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Hypothetical: strata lawyers differ on Airbnb by-law action
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JimmyT
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14/02/2018 - 1:58 pm
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Towards the end of last year,  NSW Fair Trading ruled – or, at least, stated since they don’t get to make or interpret the law – that Owners Corporations in NSW could not pass by-laws enforcing their residential only zoning.
Since then we’ve had the NCAT ruling in the Woollahra case that overturned a by-law and, on the other hand, the Privy Council ruling in the Turks and Caicos case (as well as learning of a WA Appeals Court ruling).
With these conflicting if not contradictory rulings in mind, I presented five prominent strata lawyers Stephen Goddard, Amanda Farmer, Cathy Sherry, Adrian Mueller and Jessica Bates with the following hypothetical:
An owners corporation has a by-law in place that simply says that, since the building is zoned residential only, and ‘residential’ has been defined by the local authority as being leases of no less than 90 days, lets of less than 90 days are not permitted.
An owner has cited Section 139(2), saying this by-law interferes with their dealing with their lot and is prepared to fight Notices To Comply all the way to the Supreme Court, if need be.
What would your advice to your Owners Corporation be?  Don’t fight it because you won’t win and it will be a waste of money? Or roll the dice and use the WA and Privy Council rulings to support your case?
Now, readers in Victoria should note that a series of high level court rulings in that state, where strata and planning laws are different, have established the principle that strata owners can’t do anything to prevent short-term lets.
The state government has also re-tabled its wildly pro-Airbnb legislation which it will try to ram through Parliament later this year.
But back in NSW, click on the next five pages to see how our panel of lawyers responded:

Stephen Goddard of Goddard & Co

Rolling dice always comes at a cost. It is not up to an Owners Corporation to gamble with the resources of the people it represents any more than it is appropriate for Government to abdicate its responsibility in the development of relevant public policy in the public interest.

Section 139(2) is real and present law.  Short term letting is a real and present threat to the continued public confidence in strata living as a lifestyle of choice.

It is true the denial of the right to make by-laws regulating the commercial use of common property by owners participating in a short term letting enterprise is an unintended consequence of s.139(2).  Section 139(2) was placed in the first 1961 strata legislation for no purpose other than to distinguish the new strata title from company title.  But it is the law and it is the role of Government to remediate “unintended consequences”  – not cavalier OC’s.

I must advise your hypothetical Owners Corporation that I have grave doubts about:

  1. The ability of the local consent authority to define residential use in the terms described; but in any event,
  2. The Strata Schemes Management Act does not empower an owners corporation to make by-laws regulating the leasing of a lot; and as a consequence,
  3. Any litigation commenced or defence by the OC in relation to this by-law:

a. Is a mere crusade made essential by the lack of action on the part of Government; and,

b. Should not be attempted by the Scheme because the OC will fail; and

c. It is the role of Government to amend s.139(2) rather than a group of owners acting like St George trying to slay a dragon.

Amanda Farmer of Lawyers Chambers

This hypothetical owners corporation is in an enviable position as their local authority actually defines ‘residential’ in this helpful way. In my experience, this is rare [Editor’s note: Most if not all City of Sydney residential-only DAs stipulate a 90-day minimum].

In my view, this by-law would not fall foul of section 139(2): it is not the by-law restricting the lease of the lot, it is the local authority. That is to say, even if the by-law didn’t exist, leases of less than 90 days would be illegal.

The by-law merely confirms the position of the local authority, which can be helpful in situations where the local authority may be slow, or even unwilling, to enforce its planning instrument. The owners’ corporation can rely on and enforce the by-law instead of waiting for the council to act.

We don’t need to rely on the WA Court of Appeal or the Privy Council for the above argument. Those cases are helpful where (a) the local authority is silent on the issue or (b) the local authority actually permits short term lets (perhaps on certain terms) and the owners corporation wants to prohibit it.

