Civil and Administrative Tribunal New South Wales Medium Neutral Citation: The Owners- Strata Plan No 86208 v Lowry and Ors [2014] NSWCATCD 226 Hearing dates: 3 November 2014 Decision date: 18 November 2014 Jurisdiction: Consumer and Commercial Division Before: M Harrowell, Principal Member Decision: The application is dismissed Catchwords: Unreasonable unit entitlement allocation S183 Strata Schemes Management Act, 1996 Legislation Cited: Strata Schemes Management Act, 1996 Cases Cited: Sahade v The Owners - Strata Plan 62022 [2014] NSWCA 208 Category: Principal judgment Parties: The Owners-Strata Plan No 86208 (applicant) Other parties: Michelle Lowry, Andrew Best, Mary and Ahmad Mostafa on behalf of the PBA Mostafa Super Institute and Carol and William Bodell Representation: Applicant: Mr T Prehn - Executive Committee member Other parties: Ms M Lowry (in person) File Number(s): SCS 14/37641 Publication restriction: Unrestricted reasons for decision 1. These proceedings relate to an application by the Owners Corporation SP 86208 for an order pursuant to section 183 of the Strata Schemes Management Act, 1996 (Act) to allocate unit entitlements among lots that are the subject of the strata scheme. 2. There are 40 Lots in the strata scheme. 3. The Owners Corporation was represented by members of the Executive Committee including Mr Prehn who provided oral submissions at the hearing on 3 November 2014. The Owners Corporation also provided written submissions. 4. The order was opposed by various Lot owners who filed written submissions (objectors). The objectors included Ms Lowry, Mr and Mrs Mostafa, Mr and Mrs Bodell and Mr Best. Only Ms Lowry appeared at the hearing on 3 November 2014. However the Tribunal has had regard to the submissions made at the hearing and those written submissions filed by the objectors. 5. The circumstances in which an order can be made are specified in section 183 (2) of the Act which provides: "An order may be made only if the Tribunal considers that the allocation of unit entitlements among the lots: 1. was unreasonable when the strata plan was registered or when a strata plan of subdivision was registered; or a1) was unreasonable when a revised schedule of unit entitlements was lodged at the conclusion of a development scheme, or 1. became unreasonable because of a change in the permitted land use, being a change (for example, because of a rezoning) in the ways in which the whole or any part of the parcel could lawfully be used, whether with or without development consent." 1. The present application is made on the basis that the allocation of unit entitlements was unreasonable when the strata plan was registered. The strata plan was registered on 2 December 2011. 2. Subsection 183 (3) of the Act provides that: "In making a determination under this section, the Tribunal is to have regard to the respective values of the lots and (if a strata development contract is in force in relation to the strata scheme) to such other matters as the Tribunal considers relevant." 1. Subsection 183 (4) requires that any application for an order under section 183 is to be "accompanied by a certificate specifying the valuation, at the relevant time of registration…, of each of the lots to which the application relates". (Emphasis added) There are requirements for the qualifications of the valuer under subsection 183 (5). Evidence 1. The evidence in the present application consisted of: 1. a report and certificate of valuation ("valuation") prepared by Mr Christopher Simpson dated 16 June 2014. The valuation became Exhibit A in the hearing. The date of the valuation was as at 2 December 2011 being the date the strata plan was registered. A copy of part of the strata plan is attached to the valuation. The strata plan had been signed by Ferrier Hodgson, the receiver of the developer who constructed the strata scheme.; 2. Emails between a surveyor and the receiver in May 2011 concerning the original allocation of unit entitlements and a schedule prepared by the receiver setting out the unit entitlements as recorded in the registered strata plan. These documents became Exhibits B1 and B2. 1. In addition, both parties relied on photographic evidence. These photographs depicted the various Lots and were attached to an email from Ms Lowry to the Tribunal dated 27 October 2014. They are not marked as exhibits. 2. The valuer did not attend the hearing and no party sought to cross-examine the valuer. 3. During the hearing the applicant made an application to adjourn the hearing to enable it to provide further evidence from the valuer. The application was refused, oral reasons for that decision being given during the course of the hearing. The refusal occurred in circumstances where the Tribunal had previously made directions for the filing and service of evidence by the parties and where the Tribunal had been advised by the applicant at the directions hearing on 5 September 2014 that the Owners Corporation had provided all evidence on which it intended to rely. 4. The Owners Corporation did not seek to provide any evidence from the receiver other than that recorded in Exhibits B1 and B2. 