VIC: Q&A What is the benefit principle for an owners corporation?

This Q&A is about the benefit principle in a Victorian owners corporation.

Table of Contents:

• QUESTION: Can the benefit principle apply to fire safety works on non-common property walls where some lots benefit more than others?
• QUESTION: Our building is in a larger precinct. Buildings pay into a precinct maintenance fund. We pay more than what is fair. How is our unit of liability calculated, and can it be changed?

Question: Can the benefit principle apply to fire safety works on non-common property walls where some lots benefit more than others?

I own a lot in a 12-lot strata building in Melbourne. The building has fire safety defects, including unsealed party walls and service penetrations, which the owners agreed to repair at a shared cost based on lot liability.

During the works, we discovered that the corridor walls are built with non-compliant material and need replacing at an additional cost of $190,000. The plan of subdivision shows that these corridor walls are not common property. About half the lots contain these walls entirely, while the rest have only a small section above their entry door to repair.

Given that the walls are not common property and some lots will benefit more from the works, can we apply the benefit principle so that those who benefit more pay more? Or must the cost still be shared according to lot liability since the works improve the building’s fire safety overall?

Answer: Given that the walls are not common property and the benefit of the works is not evenly distributed, there appears to be a good argument for applying the benefit principle.

Under section 49 of the Owners Corporations Act 2006 (Vic), an owners corporation may recover the cost of repairs, maintenance or other works from lot owners on the basis that the lot owner who benefits more pays more, known as the ‘benefit principle’.

The case of Owners Corporation PS407621Y v Grundl (Owners Corporations) [2017] VCAT 1550, clarified the factors to consider. The case said that, when faced with deciding how to share the cost of building works like fire safety upgrades, an owners corporation must first ask itself a key question: Do all lots benefit substantially from the works, or do some lots benefit more than others?

If the owners corporation genuinely believes that all lots benefit substantially, then it must allocate costs according to lot liability. The Tribunal won’t overturn this decision unless it’s so unreasonable that no honest and careful committee could have made it.

If the owners corporation decides that some lots benefit more than others, for example, if certain lots contain the walls being upgraded while others only receive the indirect benefit of the whole building being improved, it must apply the benefit principle. In this case, the owners corporation must assess how much each lot benefits and apportion the costs accordingly. Again, it must do this in good faith and with reasonable care.

In your scenario, half of the corridor walls are lot property, and the other lots only have a small area above their entry doors affected. Since the walls are not common property, the owners corporation is not automatically responsible for their repair under section 46 of the Act. However, if the works are necessary to ensure compliance with fire safety regulations and affect the safety of the building as a whole, the OC may still have a role in coordinating or facilitating the works.

Given that the walls are not common property and the benefit of the works is not evenly distributed, there appears to be a good argument for applying the benefit principle. The Grundl decision supports apportioning costs based on the degree of benefit received. In this case, lots that own the corridor walls and will receive the most direct benefit from the upgrades (such as improved fire separation and compliance) could arguably be required to contribute more than other lots, who still derive the benefit of a safer building, but whose benefit is incidental.

The fact that the walls are not common property strengthens the case for applying the benefit principle, as the works are not for the collective benefit of all lots in the same way that common property repairs would be. Instead, the benefit is localised and uneven, which aligns with the statutory intent of section 49.

If the owners can’t agree on which principle to apply or how to divide the costs, you could also ask the Tribunal to decide.

Fabienne Loncar
Moray & Agnew Lawyers
E: [email protected]
P: 03 8687 7319

This post appears in Strata News #730.

Question: Our building is in a larger precinct. Buildings pay into a precinct maintenance fund. We pay more than what is fair. How is our unit of liability calculated, and can it be changed?

I’m a member of a newly formed owners corporation (OC) committee for a new apartment building. We are part of a larger precinct that includes several other buildings. All buildings within the precinct pay into a precinct maintenance fund. Our building has its own OC, and all the other buildings belong to another OC, both managed by the same OC manager.

The apportionment of costs for both OCs is worked out via an equation that utilises each building’s total unit of liability. Our building’s total UoL is high compared to the other buildings. We pay more into the maintenance fund than we believe is fair and equitable, considering our building’s smaller lot sizes and smaller market value.

Who allocates the unit of liability and unit of entitlement for lots when the subdivision is drafted? – The developer? A building surveyor? Title office/Subdivision office?

Answer: Your question should be: should there be separate maintenance plans for each of the separate buildings and should costs associated with the building maintenance be subject to the benefit principle?

How the schedule of lot liability and lot entitlement is calculated initial depends on when the plan of subdivision was registered. Plans of subdivision registered after 1 December 2021 need to be compliant with Section 27F of the Subdivision Act 1988. That section provides:

27F (4)

1. lot liability in the plan must be allocated equally between the lots unless—
   
   1. there is a substantial difference in size between the lots; or
   2. different lots have a bearing on the consumption or use of common utilities or the cost of maintaining the common property; or
   3. the number of occupiers in each lot has a greater bearing on the consumption or use of the common utilities or the cost of maintaining the common property than the size of the lot; and

2. lot entitlement in the plan must be allocated on the basis of the market value of the lot and the proportion that value bears to the total market value of the lots.
5. For the purposes of subsection (4)(a), lot liability must be allocated on the basis of—
   
   1. in the case of subsection (4)(a)(i)—the size of the lot and the proportion that size bears to the total size area of the lots; or
   2. in the case of subsection (4)(a)(ii)—the size of the lot and level of consumption or use by that lot of the common utilities and the common property; or
   3. in the case of subsection (4)(a)(iii)—the number of bedrooms in the lot.

Ultimately, the decision rests with the surveyor, but is usually guided by the developer. Unless there was a breach of the Act on registration of the subdivision, the only ability to change this is via a unanimous resolution of lot owners or a Section 34D of the Subdivision Act application to VCAT. Both ways are almost impossible.

However, your question really should be, should there be separate maintenance plans for each of the separate buildings and should costs associated with the building maintenance be subject to the benefit principle under Section 49 of the Owners Corporations Act 2006? The answer to that question is probably yes and a careful examination of how levies are struck and for what should be considered. This would require a formal review of your particular situation in order to answer fully. It might be that there is a fairer way of apportioning the costs of the development. Individual owners corporations should also charge fees separately to OC1 to deal with their respective common property.

Phillip Leaman
Tisher Liner FC Law
E: [email protected]
P: 03 8600 9370

This post appears in Strata News #730.

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Read Next:

• VIC: Q&A Levies, Lot Allocations and Entitlements
• VIC: How to Alter Your Plan of Subdivision – Lot Entitlements and Liabilities

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