Beware the “by-law buster”
In NSW, owners corporations can adopt by-laws that restrict the type of use of lots in strata schemes.
Accordingly, by-laws can designate that only the resident manager’s lot can be used for the purpose of the carrying on a letting business or that all other lots cannot be used for the purpose of a competing real estate agency.
These by-laws are important as they entrench the resident manager’s exclusivity to carry out lettings and sales within a strata complex. These restrictions are generally backed up by similar restrictions in the caretaking or letting agreements. By-law restrictions, when coupled with long-term caretaking agreements, “bubble wrap” the management/letting business and make management rights the safe investment that banks are keen to fund.
However, in a city like Sydney, there are many large residential buildings that have ground-level commercial lots as part of the strata scheme. Clearly, a resident manager does not want a real estate agency operating from one of these lots in direct competition. Consequently, resident managers rely heavily on the contractual exclusivity contained in the caretaking and letting agreements with the owners corporation and the by-laws that reinforce this exclusivity.
Notwithstanding a well bubble-wrapped business, resident managers should beware of the by-law buster. Section 28 of the Environmental Planning and Assessment Act 1979 (state legislation) effectively allows councils, if they elect to adopt application of the section, to prohibit covenants or by laws that purport to override a town planning instrument. Consequently, in simple terms, (using the example above) if a ground floor commercial lot has development approval from council to be used as a real estate agency, a by-law cannot override this approval.
How to deal with the “by-law buster”
If you are a resident manager and you become aware that a real estate agency is intending to open up business in a lot in your strata plan, you need to immediately point out to your executive committee that any approval granted by the owners corporation will constitute a breach of the by-laws and (most likely) a breach of the management agreements.
Any development application relating to a strata building will almost certainly require the consent of the owners corporation before the development application can be lodged with council. In my view, this consent can be granted at executive committee level. If the executive committee (or the owners corporation, at a general meeting) signs such a consent, it is almost certainly committing a breach of a term of your caretaking and/or letting agreement, as well as breaching the owners corporation by laws.
If that development application is subsequently approved by council and a real estate agency commences business in competition to the resident manager, there is every chance that the resident manager will lose rentals to the real estate agency and suffer a significant financial loss.
Moreover, the capital value of the management rights business will drop and significant damages could be payable by the owners corporation.
Summary
• Firstly, you need to be aware of the operation of section 28, particularly if buying into a large inner-city complex with commercial or retail lots on the ground or lower levels;
• Secondly, remain vigilant to the use of the commercial lots. If you get any indication that a real estate agency may be seeking to set up in your strata scheme, immediately move into battle mode;
• Thirdly, make sure you or your solicitor alerts the executive committee to the possible damages which may flow if the executive committee or the owners corporation consents to the lodgement of such a development.
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