Nichol­son v Stra­ta Plan No 104042 –The Valid­i­ty Of Debt Recov­ery Claus­es In By-laws

The recent NSW Civ­il and Admin­is­tra­tive Tri­bunal deci­sion in Nichol­son v The Own­ers – Stra­ta Plan No 104042 [2025] NSW­CATCD 202 pro­vides impor­tant guid­ance on the lim­its of an own­ers cor­po­ra­tion's pow­er to pass by-laws reg­u­lat­ing short-term rental accom­mo­da­tion in the scheme. More impor­tant­ly how­ev­er the deci­sion rein­forces a broad­er prin­ci­ple which is, that by-laws in gen­er­al can­not be draft­ed to cre­ate a poten­tial­ly open-end­ed and pri­vate debt recov­ery régime against own­ers that pur­ports to oper­ate out­side the super­vi­sion of the Tri­bunal or the courts.

Key Take­aways

The deci­sion con­firms that when mak­ing by-laws, an Own­ers Cor­po­ra­tion should be cau­tious to avoid pro­vi­sions that pur­port to recov­er costs from lot own­ers "as a debt" par­tic­u­lar­ly where the amount payable is left to the uni­lat­er­al deter­mi­na­tion of the own­ers corporation.

Any enti­tle­ment to recov­er costs should be care­ful­ly draft­ed and sub­ject always to the ordi­nary super­vi­so­ry juris­dic­tion of the Tri­bunal or the courts. Specif­i­cal­ly, in rela­tion to bonds these may still be valid pro­vid­ed the bond serves a legit­i­mate pur­pose and does not impose a finan­cial bar­ri­er to the exer­cise of a prop­er­ty right that exceeds what is nec­es­sary to pro­tect the inter­ests of the scheme.

The upshot is that an own­ers cor­po­ra­tion is enti­tled to make by-laws to reg­u­late con­duct with­in a scheme, pro­vid­ed these do not cre­ate enforce­ment mech­a­nisms that pur­port to bypass judi­cial oversight.

The Back­ground

Angela Nichol­son owned an apart­ment in the mixed-use "Sky Res­i­dence" devel­op­ment in New­cas­tle and had his­tor­i­cal­ly used her lot for short-term rental accom­mo­da­tion. The own­ers cor­po­ra­tion lat­er adopt­ed a spe­cial by-law under sec­tion 136 of the SSMA reg­u­lat­ing short-term let­ting. The by-law required:

• pay­ment of an admin­is­tra­tion fee;
• pay­ment of a $1,000 bond (or anoth­er amount deter­mined by the stra­ta com­mit­tee) before short-term let­ting could occur; and
• per­mit­ted the own­ers cor­po­ra­tion to recov­er admin­is­tra­tion fees "as a debt" from the lot owner.

Ms Nichol­son failed to com­ply with the above and the own­ers cor­po­ra­tion attempt­ed to enforce the by-law terms against her by the issu­ing of notices to com­ply for breach of the by-law and mak­ing demands for payment.

Ms Nichol­son com­menced pro­ceed­ings in the Tri­bunal seek­ing dec­la­ra­tions that the by-law was "harsh, uncon­scionable or oppres­sive" in con­tra­ven­tion of sec­tion 139 of the SSMA and should there­fore be declared invalid under sec­tion 150. Ms Nichol­son also sought the com­pul­so­ry appoint­ment of a stra­ta man­ag­ing agent under sec­tion 237 of the SSMA.

Was the By-Law Incon­sis­tent with Sec­tion 137A?

An argu­ment advanced by Ms Nichol­son was that the by-law con­flict­ed with sec­tion 137A of the SSMA and the NSW Code of Con­duct for the Short-Term Rental Accom­mo­da­tion Indus­try. Rel­e­vant­ly, sec­tion 137A of the SSMA upholds the right of own­ers cor­po­ra­tions to pass a by-law ban­ning short-term let­ting in the scheme pro­vid­ed that the lot is not the own­er's prin­ci­pal place of res­i­dence whilst at the same time express­ly pre­serv­ing an own­er's abil­i­ty to short-term let their prin­ci­pal place of residence.

The Tri­bunal reject­ed this argu­ment, instead decid­ing that the Par­lia­ment did not intend to pre­vent own­ers cor­po­ra­tions from pass­ing by-laws to man­age the impacts of short-term rental accom­mo­da­tion in the scheme. Rather the leg­isla­tive inten­tion was lim­it­ed to pro­tect­ing an own­er's right to share their own home. Plac­ing rea­son­able con­di­tions on short- term let­ting was there­fore not to found to con­flict with sec­tion 137A of the SSMA, at least not in and of itself.

The Admin­is­tra­tion Fee

The admin­is­tra­tion fee pro­vi­sions were ulti­mate­ly proven as the own­ers cor­po­ra­tion's undo­ing. The by-law defined "Admin­is­tra­tion Fee" broad­ly to include any rea­son­able admin­is­tra­tive costs togeth­er with any oth­er costs and expens­es incurred by the own­ers cor­po­ra­tion aris­ing direct­ly from a lot being used for short-term rental accom­mo­da­tion. The by-law also per­mit­ted those amounts to be recov­ered "as a debt" from the lot owner.

At first glance, the draft­ing appeared care­ful­ly con­sid­ered. Rather than impos­ing an arbi­trary penal­ty on lot own­ers, recov­ery was lim­it­ed to indem­ni­fy­ing the own­ers cor­po­ra­tion for only those costs incurred by the own­ers cor­po­ra­tion aris­ing as a direct result of the own­er using their lot for short term rental accom­mo­da­tion. A rea­son­able­ness require­ment was also built into the clause as well.