5. While it is necessary to examine the evidence in some detail, there are some factual matters that are not in dispute: 1. the development which formed the strata scheme was completed under the direction and control of the receiver at the end of 2011 when the strata plan was registered, 2. access to the various Lots is from Fairway Drive or Seaview Road depending on the Lot location. Lots 1-20 are accessible from Fairway Drive and lots 21-40 are accessible from Seaview Road 3. under the registered strata plan the aggregate unit entitlement of all lots was 1000, each of the 40 lots being allocated units in a range between 23 and 27, that is there were five bands of unit entitlements; 4. under the proposed reallocation in accordance with the valuation the aggregate unit entitlement would be 4000 units, each of the 40 lots being allocated a range between 97 and 106 units, that is there were proposed to be 10 bands of unit entitlements. 1. Finally, it should be noted that Mr and Mrs Mostafa provided a second submission dated 30 October 2014. Attached to that document was a "Petition" signed by various people who appear to be Lot Owners in the strata scheme. This document was provided after the date for the filing and service of any evidence and submissions. In the circumstances it would be inappropriate to admit the "Petition" as evidence. Relevant Law 1. During the course of the hearing, the Tribunal referred the parties to the decision of the Court of Appeal in Sahade v The Owners - Strata Plan 62022 [2014] NSWCA 208 where the Court considered the meaning of section 183, the obligations of the Tribunal in determining an application and the matters relevant to the exercise of any discretion under that section. The Court concluded that the making of an order under section 183 was a staged process which requires the Tribunal to: 1. ascertain the respective values of the lots subject to the strata scheme; 2. determine, having regard to: 1. the respective values at the time the strata plan was registered, 2. other matters that show or tend to show whether the allocation of unit entitlements was or was not unreasonable, that the allocation of unit entitlements at the time of registration was unreasonable; and 1. determine whether an order reallocating units should be made if the allocation was unreasonable at that time. See Sahade at [62] and [86]. 1. The Court also concluded that in exercising a discretion whether or not to make an order reallocating unit entitlements, the Tribunal was entitled to take account of whether the level of control currently enjoyed by each lot owner would be affected by the variation in the allocations and whether the reallocation could lead to the potential for deadlock in voting at meetings. See Sahade at [51] and the declarations made. Submissions 1. It is convenient to first set out the submissions of Mr and Mrs Mostafa dated 29 September 2014. These submissions can be summarised as follows: 1. The Owners Corporation has not adduced evidence that the current unit entitlements "were unreasonable when the strata plan was registered". The comment by the valuer that "the method employed was presumably based upon future anticipated selling prices" and the comments concerning "market value" shows that he was apparently unaware of what method was employed to set out the current unit entitlements. 2. The lack of knowledge, views expressed and language used by the valuer in seeking to criticise the original allocation are not a sufficient basis for the Tribunal to find that the original unit allocation was unreasonable and therefore the Tribunal's power to make an order is not enlivened. 3. The evidence in relation to the proposed new unit entitlements is insufficient. The valuation on its face demonstrates that the valuer has not made a reliable assessment of the market value of each unit as is required in order to properly apply a market value-based methodology of assigning unit entitlements. Particularly, the objectors rely upon: 1. the preamble of the valuation that indicates a "good cross-section of the different types of unit in the complex" have been chosen. The preamble shows that only six units have been selected for internal inspection. The preamble also refers to information provided by a Mrs Vincent, although the information is not identified; 2. the fact that 10 bands of unit entitlements are proposed in the reallocation, despite the valuer having only inspected six units in the complex; 3. the fact that the actual sales price of the 40 units has been adopted as the respective values despite those sales having occurred over a 13 month period from November 2011 to January 2013, without any apparent adjustment for changes in the market during that period; 4. the general absence of reasons and information to enable the Tribunal to evaluate and make a determination about the matters asserted. 1. The valuer's statement that: 1. "the valuation report is as close to equal that a registered valuer can do to comply with the Tribunal requirements: and 2. "the distribution and spread is much more equal than the previous one" suggests that the valuer is attempting to achieve a particular outcome rather than expressing a view as to the value of each of the Lots and what the fair unit entitlement should be. 1. Lastly, the Mostafas say that they are not submitting any additional evidence because "the amount in dispute makes it uneconomical to obtain a further, proper, expert report". 