No Easy Way Out for Insolvent Strata Owners
The Owners – Strata Plan No 80877 v Lannock Capital 2 Pty Ltd [2023] NSWSC 1401
Quick Read
This 2023 NSW Supreme Court decision involved an application by the Mascot Towers strata building to end the strata scheme and wind up its affairs. It comes as a result of the major structural faults in the building that led to evacuation in 2018 and a series of unsuccessful attempts to resolve the causes and consequences of those problems that have left the strata building and owners ‘insolvent’ as they describe it. The case was opposed by the major lender to the strata building. The NSW Supreme Court did not make a termination order because it was not satisfied that the strata title scheme was effectively destroyed, the strata building failed to ensure that creditors would be paid in full, and there was a better option under the collective sale mechanisms available. It’s an important reminder of a few fundamental strata principles about strata building maintenance obligations, strata owner liabilities, and the protection of financial interests in strata buildings.
Implications
A strata scheme can be ended under s 136 of the Strata Schemes Development Act 2015.
Usually, termination needs strata lot owner support, preserving all ongoing property rights [except the lot owners’ titles], and payment of all debts.
Courts can consider a range of issues, including impacts on strata lot owners and others with interests [of all kinds] in the strata building.
Where the strata building hasn’t been destroyed, the strata lot owners’ interests can be relevant. But, not based on legal concepts of what’s ‘just and equitable’.
Full Report & Case Details
This decision by a single judge in the NSW Supreme Court continues a series of cases about terminating [or ending] NSW strata title schemes.
It involved Mascot Towers which has experienced a series of unfortunate [if not tragic] challenges in the last 5 years as follows.
After evacuation of the strata building at the end of 2018 and investigation of the structural faults in the building, repair work was estimated at $21.5 million and a potential legal claim against the developer of the adjoining building was identified. So, the strata building levied $7 million for the first stage of work, borrowed $10 million from Lannock, and began legal action.
At the same time, the strata building explored selling the entire site under collective sale provisions of NSW’s strata laws and received an offer of $40.5 million.
By the end of 2020, the cost of repair works grew to $33.8 million and the levied and borrowed funds had been spent, so the strata building borrowed a further $22.5 million from Lannock, and paused repair works to progress the collective sale option.
By mid-2021 the cost of repair works was estimated at $45 million and the buyout offer had increased to $42 million.
In early 2023, the strata settled the legal action against the adjoining building’s developer for an undisclosed amount.
But, instead of progressing either the repair works to make the building habitable or the collective sale, the strata building instead chose to apply to the NSW Supreme Court to terminate the strata scheme.
The strata building argued that it should be terminated because it was ‘insolvent’ [in the sense that it did not have enough money or money available to it to cover the expected costs of rectifying everything so it could resume normal operations], that the strata owners were suffering ‘devastating personal situations’, that the building structure had effectively failed, and that the best solution was to end the strata scheme and appoint a liquidator to clean everything up.
By the time of hearing Lannock was owed $15.7 million and actively opposed termination, unless it was paid in full.
Plus, most of the major Australian banks that had lent money to strata lot owners and held mortgages over their strata lots were involved. But they neither supported nor opposed termination and only wanted to ensure that if the strata scheme was terminated orders were made covering payment to them.
Keywords
#NSW #NSWSupreme #2023 #termination #collectivesale #creditors #SSDA2015 #part10 #s136 #SSMA2015 #s100