Beware the ratchet effect of bad by-laws

A ratchet is a brilliantly simple piece of engineering: easy to turn in one direction – almost impossible to go the other way.

The “ratchet effect” when applied to by-laws, or rules as they are known in some states, means that once decisions are made, they are hard to unmake.  And if the initial decision was based on emotions, it may be too late for logic.

As with most things in strata, it depends very much on where you live.  But in most states, a simple majority in support is not going to be enough to get a new rule or by-law across the line, or change it later on.

In NSW, for instance, it requires 75 per cent of votes (by unit entitlements) in favour for a by-law to pass.  Unit entitlements are the basis on which your levies are calculated – the bigger the flat, the bigger the vote.

And to be clear, that’s votes cast by those owners who bother to turn up to a general meeting or vote by other means – not by everyone in the building.

It’s even harder in Victoria where a Special Resolution in Victoria requires 75% of the total votes for all the lots affected by the owners corporation. Or 50% for and not more than 25% against for it to be an Interim Special Resolution. 

That’s “all the lots affected by the owners corporation”, not just of the lot owners who turned up at an OC meeting. [Thanks, Austman, for this clarification.]

By the way, in Victoria there’s also an Interim Resolution whereby if a special resolution attracts 50 percent of the vote, but not 75 percent, the dissenters have 29 days to lodge at least 25 percent of all owners voting against the proposal

In Queensland, a by-law change or new by-law requires two-thirds in favour at the meeting, provided the “no” vote doesn’t represent more than 25 per cent of all owners.

I know … could we make this more complicated?

Sticking with NSW, let’s take a not entirely hypothetical situation where a dog has been a major nuisance in a strata scheme.

Once it and its owner have been dealt with, the owners corporation decide they don’t want to ever again have to go through that kind of stress and anguish.

A by-law gets put up at the next AGM which says “no pets allowed” and the vast majority of people who turn up think it makes perfect sense.

But then someone else comes along who has a perfectly well-behaved animal and doesn’t realise that the building bans pets.  The new owner thinks a complete ban  based on one bad experience is unreasonable and suggests a less draconian rule.

Sixty percent of owners agree – but that changes nothing because they don’t get to the magic 75 percent – a perfect example of how the ratchet effect allows rules based on emotion to stay in place when logic dictates otherwise.

What I have just described has a lot of similarities to the case of Baxter the dog who became famous this year when his owners took their building to the Tribunal and had a “no pets” by-law overturned.

The majority of owners were happy to change the by-law to bring it into line with Fair Trading’s model by-laws but a sufficient minority wanted no change.

And that’s how the ratchet factor works.  Most people are happy to go with the flow in matters that don’t affect them directly. And if a committed minority can push through the initial change, they will probably still have enough votes to prevent things being wound back.

The ratchet factor will certainly come into play when NSW law changes allow by-laws banning short-term holiday letting.

Based on some surveys, blocks with a majority of investor owners will find it tough to put by-laws in place. On the other hand, it will be even harder to get rid of those that are already there.

Meanwhile, the next time someone in your block is all fired up to pass a radical new by-law, ask yourself and your neighbours how hard it will be to reverse if it doesn’t work.

An edited version of this column first appeared in the Australian Financial Review.

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