Liu & SP91684: indemnity clauses, fob deactivation and severability
The Owners – SP No 91684 v Liu; The Owners – SP No 90189 v Liu [2022] NSWCATAP 1
In short
Indemnity clauses in by-laws are valid.
Recovery of those indemnity entitlements is impermissible through a levy.
A by-law suffering from an invalid term cannot be severed to give the balance operation.
Preventing access to a lot through the deactivation of fobs is unlikely to be a valid measure.
Background
The lot owner owns a lot in two neighbouring residential strata schemes. Both strata schemes introduced a by-law restricting short-term letting, which were in the same terms and challenged in the Tribunal by the lot owner. The matters were heard together at first appearance and on appeal.
Relevantly, the by-law included terms that would permit the owners corporation to:
deactivate fob access devices where there was a breach of the by-law, thereby precluding access to the lot;
indemnify the owners corporation against any claims including legal and administrative expenses as a result of breach; and
recover those costs and expenses as a “levy debt”.
At first instance, the Tribunal held that the by-law was invalid on two bases:
the fob deactivation was “harsh, unconscionable or oppressive” for the purposes of section 150(1) of the Strata Schemes Management Act 2015; and
the owners corporation did not have the power to make a by-law providing for the recovery of costs and expenses through a levied contribution.
Having found those two components of the by-law to be invalid, the Tribunal considered whether they could be severed from the wording of the by-law, or whether the by-law should be invalidated in its entirety.
The Tribunal held that the appropriate order was to invalidate the by-law in its entirety.
The law
Section 150(1) of the Act empowers the Tribunal to make an order declaring a by-law to be invalid if:
the owners corporation did not have the power to make the by-law; or
the by-law is harsh, unconscionable or oppressive.
On appeal
The appellant owners coporations raised a number of appeals, mostly on questions of law as to the incorrect application of the legal tests when considering the triplet wording “harsh, unconscionable or oppressive”, finding that the by-law was without power and that the offending parts could not be severed.
The appellants were unsuccessful on all grounds of appeal.
Key propositions
The triplet “harsh, unconscionable or oppressive” remains the subject of ambiguity.
Deactivation of fobs, in the absence of explicit rigid guidelines, is against the weight of upholding the fundamental proprietary right of accessing that property.
The indemnity clause, for costs and expenses associated to the breach, was valid.
It is impermissible to recover those entitlements with a levy on the basis that the power to make such a levy does not arise in the Act.
The power in section 150(1) to invalidate a by-law is only in respect of the entirety of the by-law, not parts of the by-law. By-laws are accordingly incapable of severance where invalidity arises.
The Tribunal does not have power under section 150 to correct the wording of a by-law affected by invalidity.
The decision does not rule out the possibility of enforcing the indemnified amounts through means other than a levy.