The times they are a-changin’ – New tiers, new rules, new responsibilities | Amendments to the Owners Corporations Act

The Owners Corporations and Other Acts Amendment Act 2021 (Vic) (Amendment Act) amends many provisions in the Owners Corporations Act 2006 (Vic) (Act). These amendments are far-reaching and include significant consumer protection and greater transparency measures in the owners corporation sector.

This article seeks to summarise some of the key amendments made to the Act.

The Amendment Act received Royal Assent on 23 February 2021 and comes into operation on 1 December 2021, unless proclaimed earlier.

The five tiers of Owners Corporations

The Act previously did not differentiate between different sizes or types of owners corporations (OCs): there was a ‘one size fits all’ approach. The amendments made to the Act now differentiate between different tiers of OCs.

The intention behind these amendments is primarily:

• to reduce the red-tape and compliance burdens on smaller OCs and to regulate OCs at a level which is appropriate for their size;
• to improve the quality of OC managers and enhance protection for OCs;
• to improve developers’ duties to the OCs they create; and
• to improve the governance and financial administration of OCs.

The changes introduce a five tier system for OCs, with each tier imposing different obligations and requirements on an OC.

An OC’s tier is determined by the number of occupiable lots, and whether it includes a services only OC. Five (5) tiers of OCs now exist, ranging from a tier one OC (comprising more than 100 occupiable lots that is not a services only OC) to a tier five OC (an OC for a 2-lot subdivision or a services only owners corporation).[1]

The Amending Act also introduces definitions for a non-occupiable lot, occupiable lot and services only OC.

Common seal no longer required

The amendments ensure that it will no longer be a requirement for an OC to possess a common seal, and the use of the common seal will no longer be a requirement for the execution of documents for and on behalf of an OC. Before these amendments become law, the OC can only execute documents by way of affixing the common seal on the document which, in turn, requires the approval of members of the OC pursuant to section 20 of the Act. These current arrangements are cumbersome and unwieldy. The amendments to the Act allow for documents to be executed by individual separate lot owners (at least 2), provided certain requirements are met.

Existing OCs must still use their common seal to execute documents. However, by ordinary resolution, these OCs may determine that their common seals are no longer required and can vote to destroy their common seal. This would allow these OCs to execute documents in accordance with the new regulations. This is an action which OCs should consider, to allow for more flexibility in entering into contracts and agreements.

Commencement of legal proceedings and debt recovery

Historically, OCs could primarily only institute legal proceedings if a special resolution was passed. The Amendment Act now allows an OC to institute legal proceedings, by ordinary resolution, in the Magistrates’ Court for all matters within the civil jurisdictional limit of the Magistrates’ Court. This allows an OC to institute legal proceedings for large debt recovery, without the jurisdictional limitations of VCAT.

Additional powers of VCAT

The Amendment Act allows VCAT to order a lot owner to pay reasonable costs incurred by an OC in recovering any unpaid amount from the lot owner. This gives the OC greater incentives to pursue lot owners for unpaid amounts in VCAT.

Additional authority of an OC

Additional powers are given to an owners corporation including, but not limited to:

1. The OC may levy additional annual fees on a lot owner if the OC has incurred additional costs resulting from the actions of that lot owner. For example, the OC now has statutory authority to levy additional premium fees arising from insurance claims involving the willful acts or gross negligence of a lot owner, which result in a higher premium charge.
2. The OC may levy damages to common property whereby the damage is not covered by the insurance, or the cost is less than the excess amount that would have been payable on an insurance claim regarding the damages.
3. Provided certain requirements are met, the OC may dispose of abandoned goods on the common property.
4. The OC can make rules regarding external alterations of a building to protect the quiet enjoyment of all lot owners, rules protecting the structural integrity of any building affected by the alterations, and rules ensuring the market value of any other lot does not decrease as a result of the alterations. However, unreasonable rules restricting the installation of sustainability items are prohibited. For the purposes of this new provision, a ‘sustainability item’ includes any item that promotes renewable energy, such as the installation of solar panels.

Additional Disclosure Requirements at the First OC Meeting

The Amendment Act imposes additional disclosure requirements on the applicant (for registration of the plan of subdivision) at the first meeting. The applicant (who is typically the developer responsible for the project) must provide, in addition to the existing disclosure documents:

• a maintenance plan;
• the building maintenance manual;
• an asset register;
• copies and/or details of any warranties; and
• copies of any specifications, reports, certificates, permits, notices or orders in relation to the plan of subdivision.

The applicant must also disclose any relationship with the OC manager and any specific financial benefits that will foreseeably flow to the applicant as a result of that relationship with the OC manager.

These new disclosure requirements aim to ensure transparency in the relationship between the applicant and the OC manager, requiring the disclosure of financial consideration or upfront payments (which in many instances have been a feature of the OC industry).

Stricter Regulation of Management Contracts

The Amendment Act introduces greater restrictions on applicants for registration who appoint a third-party manager prior to the first meeting.

Firstly, if a third-party manager has been appointed by the applicant for registration prior to the first meeting, the contract of appointment automatically expires at that first meeting.