2. The other objectors who made submissions, including Ms Lowry, adopted a similar position to the Mostafas. In addition, Ms Lowry relied on the photographic evidence identified above to dispute the assessment in relation to her particular Lot that she had "spectacular views that truly stretch for ever". Ms Lowry also said that when she purchased her Lot she carefully considered the level of fees applicable to her Lot having regard to her financial position. While she identifies that the reallocation will increase her levies by 21% since she purchased her Lot in January 2013, it is apparent that some of these fee increases have arisen for reasons unrelated to issue of the unit entitlements. 3. A summary of the applicant's submissions are as follows. 4. The applicant says that the revaluation had been carried out "effectively and in full compliance with the legislative provisions" of the Act. These submissions expressly responded to those of the Mostafas referred to above, particularly those relating to the objectors' assertion that the evidence was inadequate to prove necessary factual matters required by the legislation. During the course of the hearing, in oral submission, the applicant also said that the valuation should be accepted because: 1. it is a sworn valuation; 2. from a registered valuer with 23 years experience; and 3. the valuer has detailed the appropriate criteria which he has considered in providing his valuation. 1. The Owners Corporation submitted that no expert evidence had been provided in response to the valuation and that the valuation should "be relied upon for its accuracy and that the objection should be dismissed". 2. The Owners Corporation submitted that the correct criteria for assessment had been identified and applied by the valuer and that it was not "necessary to internally inspect of 40 villas where variations of the six archetypal structures were only very minor in nature". 3. In its written submissions, the Owners Corporation contended that "in the absence of a robust methodology,… the original entitlements were not reasonably determined and thus a re-evaluation was justified as per the provisions of section 183 (2) of the… Act". The Owners Corporation supports this submission with references to the valuation which asserts: 1. the original allocation was "hastily adopted, simplistic methodology devised as a "fix" convenient"; 2. the original valuation "had no technical credence and invited challenge; and 3. the "unit entitlement schedule… Is unreasonable in most respects". 1. The applicant also submitted that a substantial process had been undertaken by the Owners Corporation in the general meeting and otherwise to investigate the circumstances in which the original allocation had been undertaken, engage the valuer and propose the alternative allocation of unit entitlement. 2. Finally, in relation to a submission from an objection from Ms Lowry that an impact statement following reallocation had not been provided by the Owners Corporation, the Owners Corporation refers to discussions at the general meeting which indicated that the consequence of the re-evaluation for individual Lot Owners was, depending on the unit allocation, that the "financial value" (presumably the potential percentage contribution for strata levies) could increase, decrease or remain unchanged. In this regard the Owners Corporation says in connection with Ms Lowry's Lot, Lot 17, "a change in the unit entitlement only accounts for a 4.1% increase to the quarterly strata levy". Decision 1. The Owners Corporation must prove its claim. The Tribunal must be satisfied of the matters necessary for it to exercise its order making powers under section 183 of the Act. This requires determinations being made by the Tribunal concerning the original allocation, the proposed reallocation and any considerations relevant to the Tribunal exercising any discretion. 2. The absence of an opposing valuation or expert opinion does not mean that any statements made by an expert should automatically be accepted. It remains for the Tribunal to evaluate all the evidence and satisfy itself that the requirements of section 183 have been met and that an order should be made. 3. For the reasons that follow, the Owners Corporation has failed to prove claim and the Tribunal is not satisfied that an order should be made. 4. It is clear from the submissions that the Owners Corporation had been in discussions with the developer/receiver in the original survey and while the Owners Corporation asserts that "neither of these parties could provide any evidence to support a view that a professional methodology was employed to determine a fair and reasonable allocation of unit entitlement", no evidence is provided from the developer/receiver about these assertions. 