In NSW, the owners corporation are statutorily obligated to maintain and keep all common property in a state of good and serviceable repair. Unfortunately, in many cases, the owners corporation are negligent in fulfilling this duty causing financial loss to lot owners and the owners corporation indirectly. NSW statute allows for strata lot owners to recover damages from the owners corporation but only where certain criteria of foreseeability and mitigation are met. In this article, we explore a Supreme Court case of the recent judgement of Smith v Owners – Strata Plan No. 3004  NSWSC 1599 which confirms the requirement for foreseeability and mitigation of damage, when seeking to recover compensation from the owners corporation.
Table of Contents
- Background to the case
- Legal Principle #1: Owners corporations have a duty to maintain and repair common property
- Legal Principle #2: Lot owners have a right to recover damages for reasonably foreseeable losses
- Legal Principle #3: Damages cannot be recovered for losses that could be mitigated by lot owners
Background to the case
In the case of Smith v Owners – Strata Plan No. 3004, the Smiths were the lot owners of an investment unit in a strata building. When the unit’s lease expired, the Smiths decided to replace the carpet before re-letting the unit. This is when they noticed damage to the living room’s magnesite flooring close to the balcony’s glass sliding door. Upon lifting up the flooring (of which a significant part was broken off as a consequence), the damage was observed to have been caused by the ingress of water from the area underneath the sliding door. The Smiths decided to not rent the unit out as they deemed it unsafe and uninhabitable. The Smiths claimed damages from the Owners Corporation to cover the loss of rent for the entire duration of 3.5 years the unit remained vacant due to pending common property repairs.
The Local Court held that the Smiths were entitled to damages for loss of rent but only for a period of three months. The loss of rent was a reasonably foreseeable outcome of the Owners Corporation’s failure to rectify damage to common property. However, it was not reasonably foreseeable that the unit would remain empty for the entire duration that the repairs remained pending. The Smiths could not prove that the unit was unsafe for residence. They made a commercial choice to not let out the unit for which the Owners Corporation was not responsible. The case reached the Supreme Court of New South Wales in appeal, where the Local Court’s decision was upheld.
Legal Principle #1: Owners corporations have a duty to maintain and repair common property
The first relevant legal principle to consider when lot owners are considering recovering damages from the owners corporation is the owners corporation’s strict statutory obligation to maintain, and keep in good and serviceable repair, any common property and any personal property vested in it. As provided for under section 106 of the Strata Schemes Management Act 2015, the owners corporation also has a duty to renew or replace any fixtures or fillings compromised in the vested common or personal property.
It is an established legal position that the breach is considered to have occurred as soon as something in the common property stops working effectively or falls into disrepair. This principle is protective of the lot owner’s interest. The absolute nature of duty imposed on owners corporations ensures accountability for any maintenance and/or repair carried out in the common property.
In the current case, the Owners Corporation was held to be in breach of its duty. This is because it failed to keep the waterproof membrane to the balcony in a state of good and serviceable repair. The worn off membrane ultimately caused damage to the flooring.
Legal Principle #2: Lot owners have a right to recover damages for reasonably foreseeable losses
In accordance with Section 106(5) of the Strata Schemes Management Act, 2015, the lot owner may recover damages for any reasonably foreseeable loss caused due to the owners corporation’s breach of duty to maintain and repair common property. This lot owner’s right of recovery is dependent upon the characterisation of the loss as “reasonably foreseeable”. Further, the loss must be suffered by the owner as a result of owners corporation’s breach of duty under Section 106.
It must be noted that damages are assessed on the:
- foreseeability of the loss, and
- connection between the loss and the owners corporation’s breach of duty. This means that the loss should be an outcome of the breach, not a far-fetched effect.
The nature or type of damage is of utmost importance in strata disputes of this nature. Even if the degree of damage or the precise manner in which the damage occurs is unforeseeable, recovery is still available if the type of damage could be foreseen. To put it plainly, if the type of damage cannot be reasonably foreseen then the owners corporation does not have to compensate for the damage.
What is not a reasonably foreseeable loss?
Damages cannot be recovered for:
- a loss that could not be reasonably foreseen as an outcome of the owners corporation’s breach of statutory duty to maintain the common property, or
- any loss that has occurred due to an unreasonable action on the owner’s part.
That being said, an owner’s action cannot be considered unreasonable simply because the owners corporation can suggest an alternate or more beneficial conduct. If the owner’s action itself is reasonable, damages could still be recovered.
In this case, it was observed that the loss of rent was reasonably foreseeable due to failure of the Owners Corporation to repair the common property. However, it could not be reasonably foreseen that the unit would remain vacant for the entire duration the repair work remained pending. Additionally,the Court determined it was not reasonable for the Smiths to remove the common property magnesite flooring by themselves and not pursue with the repairs. The Court found that it was unreasonable for the Smiths to make a “commercial choice” to not let out the property until the floors were repaired while also taking into account the lack of any reasonable concern about the safety of the unit. Therefore, the owners corporation was not held liable in damages for the loss of rent for the entire duration of vacancy.
Legal Principle #3: Damages cannot be recovered for losses that could be mitigated by lot owners
Critically, the lot owner’s right of recovery is not an unqualified right to claim all damages. Lot owners should take reasonable efforts to minimise their losses. The property owner must attempt to limit the harm they suffer due to the owners corporations breach of duty including, amongst other things, making reasonable efforts to re-let the lot property to mitigate the loss of rent.
However, when bringing a suit for recovery of damages, it is not the duty of the owners to prove that they tried to mitigate the losses. The onus lies on the owners corporation to show the owner’s failure to minimise losses. When questions arise about the appropriate amount of damages that can be awarded, the owner’s conduct plays a pivotal role where failure to mitigate can reduce the extent to which the loss is considered recoverable in the owner’s favour.
What amounts to failure to mitigate losses on part of the lot owner?
Failure to mitigate losses essentially means taking no steps to cut down on the amount of damages resulting from a breach of duty. It can include the following actions on the strata owner’s part:
- Delay in notifying the owners corporation about the damaged or defective items in the common property.
- Making no efforts to temporarily repair and re-let the lot property.
- Unreasonable and unjustified actions which make the damage worse and the lot property becomes uninhabitable because of it.
- Carrying out unauthorised work or altering the common property and causing more damage in the process.
In this case, the Smiths did not mitigate their loss by renting out the property until the repairs took place, despite there being no safety concern. Further, the immediate cause of the property being unlettable later was the owner’s unreasonable and commercial decision to remove a large part of the magnesite flooring. Highlighting these reasons, the court curtailed the damages recoverable in this case to three months rent only.
In conclusion, the owners have a right to recover damages where the owners corporation fails to repair and maintain the common property. However, the right of recovery is limited to damages which can be reasonably foreseeable as a consequence of the owners corporation’s breach of duty. While the extent or manner of damage might not be foreseeable, the type of damage certainly should be.
Further, owners should also take reasonable steps to mitigate their loss. This affects the amount of damages that can be recovered. Where the owners have failed to do so, the owners corporation can argue for reduction of damages. The owners corporation can claim that the lot owners did not undertake any measures to mitigate losses.
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