In either of those circumstances, the reasoning of the WA Court of Appeal and the Privy Council encourages owners corporations wishing to prohibit short term lets to focus on ‘use’ by using terms such as ‘residential’ or ‘settled and usual abode’ in their by-law drafting, rather than blanket references to time periods.

Of course, the above view is general in nature only and owners corporations wishing to deal with the issue of short term letting need to obtain advice specific to their situation. Your question highlights the fact that such advice should always include proper consideration of the applicable planning instruments.

 

Dr Cathy Sherry, Associate Professor of Law at UNSW

My reply would be ‘what does the planning law say?’ It varies from council to council. Where did the 90 days come from? If that is what the local planning law says, then it would be OK but if it is not consistent with planning law, then it is not. It will depend on the council area in which the building is situated.

Also, it depends on the state. NSW has s28 of the Environmental Planning and Assessment Act 1979. If a by-law is inconsistent with planning law, it will be overridden to the extent of inconsistency. But that is not the case in all states eg in the WA Byrne decision, the judge seemed to have no problem with the idea that a privately-made by-law could override a public planning consent. That seems untenable to me and is certainly not the law in NSW.

 

 

Adrian Mueller of JS Mueller & Co

The by-law would be invalid as it would clearly restrict the right of an owner to lease their lot for less than 90 days. Therefore, I would advise the owners corporation to repeal the by-law and make a new by-law that would be valid and enforceable.

The new by-law would prohibit an owner or occupier of a lot using the lot, or allowing the lot to be used, for unlawful short term accommodation. This by-law would be valid because it would prohibit a particular type of use of a lot, namely unlawful short term accommodation, rather that prohibiting leases of less than 90 days.

The distinction between a by-law that prohibits a type of use, and a by-law that prohibits a type of lease, is a neat but important one.

A by-law prohibiting a type of use (such as unlawful short term accommodation) is valid (despite what Fair Trading or NCAT might say) but a by-law prohibiting a type of lease (e.g. a lease for 90 days or less) is not.

The highest court in NSW has held that a by-law is able to prohibit lots being used for particular purposes. That is why the slightly re-worded by-law would work and could be enforced through NCAT or the Supreme Court to put an end to an owner using their lot for unlawful short term accommodation..

 

Jessica Bates, Senior Associate with Sachs Gerace Broome.

 

When a client seeks advice from me on a legal problem, their expectation is that I will provide them with a simple and definitive answer without any caveats and that I can guarantee that my answer is “correct” and, where the problem involves legal proceedings, that they will be successful in those proceedings.

The difficulty with this expectation is that the law is not the same as mathematics. In my experience, there is not always a simple and definitive answer (eg 1 + 1 = 2). Even if I am of the view that my client has a strong argument and that such argument will be successful in legal proceedings, the judicial officer hearing the case may still find against my client.

I can never guarantee to a client that their argument will be accepted by the judicial officer hearing it, as a judicial officer can hear the argument, consider the evidence and apply the law and reach a different conclusion (sometimes as a result of having misapplied the law).

As a result, the ability to appeal a decision made by a judicial officer (subject to having standing to appeal) is an important safeguard and right of all litigants in Australia. Sometimes, a decision is appealed a number of times before a final decision is provided and the proceedings are finalised.

The downside of appeals (and legal proceedings generally) is of course the costs involved. Litigation is expensive. Appealing a decision is expensive. There remains, throughout the legal proceedings including any appeals, the risk of a client being unsuccessful and having to pay money to the successful party, in addition to their own costs. For this reason, if I can assist a client to avoid or extricate themselves from legal proceedings, I will.

However, the reality is that sometimes there is no avoiding legal proceedings, especially when a client is involuntarily dragged into proceedings as a defendant.

The hypothetical

Bearing in mind all of the above, I turn now to deal specifically with the hypothetical by-law and advice sought by the hypothetical Owners Corporation client.

It is clear that the issue of short-term letting is a vexed one. There are arguments on both sides that have merit and no doubt there are many lawyers, owners and owners corporations in New South Wales who are eagerly awaiting a final determination, either through a judicial decision or legislative intervention, on whether or not short term letting by-laws can be enforced by owners corporations.

