maintained that the duty under s. 106 is a strict one owed by owners corporations to lot owners. The Court found that the duty requires an owners corporation to investigate and take steps to rectify defects in the common property, even if they cannot obtain the lot owner’s consent.
In assessing the damages that flow from a breach of s.106, the Court found that a claim for damages under s. 106(5) “as a result of” a breach of s.106 is a “question of fact” and should be assessed in a “practical way.”

It is relevant for NCAT to consider, where the lot owner has behaved unreasonably, that part or all of the claimed loss was caused by the lot owner rather than by the owners corporation’s breach.

The Court then went on to find that there is also nothing in the statute to warrant the owners corporation being rendered liable for all loss, however remote, and however unreasonable the conduct of the lot owner. In circumstances where a breach of s. 106 (1) duty is easy to establish, the Court indicated it is to be firmly borne in mind that:

1. Breach of duty is but one element of an entitlement to damages, and
2. Determining whether a lot owner’s claim for damages is one which is “as a result of” the owners corporation’s breach turns on the nature of the claim and the conduct of the lot owner subsequent to the breach, rather than the strictness of the duty.
3. The question of damages that flow “as a result of” will turn on the standard construction of causation, unaffected by the Civil Liability Act.