How to Secure Strata Defect Costs with Freezing Orders: Owners Corporations v Aqualand Case Study

Introduction

Owners corporations in New South Wales often face significant challenges when trying to recover funds for building defects from developers. Developers frequently use complex corporate structures to protect their assets, making it difficult for strata stakeholders to secure the compensation needed for defect rectification.

A 2025 Supreme Court case has demonstrated that freezing orders can be a powerful legal tool for owners corporations, ensuring that developers cannot dissipate assets to avoid liability. This guide explains how freezing orders work and why they matter for anyone involved in navigating strata disputes.

Interactive Tool: See If You Qualify for a Strata Freezing Order

The Challenge of Recovering Strata Defect Costs from Developers

Why Recovering Rectification Costs for Your Strata Property is Difficult

The property development industry has become increasingly astute, with developers often implementing protective corporate structures to safeguard their assets. Consequently, when legal claims for building defects emerge after construction is complete, owners corporations face significant challenges in securing compensation.

Key factors include:

• Protective corporate structures prevent owners corporations from recovering sufficient compensation to cover the necessary costs of rectification.
• Asset protection strategies effectively shield the broader development group from liability, leaving the owners of a strata scheme to bear the financial burden.

How Developers Use Special Purpose Vehicles to Limit Liability

Developers frequently establish a special purpose vehicle (SPV) as part of their corporate structure for a particular project.

Common characteristics of an SPV:

• Single-purpose entity created specifically for a single development
• Distinct corporate entity operating within a larger corporate group
• Risk isolation that confines the financial and legal liabilities to that one project

To illustrate, consider a developer that uses an SPV to build a new apartment complex, so that if the owners corporation later files a claim for defect rectification costs, the claim is directed against the SPV.

However, this vehicle may have no significant assets beyond the development itself, severely restricting the owners corporation’s ability to recover funds from the more financially robust parent company, whose assets remain protected.

A Case Study: The Aqualand Freezing Order

The Milsons Point Building & the $10.6 Million Strata Defect Claim

The legal dispute in The Owners – Strata Plan No. 102081 v Aqualand Constructions Pty Ltd [2025] NSWSC 31 involves a mixed-use strata building in Milsons Point, Sydney. This property consists of 125 residential lots and two commercial lots and was completed in July 2021.

Following the building’s completion, defects were identified, prompting the owners corporation to commence legal action against the developer, a process that raises the question of how owners corporations can sue for building defects. A claim was filed in the Supreme Court of New South Wales seeking $10.6 million to cover the rectification costs, an amount substantiated by evidence from a quantity surveyor.

Understanding Aqualand's Use of a Special Purpose Vehicle

The developer of the Milsons Point building was Aqualand North Sydney Lavender Development Pty Ltd, which operated as a special purpose vehicle (SPV). This corporate structure is a common practice in the property development industry, where a company is established solely to undertake a specific project within a larger corporate group.

In this case, the SPV’s only function was to develop the Milsons Point site. Notably, its operations included:

• Selling off 121 of the 125 residential units.
• Not retaining the proceeds from those sales.
• Distributing profits to other entities within the broader Aqualand group, a key fact that became central to the court’s later decisions.

How to Secure a Strata Freezing Order

Identifying the Risk of Developer Asset Dissipation

An owners corporation’s primary concern is often the risk of a developer dissipating its assets before a defect claim can be resolved. In the Aqualand case, the developer's only significant assets were four remaining residential lots within the building.

The owners corporation was worried that once these lots were sold, the proceeds would be distributed throughout the developer's corporate group. This action would leave the developer company with no funds to pay for the rectification costs.

Such a situation would have two major consequences:

• The developer company would have no assets to satisfy any judgment awarded.
• The continuation of the court case would be rendered pointless, as there would be no assets available to enforce any judgment.

Applying to the Supreme Court for an Asset Freezing Order

To protect its interests, an owners corporation can take proactive legal action by applying to the Supreme Court of NSW for a freezing order. In November 2024, the owners corporation in the Aqualand matter made such an application against the developer.

The application sought to:

• Prevent the developer from disposing of or diminishing the value of its assets up to the claimed amount of $10.6 million.
• Ensure that sufficient assets would remain available to satisfy a potential judgment in the building defects case.

The developer resisted this application, arguing there was no basis for the court to make such an order.

Why did the Supreme Court Grant the Freezing Order?

How the Court Protected the Owners Corporation’s Interests

On 6 February 2025, the Supreme Court of NSW ruled in favour of the owners corporation, granting a freezing order against the developer. This decision was a crucial step in protecting the strata scheme’s interests, as it prevented the developer from disposing of or diminishing its assets up to the value of the $10.6 million defect claim.

