Dr Cathy Sherry Associate Professor, UNSW Law,
and author of the new book Strata Title Property Rights: Private governance of multi-owned properties (also available via Amazon Kindle)
I think that Fair Trading is right. The section is very clear and has been in the Act since its inception in 1961. It was designed to prevent the re-emergence of the problems that existed in company title. First, the transfer of shares in company title requires board approval and boards may refuse to approve some purchasers, ie vetting.
Banks did not like this because if they wanted to exercise a power of sale on mortgage default, they just want to be able to sell to the highest bidder and not have to wait around for board approval, which may not be forthcoming.
Because banks considered company title riskier, they were reluctant to lend money for the purchase of a company title unit and that reduced the pool of people who were able to buy and reduced the amount they were able to pay. By prohibiting any restrictions on transfer, such as requiring owners corporation approval for a sale, the section widens the pool of potential purchasers, increasing bank willingness to lend and in turn increasing the value of strata apartments.
Second, company title units frequently restricted letting altogether or required board approval of prospective tenants. This might have increased the value of apartments to a class of purchasers, but markedly decreased its value for investors or people who might need or want to let their apartment at some point.
I suspect it is pretty rare for any of the small number of remaining company title buildings to have blanket bans on letting anymore. It is too economically damaging. The strata title legislation was designed to prevent the potential economic damage to property values that can (but not necessarily) flow from bans on leasing.
This is in no way a new issue. The United States has struggled with it for decades. Bans on leasing used to be much more common but became less popular because they depress values.
Of course short-term leasing is a specific type of leasing, but the general concern remains the same. If people cannot put their property to its highest economic use, which might be short-term leasing, it can depress values. But as you are no doubt thinking, not always; it would increase property values for homeowners and many tenants.
Sorry to sound like an academic lawyer but this is the eternal double-edged sword of private land regulation – it can increase values and be beneficial for some but it can decrease values and be detrimental to others.
The source of the problem is negative gearing and the partial capital gains tax exemption. This has resulted in 50% of apartment stock being owned by investors. A far cry from the ‘home units’ they were initially marketed as. Not surprisingly many investors are only interested in the highest economic return.
There is no easy answer to this dilemma but the answer that the strata legislation very clearly gives is that other owners have no power to restrict an owner’s ability to lease their property.
That said, the model by-law is perfectly valid and I don’t see why you could not enforce it against someone if they are breaching planning law. If the zoning genuinely prohibits short-term leasing, I can’t see why that by-law could not be enforced.
Further, under s123 any person can bring an action to restrain a breach of the Environmental Planning and Assessment Act 1979; it is not the case that only local councils can ask a court to enforce planning law. The ‘Terrigal Party House’ case, Dobrohotoff v Bennic  NSWLEC 61, was an action brought by homeowners in Terrigal, the Dobrohotoffs, to restrain their neighbour, Ms Bennic, from using her house for short-term letting.
The Dobrohotoffs were successful because Justice Pepper held that the use of the property was not sufficiently permanent to be a “dwelling-house” under the local zoning. Justice Pepper was also extremely critical of Gosford City Council for not clarifying the ambiguity in their Local Environmental Plan about what constituted a ‘dwelling’.
If owners corporations believe that people in the building are using apartments in violation of zoning, they might be better off not fussing with by-laws and going straight to the Land and Environment Court. It is important for the strata world to remember that they are part of the wider legal system, subject to it and able to take advantage of it. Short-term letting is not strata-specific; it is a thorny issue for many non-strata property owners too.
I know that might sound nutty given all I have said above, but as I say to my students, law is not a soup pot, it’s a bento box. You don’t just dump all the law in one pot and stir it around. You have to think about how different areas of law related to each other, but they remain distinct areas of law.