Booklet: Company Title Essentials (Chapter 6 – Rights, duties and disputes)

Ico Ho

2 years ago

Below is Chapter 6 of our ‘Company Title Essentials’ booklet. To read the other chapters of our booklet, click the links below:

Rights, duties and disputes

Shareholders’ rights

Tenants under leases have a number of rights that are recognised at common law, such as the right to quiet enjoyment of the leasehold property, while shareholders will only have such rights as are expressly or impliedly conferred on them under the constitution or a separate licence agreement or other contract with the company

Often, the only ‘rights’ that a shareholder possesses is the right to exclusive use and occupation of a flat and a limited right to grant a lease over that flat in approved circumstances. Some modern constitutions may replicate some of the rights granted to lot owners under the Strata Schemes Management Act 1996, the Strata Schemes Management Act 2015, and the associated model by-laws, such as the right to peaceful enjoyment of the property. Such rights are rarely granted by older constitutions.

Review the constitution and house rules to determine what rights each shareholder has.

Shareholders’ duties

The constitution may require shareholders to discharge a variety of duties. Typically, these duties include:

Not using their flat, or permitting their flat to be used, in a way that creates a ‘hazard or nuisance’ by interfering with the rights of other occupants;
Not using the common property in a way that unreasonably interferes with the use of the common property by other occupants;
Not making structural changes or alterations to their flat without the consent of the company;
Maintaining their flat in a good state of cleanliness and repair, and undertaking necessary repairs for wear and tear;
Allowing the directors access to their flats for the purposes specified in the constitution; and
Complying with the house rules.

Review the constitution and house rules to determine what duties each shareholder has.

Companies repairing flats

If a shareholder does not comply with his or her obligation to keep his or her flat in good and proper repair, most constitutions provide the company with a power to issue a breach notice with which the shareholder must comply within a specified time. Though it is often effective, this process can be slow and cumbersome to implement. It is often more efficient for the company constitutions to supplement a breach notice regime with provisions that empower the company to:

Enter a shareholder’s flat, where it suspects on reasonable grounds that the shareholder has failed to comply with his or her duty to keep that flat in good and proper repair;
Carry out any works that may be necessary to put the flat in good and proper repair; and
Charge the shareholder for its costs in carrying out those works.

Such powers can be exercised in circumstances in which repairs are particularly urgent or are required to prevent damage to common property or another flat.

Leasing

Constitutions and house rules generally have strict requirements governing the ability of shareholders to lease their flats to tenants. These requirements aim to restrict the disruption that is caused by frequent short-term leases.

Common requirements include a:

Prohibition on leasing until the relevant shareholder has occupied the flat for 12 months and
Prohibition on short-term leasing and licensing, such that shareholders cannot advertise their flat on online platforms such as Airbnb (there is typically an exception for short-term stays by family and friends of the shareholder) and
Prohibition on long-term leasing. This usually takes the form of a maximum permissible length for a lease, such that the right of occupancy must be returned to the shareholder after a specified period of time and
Requirement that prospective tenants be approved by the board. This usually requires prospective tenants to submit written references to the board, attend an interview with board members, and to affirm that they have read and agree to be bound by the house rules and the constitution.

Some constitutions prohibit leasing altogether. If this is the case, directors should be mindful to ensure that the prohibition is either enforced consistently or removed from the constitution by way of a special resolution. Complex disputes can arise where prohibitions on leasing are selectively enforced.

Put specific and procedural provisions about leasing in the house rules rather than the constitution. This will allow the board more rapidly to respond to changes in the short-term leasing market.

Short term stays

In recent years, many company title buildings have found themselves confronted with an influx of short-term tenants and licensees. This influx has been facilitated by the emergence of online leasing platforms such as Airbnb. This is a particular problem in the Potts Point area, in which Airbnb is often used to lease properties for ‘bucks’ nights’ and other social occasions.

Company title boards need to get on the front foot quickly. There are several strategies that they can adopt. These include:

Modifying house rules to prevent short-term letting or licensing without the consent of the board;
Limiting the number of keys issued to shareholders and tenants;
Amending the constitution to provide for shareholders to indemnify the company for any loss or damage that results from the conduct of tenants, sub-tenants and licensees;
Monitoring who enters and exits the building;
Communicating expectations to shareholders and tenants;
Preventing shareholders from leasing different parts or areas of their flat to multiple people at the same time; and
Requiring shareholders give a legitimate reason for requesting a short-term lease, such as a brief overseas work placement.

Controlling Problem Tenants

It is important that all companies have rights that are directly enforceable against tenants. If there is no agreement between the company and a tenant, the company will be forced to rely on the shareholder, leasing the flat to the tenant, in the event of a dispute about the behaviour of that tenant or his or her compliance with the House Rules.

All tenants, including short-term tenants and licensees, should be asked to enter into an occupancy agreement with a company before occupation of the unit being leased or licensed to them by a shareholder. Signing such an occupancy agreement can be made a condition of the directors granting consent to the lease.

There are several terms that are worthwhile including in the occupancy agreement.

They are terms:

Preventing sub-licensing or sub-leasing without consent;
Requiring the tenant to comply with the house rules; and
Requiring them to indemnify the company against damage caused by their misconduct.

Penalty Clauses

Many constitutions impose monetary ‘penalties’ on shareholders if they breach the constitution or house rules. Such clauses will not be enforceable if the amount that the shareholder is required to pay is not a genuine pre-estimate of the loss that would be suffered by the company as a result of the breach of the relevant provision in the constitution or by-law.

Companies should be particularly cautious about any such clauses. For example, some house rules require shareholders to pay a lump sum for each day on which they are in breach of short-term leasing provisions of the house rules. Given that the loss actually incurred by the company because of such a breach will be difficult to estimate in advance, it may be more appropriate to require such shareholders to indemnify the company for the costs of repairing any damage or any necessary cleaning after short- term lessees vacate.

The board should review ‘penalty’ clauses and consider more appropriate ways of protecting the company from loss resulting from breaches of house rules or the constitution.

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Booklet: Company Title Essentials

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The information contained in this post is current at the date of editing – 3 April 2024.