The court was persuaded that two significant risks justified the order:

• selling its last four residential lots and distributing the profits throughout its corporate group, as it had done with the previous 121 sales
• ensuring that sufficient assets would remain available to satisfy a potential judgment, preventing the owners corporation from being left without a remedy if its claim succeeded

The Legal Test for Granting a Strata Freezing Order

Under Regulation 25.11 of the Uniform Civil Procedure Rules 2005 (NSW), the court must be satisfied that there is a danger that a future judgment will be wholly or partly unsatisfied.

A freezing order is considered an extraordinary remedy, and the applicant must demonstrate a real risk that the other party might dissipate its assets.

In the Aqualand case, the court applied this test by examining the Aqualand case and the developer’s conduct. Key factors included:

• The developer was a special purpose vehicle (SPV) whose only function was to develop the Milsons Point site
• It had a history of distributing proceeds from unit sales to other entities within its corporate group rather than retaining them
• It was reasonable to infer that, without a court order, the developer would continue this practice with the sale of the final four lots

Based on these facts, the court concluded that the requisite danger existed, justifying the order to preserve the developer’s assets.

What Happened When the Developer Appealed the Original Freezing Order?

The Developer's Argument Against the Freezing Order

In response to the initial ruling, the developer sought leave to appeal the decision.

They argued that the freezing order—an extraordinary legal remedy—was unjustified in this context. Specifically, they maintained that distributing profits from a special purpose vehicle (SPV) to related corporate entities was:

• An ordinary course transaction rather than an unwarranted legal constraint.
• A choice rooted in commercially rational business practice.

The Court of Appeal's Reasoning for Upholding the Strata Order

The Court of Appeal, in Aqualand North Sydney Lavender Development Pty Ltd v The Owners – Strata Plan No. 102081 [2025] NSWCA 143, ultimately dismissed the developer's appeal, upholding the freezing order.

It found that the developer’s distributions were not made in the ordinary course of business. In particular, the court noted:

• The transactions did not involve routine liabilities, such as paying trading debts.
• The SPV’s sole function was to complete the Milsons Point development.
• Disbursing all profits risked leaving a successful claimant without recourse.

Moreover, the court emphasised that permitting such distributions posed a sufficient danger that a future judgment would remain unsatisfied, thereby satisfying the legal test under Regulation 25.11 of the Uniform Civil Procedure Rules 2005 (NSW).

Key Lessons for Strata Owners Corporations & Developers from the Aqualand Case

A New Strategy for Owners Corporations in Strata Disputes

The Aqualand case establishes a positive precedent for owners corporations in New South Wales, demonstrating that freezing orders are a powerful legal tool to protect their financial interests. It also shows that an owners corporation with a legitimate building defect claim can take proactive steps to prevent a developer from dissipating assets, which is a key part of the question of who pays for a building defect.

Furthermore, the decision confirms key safeguards:

• The Supreme Court is prepared to grant freezing orders in appropriate circumstances.
• A strata scheme at risk of being left without a remedy is protected from a developer dealing with its assets without restraint, ensuring accountability.

Understanding the Limitations of SPVs for Developer Asset Protection

Developers should recognise that a special purpose vehicle (SPV) structure may not provide the absolute asset protection they anticipate. The Aqualand case serves as a clear warning that the court is willing to intervene to protect an owners corporation with a valid defect claim.

Developers must also consider:

• Difficulty in resisting a freezing order application if there's genuine concern over asset dissipation.
• The risk of being ordered to pay legal costs when such resistance fails.

The Broader Impact on Strata Defect Litigation in NSW

The significance of this ruling extends beyond owners corporations and developers, setting a precedent with broader ramifications for building defect litigation across the strata sector.

Additionally, other parties in complex construction disputes may adopt this legal strategy. For instance, a builder with a cross-claim against a developer could explore applying for a freezing order to secure their own financial position.

Conclusion

The Aqualand case represents a significant win for owners corporations in NSW, demonstrating that proactive legal action can protect their financial interests in strata defect disputes. This decision confirms that freezing orders are a powerful tool to prevent developers from dissipating assets, ensuring they remain accountable for rectification costs.

If you are a developer seeking guidance on navigating the complexities of freezing orders and strata defect litigation, contact our strata lawyers for developers at PBL Law Group in Sydney for tailored strata legal advice and protection of your interests. Owners corporations concerned about developer asset dissipation can also consult our specialist strata lawyers for owners corporations to understand their options and secure their rights.

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