5. The only evidence concerning the original unit allocations is found in Exhibits B1 and B2. Exhibit B1 is two emails on 30 May 2011. The first email is apparently from a surveyor employed by the developer/receiver. It says that the developer had initially prepared a schedule of unit entitlements of equal value across all units. The email from the surveyor attaches a copy of the Registrar General's Direction explaining how unit entitlements should be determined and the surveyor says that they should be based on the market value of the lots. The surveyor points out that keeping the unit entitlements equal would mean that a determination would need to have been made that each Lot is generally of equal value. 6. The email in reply from the receiver to the surveyor indicates that the receiver had created a specific unit entitlement for each lot based on "the % value of each unit". Exhibit B2 is a schedule recording the unit entitlements which are the same as those recorded in the original strata plan. It should be noted that the schedule records the "% of total value" for Lot 40 as 2.6% although the unit allocation is 27/1000. Lot 40 was in fact allocated 27 unit entitlements in the strata plan. 7. While there is little evidence from the developer/receiver about these matters, the Tribunal is satisfied that the proposed unit entitlements as of 30 May 2011: 1. had been determined by reference to the value of each unit as a percentage of the whole; and 2. there were 5 bands of unit entitlements ranging from 23 to 27. 1. There is no evidence that would show that the values used in May 2011 had changed or substantially changed (either in relative or gross terms) between May 2011 and December 2011 when the strata plan was registered. Nor is there evidence to show use of the May 2011 allocation in December 2011 was unreasonable because the values had changed in that period. Having regard to the fact that few units had been sold by 2 December 2011 (the only evidence of sale being Lot 25 sold on 9 November 2011) it seems inevitable that an estimate of the market value of each of the units at this time would need to be made. Further, to displace such an estimate it would be necessary to show by an analysis of the original unit allocation, relevant actual sales and/or a reassessment of values as at 2 December 2013 that the original unit allocation for each of the Lots was unreasonable. 2. In the Tribunal's opinion, the valuation evidence does not meet the requirements of the Act and is not sufficient to prove the matters asserted for the following reasons: 1. the certificate and information provided in the valuation does not provide a "valuation of each of the lots which the application relates" as required by section 183 (4) of the Act; 2. the valuation is expert evidence and does not meet the requirements of the expert code of conduct. Aside from the expert code of conduct, the evidence provided does not expose the reasoning of the valuer nor does it state all of the facts and information relied upon by the valuer in forming his opinion so as to enable the Tribunal to evaluate and evidence for the purpose of making the determinations required under section 183 of the Act; 3. there is no justification provided as to why the original use of six bands for allocating unit entitlements was unreasonable; 4. there is no analysis of each of the Lots (including the features of each Lot) that show their particular banding was unreasonable or otherwise inappropriate, other than some general comments; 5. there is no justification provided as to why 10 bands were appropriate to use (as opposed to 6 bands of 40 individual unit allocations), other than by the valuer saying: "as a means of providing clearer recognition of all the factors at play impacting upon value, I suggest that the total number of units be increased from 1000 to 4000 units which may provide a more appropriate calibration in identifying and acknowledging features of a positive or negative nature pertaining to each lot" 1. there is no justification as to why each Lot is allocated to a particular band in the 10 band range nor an explanation of the differences between the Lots to justify the particular banding. 1. Further, even if these deficiencies are ignored, in the Tribunal's opinion an analysis of statements made in the valuation does not lead to the conclusion that an order should be made to vary the unit entitlement allocation. 2. The valuation provides the following information about the sale of the Lots: 1. Lot 25 was sold on 9 November 2011 for a price of $485,000; 2. Lot 15 was sold on 25 January 2013 in the amount of $452,000; 3. over a 13 month period prices range from a high of $495,000 for a three bedroom, double bathroom, three story unit sold on 9 November 2011 to a low of $405,000 for a similar sized unit located on top side of Fairway Drive which sold on 1 June 2012. 1. The valuation also provides "market analysis" of 127 units sold within a 2 km radius of the subject strata scheme for various prices in the 13 month period ranging from $240,000-$580,000, an average of $343,000. The valuer concludes in relation to this market analysis that: "So it seems that although not experiencing a rush of buyer activity, Eastpointe sold in a satisfactory manner with an above average return." 