New Code of Conduct for Strata Owners with Short Term Rental Agreements

With International borders set to reopen imminently, Owners Corporations will be back to regulating short-term rental accommodation (STRA) arrangements in their scheme.

Importantly, in April 2020, s 137A of the Strata Schemes Management Act 2015 (NSW) commenced that states that a by-law a) may prohibit a lot being used for the purpose of a STRA if it is not the principal place of the owner/occupier and b) has no force or effect to the extent which it purports to prevent a lot being used for the purposes of a STRA if the lot is the principal place of residence of the owner/occupier. This section was intended to commence alongside the STRA Code of Conduct, which was only implemented on 1 November 2021.

The key obligations arising from the Code are that a premises will need to be registered on the premises register before it can be advertised. Additionally, hosts are required to make the Owners Corporation aware that the premise will be used as a STRA, provide their own or their authorised representative’s contact details and provide guests with a copy of the STRA code and any by-laws in force for the strata or community scheme.

Failure to comply with the code could mean that the host ends up on the ‘exclusion register,’ which is a register kept by the Commissioner for Fair trading in the NSW Department of Customer Service.

$1 Contract of Sale Still Binding

The recent case of Tapp v Barnett [2021] NSWSC 1271 concerned a contractual dispute between two parties for the sale of land. The property consisted of nine lots on separate titles of land owned by the defendant, which comprised approximately half of the vendor’s property.

A contract of sale of nine lots of the property was signed in the presence of a licenced conveyancer acting for all parties. The contract recorded all matters essential for a binding contract of sale, however the purchase price was expressed to be $1. As a result, the vendor argued that the contract was in draft form and not intended to be binding. The purchasers thus sought specific performance of the contract of sale.

The purchasers also brought a claim for equitable estoppel based on the vendor’s representations that she would transfer half of the property to the plaintiffs in return for the plaintiffs providing benefits to her such as by transferring cattle, paying money at her request and assuming liability with her for a bank loan. The purchasers contended that they acted to their detriment in reliance upon the vendor’s representations and that it would be unconscionable for the vendor to depart from her representations.

The Court held that the contract was binding and that the reference to a transfer of 9 lots of the land held by the vendor was sufficiently certain to support an equitable estoppel. Additionally, it was reasonable for the purchasers to rely upon the vendor’s assurances and assume or expect that the vendor would fulfil her promise.

Copyright Licences for Photos and Floorplans on Realestate.com

The case of Hardingham v RP Data Pty Limited [2021] FCAFC 148 considered the scope of the right to use photographs that were taken for the purpose of marketing residential properties on realestate.com.au. Mr Hardingham was a professional photographer and director of a company that provides photographs and other graphic images including floor plans to residential and commercial real estate agencies for ‘use in marketing campaigns for the sale or lease’ of the relevant property.

The appellants claimed infringement of their copyright as owner and exclusive licencee subsisting in the photographs of the properties by conduct of RP Data Pty Ltd (RPD) in reproducing the photographs on RPD’s website and manipulating the images so as to superimpose a logo.

The issue in the case was whether the authority extended to allow the agents the right to edit the digital versions of the photographs and floorplans. The photographer and the agents had made an informal oral arrangement granting the agent permission to ‘use’ the works ‘for the purposes of the marketing campaign.’ However, the Full Federal Court of Australia overturned the decision of the Federal Court of Australia and found that the oral agreement did not confer upon the agencies an implied right to sub-licence the works for the purposes of the marketing campaign.

Whilst the agreement was expansive, it did not enable third parties to virtually expropriate the ownership of the copyright in the works, as these terms and conditions were never communicated to the photographer. This case is illustrative of the complicated nature of the scope of copyright licences.

Rebutting the Presumption of Advancement

The recent case of Hans-Egon Bruno Bernhard Metzner & Anor v Jaqueline Rita Metzner [2021] NSWSC 1336 considered whether parents who a purchased a property in their daughter’s name could rebut the “presumption of advancement” (the presumption that the property was intended to be a gift).

The parents sought an order to have the property transferred to them. They argued that they had only agreed with Jackie, the daughter, to be the registered owner on the basis of her representations that this would prevent her sister from interfering with the parents intention to leave the property to Jackie upon their death, and because she had promised to regard her parents as the true owners of the property until their deaths.

The parents said that their daughter had taken unconscionable advantage of them by accepting the benefit of the legal ownership of the property, knowing the basis on which it had been conferred. They sought an order that Jackie held the property on resulting or constructive trust for them. In response, Jackie argued that her parents had gifted the property to her.

