Watergate – the complete story

A number of articles in a variety of publications have covered the recent decision of the Victorian Court of Appeal involving the use of class 2 buildings for short term accommodation. Most of the articles, including those written by me, have been relatively brief, focussing on the points that are critical to our industry.

However it is a worthwhile exercise to look in more depth at the background to the case and at some of the comments made by the Court of Appeal in its judgement.

Background – The case concerned a 340 apartment, twin 16 storey complex perhaps aptly named Watergate in the Docklands area of Melbourne. Most of the apartments in the complex were occupied by owners or long term tenants. Paul Salter, a fellow owner operated a business of letting out apartments in the complex for short term accommodation, predominantly for two to three days.

Although not an appointed onsite letting agent, Mr Salter and his partner carried on the letting business and provided all of the ancillary services typically offered by managers of serviced apartment buildings. Like most apartment buildings, Watergate was a class 2 building under the Building Code of Australia, a code adopted by all states. That defines a class 2 building as a building containing 2 or more sole-occupancy units each being a separate dwelling.

The term “dwelling” is not defined in the BCA but “sole-occupancy unit” is defined as a room or other part of a building for occupation by one or joint owner, lessee, tenant, or other occupier to the exclusion of [others] and includes, amongst other things, a dwelling.

The building legislation in all states requires, in effect, that buildings may only be used for purposes permitted by their classification and not for any purpose permitted only by another classification.

Council action – A group of disgruntled live-in owners in Watergate persuaded the Melbourne City Council to take action against Mr Salter in relation to the short term letting operation essentially on the grounds that class 2 apartments could not be let on a short term basis. The council’s building surveyor issued a notice to Mr Salter directing that the use of one of the apartments for short term accommodation or the like is prohibited and to produce within 30 days evidence that the apartment is used by the owner or leased for a minimum of 30 days or, alternatively, do what was required to convert the apartment from a class 2 to a class 3 under the Building Code of Australia.

The thrust of the council’s argument was that the term dwelling, when used in the class 2 definition, referred to residential occupancy of a permanent or long term duration.

Appeals board – Mr Salter appealed to the Victorian Building Appeals Board against the council’s notice but failed in that appeal with the board upholding the validity of the notice. The essential findings of the board were:

• The definition of dwelling did not include the use by short term guests in the context of a commercial hotel like operation;

• Any period of occupancy up to 30 days was short term; and

• The council was correct in its claim that the use of the apartments for short term accommodation presented a danger.

Supreme court – Mr Salter successfully appealed to the Supreme Court of Victoria which, in handing down its decision, ruled:

• The board misconstrued the BCA when interpreting the word “dwelling” as excluding short term residential usage;

• The concept of dwelling encompasses short term holiday accommodation, there being no rational basis for limiting the word dwelling to just long term residential usage;

• There was no evidence that the apartments being utilised for short term accommodation were a danger; and

• The board erred in law in making its findings, its decision should be quashed and the matter sent back to a differently constituted board for determination in accordance with the law.

Not satisfied with the Supreme Court’s ruling, the council appealed to the Victorian Court of Appeal.

Court of appeal decision – Both judges dismissed the council’s appeal and upheld the Supreme Court’s decision that the matter should be sent back to a differently constituted board for proper determination. Justice Nettle found that the board’s decision was
based on the misconceived view of the definition of dwelling.

Justice Osborn found there was nothing in the classification definitions that suggested that the characterisation of a sole occupancy unit as a dwelling depended on the duration of its residential occupancies. He said that there was no justification for implying additional conditions imposing a requirement of long term residency.

Both judges referred to other definitions in the BCA where reference was made to the duration of the residential usage. As Justice Osborn pointed out the definition of class 1(b) expressly contemplates that a dwelling may be used for short term accommodation.
Observations – Whilst the decision is a welcome one providing certainty in an area that had become somewhat blurred in recent years, it should not be seen as support for the proposition all management rights operations, however similar to an hotel, can be conducted in class 2 buildings.

Justice Nettle in particular commented on the circumstances where a hotel like management rights operation might necessitate a class 3 classification. A class 3 building by definition includes a residential building (other than one of class 1 or 2) that is a common place of long term or transient living for a number of unrelated persons, including (amongst others) a residential part of a hotel or motel.

He commented that there is not a lot of difference between hotels, or more commonly motels, that comprise self-contained units on the one hand and on the other hand a serviced apartment enterprise comprising self-contained units let out as short term hotel-style accommodation. While the former require a class 3 classification, he commented that in certain circumstances the latter might also require a class 3 classification.

If, for example, all of the apartments were being used as serviced apartments and provided with the full gamut or a substantial cross-section of the services customarily expected of a decent hotel, such as reception facilities, dining and restaurant facilities, laundry facilities, swimming pool, gymnasium and a business centre then you could reasonably conclude that the apartments so much resemble the residential part of an hotel as to be properly classified as class 3.

It will always be a question of degree.

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