1. Despite this statement, it is evident from the valuation that over the 13 month period there had been significantly different prices obtained for "similar sized units" in this strata scheme. As indicated in the summary above, one lot had sold for $495,000 on 9 November 2011(although this may be a typographical error and should in fact be $485,000 due to the reference to $485,000 elsewhere in the valuation) whereas some seven months later a similar sized unit sold for "a low of $405,000" on 1 June 2011. If this is correct, the sales results suggest a decline in the market value from November 2011 to June 2012. 2. In these circumstances, the Tribunal concludes that the use of market prices obtained for the sale of Lots in the strata scheme over the period of 13 months does not provide evidence of value of the Lots as at 2 December 2011. Certainly without information to show that values for particular sales have been adjusted to take account of market movements, it can only be concluded that the use of sales information over a 13 month period is unlikely to provide a proper basis for assessing the value of each of the Lots as at 2 December 2011. 3. In relation to the opinion that the original unit allocation process was "flawed", the valuer said that "the method adopted by those responsible on 30th May 2011 may have seemed fair at the time. However it bore no relationship to the 'market value', the method employed was presumably based upon future anticipated selling prices." 4. That part of Exhibit B1, being the email from the surveyor, records that it was necessary to assess "market value" for the purpose of determining the unit entitlement allocation. Based on the receiver's comment in the second email forming part of Exhibit B1, Exhibit B2 appears to be such an assessment, at least at May 2011. Leaving aside the need to determine values at 2 December 2011, the evidence in Exhibit B1 does not support a view that the allocation made in the schedule (Exhibit B2) was based on "what may have been fair". To the contrary, Exhibit B1 suggests it was based on "% value" of the Lots. 5. In relation to the banding and whether six bands was unreasonable, the valuer identifies (under the heading Structural Improvements) three types of property in the "Seaview villas" and two types of property in the "Fairway villas". There are two floor areas between the five types, 264 m² and 282 m² respectively. These facts do not justify 10 bands nor explain how Lots have been allocated to particular bands. 6. Further, these facts, when considered with the photographic evidence, do not suggest that the use of five bands in the range provided was inappropriate. 7. In terms of the analysis of individual Lots, Lots 1 and 21 are identified as being subject to "noise, movement at the security gate, … with adjoining units being less affected". A general comment is made about adjustment for "better quality views" and that "most of the previously high rated units retain that ranking whilst some units previously understated were upgraded". 8. The statements suggest that the original relative allocation of "most units" within the original unit allocation was reasonable. Further the statements also suggest that some unexplained adjustments to "value" had been made despite the conclusion at page 5 of the valuation that "the sale results as they stand, set 'the market'." 9. Accordingly, the relative values (as could be inferred from the proposed banding for reallocation) appear to be based on the valuer's personal opinion of particular features, not any assessment related to market value. 10. Finally, a review of the evidence shows the changed bandings and proposed reallocations do not significantly alter the general relativities between the Lot owners, nor the amount individual Lot owners will be required to pay as their share of strata levies following reallocation. These conclusions are demonstrated by the schedule attached to the submissions of Mr and Mrs Mostafa dated 29 September 2014 which records the dollar value changes in levies based on the proposed reallocation. 11. This view is corroborated by the Owners Corporation's submissions dated 23 October 2014. When responding to the submissions of Ms Lowry concerning the impact upon her of the proposed reallocation, the Owners Corporation said that "a change in the unit entitlements only accounts for a 4.1% increase in the quarterly strata levy" and it was a "gross misrepresentation" to suggest that any increase in strata fees would be attributable to the proposed reallocation of unit entitlements. 12. These facts show that there will be no significant change for most Lot Owners which supports the conclusion that the original unit entitlement allocations were not unreasonable and/ or that they should not be altered in the manner proposed. 13. Having regard to these conclusions, the Tribunal is not satisfied that: 1. the original unit allocation was unreasonable; or 2. that an order should be made for the reallocation of units in accordance with the schedule contained in the valuation. 1. Accordingly, the application for an order to allocate unit entitlements in connection with strata plan 86208 is dismissed. M Harrowell Principal Member Civil and Administrative Tribunal of New South Wales 18 November 2014 I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 February 2015