Executive summary

In a judgment given on Friday 24 June 2011, the NSW Court of Appeal overturned the recent case of Santai v The Owners – Strata Plan 77971 [2010] NSWCA 628 (Santai), ending a difficult period of uncertainty for developers of more complex strata and community schemes.

It has been common practice for many years for developers to seek to ameliorate development costs, and reduce future strata and community levies, by providing for individual schemes to share common facilities such as pools, tennis courts and gyms, and increasingly infrastructure such as recycled water treatment plants with other nearby schemes and properties. Such shared facilities are often outside the physical boundary of the scheme, so it has been common practice for the scheme association to be empowered by its by-laws to enter into a shared facilities agreement with the adjoining third party to document the right to use and obligations to upkeep the facilities. The view taken was that such agreements enhanced the use and enjoyment by owners and occupiers of the lots and association property of the scheme, and so it was within the power of the association to enter into them.

The Santai case posed many challenges for developers, as it held that associations normally had no power to make such by-laws.

After Santai, if the occupiers within, say, 4 strata schemes were to all have access to a pool, strictly, 4 pools would need to be constructed, one in each scheme. Similarly, in a community scheme context, if neighbouring community schemes wanted, for economic reasons, to share a common sports ground located in the middle of the community schemes, they could not.

The Court of Appeal has now reversed the single judge decision in the Santai case and has taken a much broader view of the powers of associations to enter into such third party agreements. In short, such agreements are valid if the amenity the subject of the agreement is capable of enhancing the owners' use or enjoyment of their lot.

The key principles of the Court of Appeal decision

The key principles of the Court of Appeal's decision are as follows:

  • A valid by-law must have a clear nexus between the by-law's subject matter and the use or occupation of the lot in the strata scheme.
  • There is no precise rule to determine if that nexus exists. The question to be determined is one of fact and degree. In Santai, the amenity was a fitness club, which was a 15 minute walk from the strata scheme and therefore easily accessible by the lot owners. The Court of Appeal found that a nexus existed.
  • For by-laws relating to amenities, the amenities must be capable of enhancing the lot owner's use or enjoyment of their lot. It is not necessary for the amenity to be enjoyed within their lot or the common property of the strata scheme. The amenity can be located outside of the strata scheme.
  • The power to make by-laws should be generously construed and limited only to the doctrine of fraud and a test of reasonableness.
  • The reference to these arrangements in the "original" by-laws of a strata scheme will further assist in making an argument that the by-law is valid. "Original" by-law means a by-law included in the by-laws on the scheme's creation. Buyers of a lot in a strata scheme buy with notice of an original by-law. Only in rare circumstances will an original by-law be deemed invalid.
  • As an original by-law, all owners were (or should have been) aware of the proposed by-law and subsequent third party agreement before deciding to buy the property. This reinforces the importance of disclosing all such arrangements in your contracts for sale before the launch of sales.

Case Note – Casuarina Rec Club Pty Limited v The Owners – Strata Plan 77971 [2011] NSWCA 159

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.