In the recent Western Australian Court of Appeal decision of Byrne v The Owners Of Ceresa River Apartments Strata Plan 55597 [2017] WASCA 104 (Byrne case), the Court of Appeal determined that the by-law the subject of the appeal restricts the use to which an owner may put their lot so that a lot may only be occupied by persons who use the lot as their settled or usual abode.

The lot cannot be used by people as tourist accommodation or to live in whilst on holidays or breaks from their settled or usual abode. The Court of Appeal determined that this restriction on use does not infringe the Western Australian equivalent of section 139(2) of the Strata Schemes Management Act 2015 (SSMA) (no by-law is capable of operating to prohibit or restrict the devolution of a lot or a transfer, lease, mortgage or other dealing relating to a lot).

After considering both sides of the argument and the Byrne case, I prefer the argument that by-laws prohibiting short term letting are by-laws restricting the use of a lot, rather than restricting the right of the owner to lease the lot and are permissible and enforceable.

The hypothetical by-law restricts the use of lots in the hypothetical strata scheme to residential occupation. Residential occupation is apparently defined in the by-law, by reference to the relevant planning controls, to be a lease of the lot of not less than 90 days.

The effect of this by-law is to prohibit the lot being used for short term letting. Section 136(1) of the SSMA confirms that by-laws can be made for the use of lots in a strata scheme (this by-law regulates the use to which lots may be put) and section 136(2) confirms that a by-law has no force or effect to the extent that it is inconsistent with the SSMA, or any other Act or law (this by-law is not inconsistent with the SSMA or any other Act or law and specifically adopts a definition in the relevant planning controls).

Subject to consideration of all of the relevant by-laws for the strata scheme, in my view it is arguable that the by-law is permissible and enforceable.

My advice …

Having regard to all of the above, my advice to the Owners Corporation client would be that:

  1. The Owners Corporation can pursue enforcement of the by-law in NCAT as there is an arguable case that the by-law is permissible and enforceable including by relying on the Byrne case;
  2. Notwithstanding my view that there is an arguable case, there of course remains a risk that the by-law will be held to be unenforceable;
  3. The Owners Corporation should anticipate that one or more appeals may be lodged (including by the Owners Corporation itself) and therefore appeal costs should be factored into the anticipated legal costs of the proceedings, in addition to the costs of pursuing the initial enforcement of the by-law in NCAT;
  4. The Owners Corporation should determine whether or not short term letting is so much of a problem in its strata scheme that it is prepared to incur substantial legal costs to obtain a final and binding determination as to the enforceability of its by-law and whether or not it is prepared to accept the consequences (including a possible costs order being made against the Owners Corporation) should the by-law be held to be unenforceable;
  5. The Owners Corporation should consider the possibility of seeking out and joining forces with other owners corporations (who also want guidance on the enforceability of their by-laws prohibiting short term letting) and entering into an arrangement in relation to legal costs so that there can be a sharing of legal costs amongst all of the owners corporations, but only one owners corporation pursues the argument in NCAT.

If, ultimately, by-laws prohibiting short term letting are unenforceable, then that is not the end of the matter. The next step would be for owners corporations to consider how best to deal with the impact of short term letting on their individual strata schemes.

Consideration would need to be given to making a new by-law to regulate the use by short term letting occupiers of common property, including in an attempt to minimise, as much as possible, any financial burden that short term letting can have on a particular strata scheme.

I am of the view that it is fair and reasonable for owners using their lot for short term letting to be required to pay a fee to the owners corporation to help offset any increased costs or risks that the owners corporation has or may have in the future as a result of the use to which those owners are putting their lots.

Owners who do not use their lots in a similar manner should not be liable to pay increased costs to, for example, repair and maintain the common property, particularly where those increased costs would never have arisen if there were no short term letting in the strata scheme.

 

 

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