An interesting point about this case is that the parents had two daughters, Jackie and Madeline, and from 2004-2018, they had almost no contact with Madeline but were very close with Jackie and had left the entirety of their estates to her in their Wills. However, in late 2018 the parents had changed their wills such that Madeline was now the object of their affection and their new Wills in 2019 left the bulk of the estates to Madeline with Jackie to receive nothing.

The father was not able to give evidence in his proceeding on account of his Alzheimer dementia and the mother was found by the court to be an unreliable witness for lack of credibility.

Ultimately, the Court found that the Plaintiff’s had not discharged their onus of rebutting the presumption of advancement. Although they did find that the plaintiffs had a life interest in the property such that Jackie’s beneficial ownership in the property was not absolute.

This case demonstrates the difficulty of un-doing a transaction whereby the legal title to a property has been recorded in the register under another’s name.

Pets Permitted in Strata Schemes

This year the Strata Schemes Management Act 2015 (NSW) was amended to insert a new s 137B which states that a strata scheme can no longer unreasonably prohibit the keeping of a pet in the lot. This amendment comes after a string of cases in NSW courts dealing with the topic of pets in strata schemes.

Section 137B(1) states that a by-law or a decision by an Owners Corporation under a by-law is to have no effect to the extent that it would unreasonably prohibit the keeping of an animal. Further, subsection (2) clarifies that it is ‘reasonable’ to keep an animal on a lot unless the keeping of the animal interferes with another occupant’s use and enjoyment of the occupant’s lot or the common property.
Some examples of unreasonable interference with another’s use or enjoyment of their lot include that the animal makes a persistent noise that occurs to a degree that it unreasonably interferes with the peace, comfort or convenience of another occupant, that the animal repeatedly runs at or chases another occupant, that the animal attacks or otherwise menaces another occupant, that it causes damage to the common property or another lot, or that it endangers the health of another occupant.

Owners Corporations should be aware that any by-laws imposing a blanket prohibition on pets will now be unenforceable. Instead, they may wish to implement pet policies or a pet register to better manage pets in a strata scheme.

Directors’ Duties and Third Party Liability

The recent case of Re Australian International Yacht Club Pty Ltd [2021] NSWSC 586 considered whether directors had breached their statutory duties and fiduciary duties. The company was established to purchase a motorboat to provide services for a Chinese market, and to assist the plaintiffs to become permanent residents in Australia. One of the directors caused the company to buy a boat that was not registered for commercial use from a company that was owned by his wife. The boat was unsuitable for the proposed business, and sold to the company at an overvalue.

Consequently, the applicants sought a declaration under s 1317E of the Corporations Act 2001 that one of the directors breached the statutory and fiduciary duties owed under s 181 (duty to act in good faith) and 182 (duty not to improperly use their position). The applicants also sought orders that the director pay equitable compensation to the company and that the director pay compensation under s 1317H of the Corporations Act.

Furthermore, the applicants brought claims against the director’s wife and the company associated with the wife for knowing involvement of the breach of the statutory duty and knowing assistance in the breach of the fiduciary duty owed by the director to Australian International Yacht Club Pty Ltd.

The court held that the director’s breaches were dishonest and that the director’s wife, and her company by association, had knowing involvement and assistance in the breach. The court ordered equitable compensation to be made in respect of the purchase of the boat at an overvalue, but held that no order for compensation under s 1317H was necessary.

This case demonstrates the stringency of directors’ duties, and the potential for third parties involved to be held liable as well.

Contractual Dispute Resolved by Close Analysis to Contractual Provisions

The case of Jabcorp (NSW) v Strathfield Golf Club [2021] considered whether a contractor was entitled to additional payment for works required pursuant to a development consent.

Jabbcorp was contracted design and construct a new clubhouse, access road and associated works on land owned by the Golf Club. It claimed that it was entitled to be paid for variations 14A and 59 of the contract on top of the contract price. The notices of variation described the variations as ‘Drainage, pavement and other works surrounding greenkeepers shed to the southern and western sides’ and ‘Works on golf course and outside the construction boundary,’ respectively. The issue was whether those variations fell within the definition of “Excluded works”, rendering the Club liable for payment over and above the contract price.

Jabbcorp’s submission was that the works were ‘Excluded Works,’ because they were works which were outside the construction boundary of the site and were required pursuant to conditions of the Development Consent. However, the Club submitted that the ‘Excluded works’ term, referring to other work being undertaken on the site, were only included for caution in the case that extra work was required.