The Tri­bunal nev­er­the­less found the pro­vi­sions to be invalid in so far as it effec­tive­ly allowed the own­ers cor­po­ra­tion to deter­mine for itself what costs were payable, includ­ing poten­tial­ly legal­ly costs asso­ci­at­ed with recov­ery and then to seek to recov­er these amounts as a debt from the lot own­er. In doing so, the by-law shift­ed the finan­cial risk of the own­ers cor­po­ra­tion's admin­is­tra­tive deci­sions entire­ly onto the lot own­er with­out inde­pen­dent over­sight. The Tri­bunal con­clud­ed that this cre­at­ed an unrea­son­able and open-end­ed finan­cial lia­bil­i­ty which was "harsh, uncon­scionable and oppres­sive" in con­tra­ven­tion of sec­tion 139 of the SSMA.

The Bond Requirement

The Tri­bunal also con­sid­ered the require­ment that own­ers pay a $1,000 bond, or anoth­er amount deter­mined by the stra­ta com­mit­tee, before being per­mit­ted to use their lot for short-term rental accom­mo­da­tion. The own­ers cor­po­ra­tion argued that the bond was jus­ti­fied giv­en pre­vi­ous dam­age caused to com­mon prop­er­ty by short-term occu­pants. The Tri­bunal accept­ed that pro­tect­ing com­mon prop­er­ty was a legit­i­mate objec­tive. How­ev­er, it observed that the SSMA already pro­vides mech­a­nisms to recov­er the cost of dam­age to com­mon prop­er­ty and to enforce by-laws.

Impor­tant­ly, unlike a res­i­den­tial ten­an­cy bond held by a statu­to­ry author­i­ty, the pro­posed bond would be held by the own­ers cor­po­ra­tion, with the stra­ta com­mit­tee retain­ing dis­cre­tion to deter­mine if a high­er amount was payable as the bond. The Tri­bunal found that this cre­at­ed uncer­tain­ty and the poten­tial for incon­sis­tent or dis­crim­i­na­to­ry appli­ca­tion. Accord­ing­ly, the bond require­ment was held to be oppres­sive because it imposed a finan­cial bar­ri­er on the exer­cise of a lot own­er's prop­er­ty right that exceed­ed what was rea­son­ably nec­es­sary to pro­tect the legit­i­mate inter­ests of the scheme.

Could the Invalid Claus­es Be Severed?

Hav­ing found the admin­is­tra­tion fee and the bond pro­vi­sions invalid, the Tri­bunal con­sid­ered whether it was pos­si­ble to sev­er the offend­ing claus­es whilst leav­ing the remain­der of the by-law intact. Ulti­mate­ly this was found not to be pos­si­ble. The finan­cial pro­tec­tions formed an inte­gral part of the own­ers cor­po­ra­tion's deci­sion to reg­u­late short-term rental accom­mo­da­tion in the scheme. It could not be assumed that the own­ers cor­po­ra­tion would have passed the by-law with­out the accom­pa­ny­ing finan­cial secu­ri­ties and indem­ni­ties it deemed nec­es­sary to pro­tect its inter­ests. As a result, the entire by-law was declared invalid pur­suant to sec­tion 150 of the SSMA.

Com­pul­so­ry Appoint­ment of a Stra­ta Manager

Ms Nichol­son also sought the com­pul­so­ry appoint­ment of a stra­ta man­ag­ing agent under sec­tion 237. Although the Tri­bunal accept­ed that the own­ers cor­po­ra­tion had depart­ed from its own enforce­ment pol­i­cy by fail­ing to issue a cour­tesy let­ter before serv­ing a notice to com­ply, this was not suf­fi­cient to demon­strate the lev­el of dys­func­tion required for com­pul­so­ry man­age­ment. The Tri­bunal not­ed that the own­ers cor­po­ra­tion con­tin­ued to func­tion effec­tive­ly by hold­ing meet­ings, rais­ing levies, main­tain­ing insur­ance and mak­ing oper­a­tional deci­sions. The dis­pute con­cerned a pri­vate dis­pute between Ms Nichol­son and the own­ers cor­po­ra­tion regard­ing the inter­pre­ta­tion and enforce­ment of a spe­cif­ic by-law rather than sys­temic man­age­ment fail­ures. The appli­ca­tion for com­pul­so­ry appoint­ment was there­fore dismissed.

An Impor­tant Reminder About Legal Pro­fes­sion­al Privilege

The deci­sion also con­tains a use­ful reminder about the impor­tance of main­tain­ing legal pro­fes­sion­al priv­i­lege in lit­i­ga­tion. In her evi­dence, Ms Nichol­son stat­ed that she had received legal advice which "sup­ports" her under­stand­ing of the law and "con­firms" that the by-law was invalid. The own­ers cor­po­ra­tion suc­cess­ful­ly argued that priv­i­lege had been waived and sought pro­duc­tion of the legal advice. The Tri­bunal agreed with the own­ers cor­po­ra­tion and held that by vol­un­tar­i­ly rely­ing upon the sub­stance and con­clu­sions of the advice to strength­en her case, Ms Nichol­son had act­ed incon­sis­tent­ly with main­tain­ing priv­i­lege. It would have been unfair to per­mit her to rely upon the favourable con­clu­sion of the advice while pre­vent­ing the own­ers cor­po­ra­tion from exam­in­ing the rea­son­ing behind it. The advice was there­fore admit­ted into evidence.

For further information please contact:

Joshua Bernie, Senior Asso­ciate
Phone: +61 2 9777 8163
Email: jbb@swaab.com.au