Secondly, if the applicant has entered into another contract that relates to the OC (eg maintenance or cleaning contracts), and if the applicant benefits from that contract, then the term of that contract cannot exceed three (3) years in duration.

These changes were enacted to prevent long ‘lock in’ management contracts (which are usually between 5 and 20 years in length, and afford OCs limited or no rights of termination) because these contracts often include large payments by the manager/service provider to the applicant (ie, the original owner/developer) in return for securing the long term contract.

Further restrictions introduced are as follows:

• The initial owner, or an associate of the owner, must not be appointed as the manager of the OC and cannot vote on any resolution of the OC that relates to any building defects in or on a building on the plan of subdivision.
• The initial owner must not propose an unreasonable or unsustainable annual budget for the OC.
• The initial owner must not designate any common property or services as a private lot.
• The initial owner must not receive payment from the manager in relation to the manger’s contract of appointment.

Additional responsibilities of the OC

Each OC tier has additional responsibilities in relation to their records and financial statements.

A tier one OC must now appoint a person to be the manager of the OC. However, by special resolution, an OC can opt out of this requirement. A tier two, tier three, tier four or tier five OC is not required to appoint a manager. For an OC of any tier, the appointment of a manager cannot exceed a term of three (3) years.

A tier one, tier two or tier three OC must prepare annual financial statements in accordance with the Australian Accounting Standards. These financial statements must be presented at the general meeting of the OC. However, a tier four OC must only prepare annual financial statements for annual fees that are levied.

Furthermore, a tier one or tier two OC must prepare and approve a maintenance plan. A tier three, tier four or tier five OC may prepare and approve a maintenance plan; however, they are not required to do so.

Consumer protection measures for management contracts

The new regulations impose certain restrictions on the contract of appointment of an OC manager. These protections are for the benefit of lot owners in the OC. The restrictions are as follows:

• The contract must not include a term which requires the OC to pass a resolution (of any kind), convene a general meeting, or take an additional step, to revoke the appointment of an OC manager.
• The contract must not include a term that allows the manager to renew the contract of appointment at the manager’s option.
• The contract must not include a term that requires a tier one or tier two OC to give three (3) months or more notice of intention to revoke the manager’s appointment.
• The contract must not include a term that requires a tier three, tier four or tier five OC to give one (1) month or more notice of intention to revoke the manager’s appointment.
• The contract must not include a term for the automatic renewal of the contract of appointment if the OC fails to give notice to not renew the contract.
• The contract must not include a term that restricts the ability of the OC to refuse consent to an assignment of the contract of appointment to a person appointed by the manager.

Additional duties of Managers of an OC

The Amendment Act introduces additional duties of the OC Manager that were made for the benefit of the lot owners. The additional duties are as follows:

• The OC manager must ensure that any goods or services procured are procured at competitive prices.
• The OC manager must not exert any pressure on any member of the OC to influence the outcome of any vote or election.
• For any contract that gives commissions or benefits to the OC manager, written notice must first be given to the chairperson of the OC, disclosing any commission or benefit received as a result of that contract.

OC managers now have an obligation to disclose a beneficial relationship with a supplier.

The OC manager, who must now have professional indemnity insurance in place, must make several disclosures including any commission or benefit gained as a result of the beneficial relationship, any benefit (commission or otherwise) to the chairperson of the OC, and details of receipts and disbursements held on trust for the OC.

New prohibitions

The Amendment Act prohibits lot owners from repairing, altering or maintaining the common property of the OC, or repairing or altering a service (relating to a lot that is for the benefit of more than one lot in the OC), without express permission from the OC.

Voting rights when in arrears

Lot owners who are in arrears for any amount owed to an OC are not entitled to vote on a resolution unless the amount in arrears is first paid in full, save for voting on matters that require special or unanimous resolutions. If lot owners would like to vote in matters that do not require special or unanimous resolutions, they must satisfy all rent arrears at least 4 business days, or in cash at any time, before the vote.

Proxies

A lot owner may authorise, in writing, an individual to vote on any matter through a proxy vote. For a proxy to be validly authorised, the lot owner must use the prescribed form, specify the individual to use as proxy, and deliver the form to the secretary of the OC.

A lot owner may still vote at any meeting instead of the proxy, and may revoke authorisation at any time of a proxy by giving written notice to the secretary of the OC. A proxy authorisation automatically expires 12 months after authority is given, or at an earlier date specified in the authorisation form.

Transitional Provisions

The Amendment Act allows for a transitional period from the date the changes are enacted. Specifically, a tier one OC has 12 months to create a maintenance plan, whereas a tier two OC has 24 months.

Conclusion

The Owners Corporations and Other Acts Amendment Act 2021 (Vic) is currently awaiting proclamation and will become law no later than 1 December 2021. OCs, developers and others involved in the sector should understand these impending amendments to the Act, to ensure they comply with their revised obligations and requirements at law.

[1] Note: Additional qualifications and rules apply to the above tiers for certain OCs that have a combination of occupiable and non-occupiable lots.

Queries

If you have any questions about this article please get in touch with the author or a member of our Building & Construction or Property teams.

Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.