The court considered the syntax of the definition of ‘Excluded works’ and the constructional choice of the contract objectively, by reference to what a reasonable person would understand. The court dismissed Jabbcorp’s claim because it found that the provision was not intended to refer to work that was already included in the works that Jabbcorp had undertaken, but was intended to cover works made ‘in the future.’

This case demonstrates that complicated contracts which consist of a number of documents that do not seamlessly fit together, will be interpreted by courts according to the words used and the structure of the contract as a whole.

Update and Reminder About Director Resignation Laws

Director resignations are no longer effective if ASIC is not properly notified of the resignation within 28 days or if the resignation would leave the company with no directors. Last year the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) amended the Corporations Act 2001 (Cth) to assist regulators and liquidators with illegal ‘phoenix activity’.  Illegal phoenix activity involves creating a new company to continue the business of an existing company that has been deliberately liquidated to avoid paying outstanding debts, including taxes, amounts owed to creditors and employee entitlements.

Section 203AA of the Corporations Act states that a director’s resignation will only take effect on the original date of their resignation if ASIC is notified within 28 days. If not, the director’s resignation will be the date that ASIC is notified. As such, the practical effect of these changes is that a director will continue to be so until the effective date of their resignation, so the onerous directors’ duties will still apply to them and they may be liable for any actions taken by the company in the interim period.

Additionally, section 203AB provides that a director’s resignation will be void if it means that the company will not have any remaining directors. The few exceptions are where the company is being wound up, the last remaining director is deceased, or the person never consented to act as a director of the company.

These provisions are important for directors to be aware of, as directors may be unable to vacate their position in circumstances where they are the only remaining director.

An Unfortunate Mistake on the PPSR

The case of In the matter of OneSteel Manufacturing Pty Limited (administrators appointed) [2017] NSWSC 21 serves as a reminder of the importance of ensuring that registrations on the Personal Property Securities Register (PPSR) are correct if you are the lessor of plant and equipment or other goods. Alleasing Pty Ltd had leased a crusher and spare parts to OneSteel Manufacturing Pty Ltd. The leases were PPS leases within the meaning of s 13 of the PPSA and Alleasing had registered a financing statement in respect of the crusher, and later the spare parts. However, by mistake, the registrations were entered against OneSteel’s 11-digit ABN and not its 9-digit ACN as required by the PPSA Regulations.

The administrators of OneSteel informed Alleasing that the registrations were ineffective due to their mistake in registration. Alleasing then amended its original registration to include OneSteel’s ACN. The court considered whether the original registrations were valid and if not, whether Alleasing could be entitled to an extension of time to allow the registrations after OneSteel’s administrators were appointed to be declared effective.

The Court held that the original registrations were ineffective under s 165 of the PPSA as a search of the PPSR for OneSteel’s ACN would not have revealed the original registrations. The amended registrations were also ineffective because once administrators had been appointed to OneSteel, Alleasing’s security interest was unperfected, and the property had already vested in OneSteel.

This case is illustrative of the consequences of failing to comply with the complicated regulations of the PPSR. Alleasing had spent over $23 million in funding the design, supply, installation, assembly, construction, and commissioning of the crusher and had funded the acquisition of the parts.

Fiduciary Duties That Apply to Directors

Fiduciary duties apply to directors and require them not to make a profit from their position and not to put themselves in a position where their personal interests conflict with their professional duties on obligations to the company of which they are a director.

Directors may be susceptible to breaching fiduciary duties in circumstances where they are involved in a transaction in which they have a ‘material interest,’ or where a director has misappropriated corporate property, information or opportunities for their own benefit.

A useful example of the stringency of the obligations is the case of Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134. The directors of Regal Hastings formed a subsidiary company with the intention that Regal should hold all the shares in the subsidiary company. They sought a lease of two cinemas for the subsidiary company, for a price of £5000. As Regal did not have the necessary capital to invest £5000 immediately, the directors decided that Regal would invest £2000 and the directors would personally invest £3000. The issue was whether the directors had breached their fiduciary duties by making a profit from the shares issued to them in the subsidiary.

Ultimately, the directors were liable for an account of profits, regardless of the fact that Regal could not contribute the full £5000 themselves or that the directors had acted honestly and bona fide.

The key takeaway is that if a director has ‘a material personal interest’ in a matter that relates to the affairs of the company at a meeting of directors, then the director will need to disclose the nature and extent of the interest to the directors. This is important because the only defence to a breach of the no conflict/no profit rule is that the director had fully informed consent from the company to do a particular act. In Regal Hastings, for example, the directors could have avoided liability by obtaining fully informed consent from the company before investing the money.