Company Title Updates 2017
In a recent seminar which we gave in North Sydney, there were a number of noteworthy points raised and recorded:
1. Risks to Companies
- Occupier’s Liability
- Companies have a duty at general law to protect person who enter their buildings from reasonably foreseeable risks of injury.
- This duty extends to both the common company property and the individual units occupied by shareholders.
- Companies should make sure to take prompt action whenever a director becomes aware of a hazard or risk in either the common company property or in a unit.
- Where the hazard or risk is in a unit, the company may need to exercise powers of entry that it has under the Constitution.
- Case study – director of the company is walking on the street and notices that a sash window in a fifth floor flat is unhinged. The unit is rented by tenants. What should the director do?
- In exceptional circumstances, companies may be liable for injuries caused by erratic or dangerous residents who are known to the directors. The company should take steps to manage such residents by enforcing the house rules, if necessary by way of Local Court proceedings.
- Constitutional Liability
- Companies often have constitutional obligations to keep the common company property in a good state of repair.
- A shareholder will be able to sue the company for damages in the event that the company breaches this duty.
- Work Health and Safety
- Generally speaking, companies operating residential company title schemes only need to comply with the Work Health and Safety Act 2011 (NSW) if they have engaged contractors to carry out works involving dangerous plant or chemicals.
- Companies will also need to comply with the Work Health and Safety Act 2011 (NSW) if they are conducting commercial operations on part of their building.
- Renovations by Shareholders
- Directors who do not take steps to ensure that work is carried out by appropriately qualified and licensed tradespeople with suitable insurance policies may risk breaching their duty to exercise due care and diligence by failing to take reasonable steps to protect the company from liability for personal injury or economic loss to shareholders.
- The company should adopt a policy pursuant to which each shareholder is required to make a written application for the consent of the directors in the event that a shareholder wishes to carry out renovation works.
- That written application should include details about the licences and qualifications held by the tradesperson, and the licences and qualifications of any sub-contractor that the tradesperson wishes to use.
- The company should also require that the tradesperson provides evidence of insurance for the works. The company should ask that it be nominated as a beneficiary of that insurance policy or as an interested party to whom the benefit of the insurance extends. Insurers will generally agree to listing the company as an interested party.
- The use of the tradespersons specified in the written application should be made a condition of consent. In the event that other tradespersons are used, the work should be treated as an unapproved renovation.
- Vendor’s Packs
- Vendors who are selling shares in the company must be sure to give incoming purchasers sufficient information about the company to allow them to determine whether they want to buy the shares.
- If incoming purchasers are not told about anticipated major capital works in respect of which a special levy may be struck, they may commence proceedings against the vendor. The company may be joined to these proceedings, and its directors may need to participate as witnesses.
- The best way to avoid this is for the company to ensure that each vendor gives an incoming purchaser a set of documents that gives them an accurate picture of the governance and financial standing of the company and any future works that are planned.
2. Risks to Directors
- Directors’ Duties
- There are three directors’ duties which often cause problems for directors of company title companies.
- First, directors have a duty to disclose and avoid conflicts between their personal interests and the interests of the company. For example, a director who wishes for the company to approve a renovation in their unit should make a prompt declaration about their interest and avoid from voting on any resolution that relates to the renovation.
- Secondly, directors have a duty to act in good faith in the best interests of the company. For example, a director should not vote on a resolution for the purposes of benefitting particular subgroup or faction within the building. They should make sure to vote in a way that they think is best for the company as a whole.
- Thirdly, directors have a duty to act with due care and diligence. Even though directors are volunteers who have busy lives outside the building, they need to make sure that they read, understand and ask appropriate questions about all board documents.
- Fire Safety
- Companies have an obligation to provide Fire and Rescue New South Wales with an Annual Fire Safety Statement. The Annual Fire Safety Statement is a certificate prepared by a qualified fire consultant which stating that each of the essential fire safety measures contained in the building’s approved Fire Safety Schedule work properly.
- It is not enough simply to comply with the letter of those regulatory requirements. As Deputy Coroner Dillon explained in his final report on the Inquest into the Death of Connie Zhang, all persons with responsibility for the management of residential buildings should seek to establish a ‘real safety culture’ that is built on a constant ‘mindfulness’ of potential fire safety risks.
- Directors who do not take steps to develop a ‘real safety culture’ may risk breaching their duty to exercise due care and diligence by failing to take reasonable steps to protect the company from liability for personal injury or economic loss to shareholders.
- It is a good idea to consider fire safety matters at each board meeting, and ensure that there is a clear mechanism for all residents to report fire safety hazards in units or on common property to a responsible director who can take immediate action.
- Directors may consider taking out directors’ and officers’ insurance as a means of protecting against risks.
3. Working with Insurers
- The directors must make sure to communicate any claim or potential claim about which the directors receive notice to the company’s insurer as soon as is possible. The directors should do so even if they think that the company has a basis on which to contest the claim.
- At least one director should have a comprehensive knowledge of the insurance policies held by the company and the circumstances in which the company will be required to communicate information to the insurer under them.
- See Company Title Handbook for discussion of meeting procedures and governance.
- The importance of minutes cannot be understated. We have been instructed in a number of disputes recently in which a failure to properly document certain things done by the company has given rise to complex legal disputes decades later.
- Where the company’s constitution mandates meeting procedures that are arcane, impractical or difficult to understand, it is far better to take steps to amend the constitution than it is to ignore them. Ignoring the procedures can give rise to legal disputes and may make it difficult to enforce parts of the constitution against problematic shareholders.
- It is important not to take a relaxed approach to compliance with the constitution and the Corporations Act 2001 (Cth). It is much easier to resist attempts to undo initiatives commenced by the directors or the shareholders if proper procedures have been complied with. A number of buildings in the Northern Beaches and Eastern Suburbs have had to defend multiple legal proceedings brought by a disgruntled shareholder who wants to undo such initiatives in recent years.
- Airbnb continues to be a disruptive influence in company title buildings, particularly those in suburbs like Potts Point, Manly and Kirribilli.
- Companies need to manage Airbnb by adopting a range of mechanisms. These include ensuring that the house rules prohibit short term leasing and licensing without the consent of the directors and ensuring that the company has a constitutional right to be indemnified for damage that short term residents cause to common property.
- Where Airbnb is causing a particular problem, companies can restrict the number of keys that are issued to residents and should monitor listing on Airbnb to ensure that units in their building are not being marketed on it.
6. Pets in Buildings
- Last year, the Victorian Civil and Administrative Tribunal recently held that strata body corporates have no power to prevent residents from having pets in strata buildings. The Victorian Government recently legislated to give all tenants the right to keep pets in rented premises.
- Though this ruling does not apply to company title buildings in New South Wales, we have noticed an upsurge in the number of companies approaching us to deal with issues associated with pets.
- All companies should have a provision in their house rules determining whether or not residents are allowed to have pets and outlining the obligations of owners of pets in the event that pets are allowed.
- The model strata by-laws in the Strata Schemes Management Regulation 2016 (NSW) contain a number of alternative rules that can be adopted by companies. Option B, which allows residents to keep pets in their units with consent of the directors, which cannot unreasonably be withheld, is a good option.
- It is also worth remembering that the Companion Animals Act 1988 (NSW) prevent companies from imposing restrictions on assistance animals such as guide dogs.