3. Why Do We Need Strata Title Legislation? Limitations in Orthodox Property Law

To understand the benefits and risks of strata and community title, it is important to understand why the legislation was enacted. To a large degree it was created to overcome the limitations in orthodox property law, particularly traditional easement and covenant law.

3.1 Limitations of Freehold (Restrictive) Covenants

There is a foundational rule of orthodox property law that prohibits current owners of freehold fees simple from burdening their land with covenants (promises in relation to land) that bind future owners of the fee — for example, covenants created by an original owner that compel all future landowners to buy water from a particular supplier or to repaint houses pink every year. This cardinal rule ensures that each generation of landowners will be free to economically and socially exploit their land as they please; by limiting current owners’ freedom, the law guarantees future owners’ freedom. There is one exception to this rule — restrictive covenants. That is, the equitable doctrine from Tulk v Moxhay^[1] (‘Tulk’) that allows current landowners to burden their land with restrictions of which later owners have notice. Examples include ‘brick and tile’ and ‘residential only’ covenants, preventing the construction of houses in substandard materials like fibro and corrugated iron and protecting the residential character of neighbourhoods. Restrictive covenants were used to combat the ills of unplanned, overcrowded Industrial Revolution cities, and they played a key role in the development of suburban Australia, resulting in single-storey, freestanding houses set in spacious gardens as the dominant housing form, as noted above.^[2]

Beneficial as Tulk may have been for suburban development, like strata by-laws, freehold covenants are a double-edged sword. Legally, Tulk is arguably wrong because it allows a current landowner to be bound by a contract made between a previous owner and a third party, violating the basic contractual rule of privity. Practically, the decision’s effect was to potentially undermine the utility of all freehold land. If current owners can be bound by promises of previous owners of which they have notice — for example, to employ a particular cleaner, buy electricity from a particular supplier — all land could potentially be burdened by an unlimited range of contractual agreements made by previous owners, reducing the social and economic utility of land. Recognising the potentially destructive nature of the decision in Tulk, courts rapidly backtracked, limiting covenants to restrictions,^[3] not positive obligations (the litmus test of a positive obligation being the payment of money),^[4] and covenants that benefit land, not businesses.^[5] The result is that when people buy a fee simple they will be obliged to pay their vendor the purchase price, and their annual council rates, but they will never be required to make ongoing payments to their vendor or third parties for facilities or services.

While this rule is essential to maintain a free and functional land market, it creates an impediment to the construction of apartments with freehold fee simple titles. The building will need to be maintained, but there is no way to impose an obligation on individual apartment titles to pay for maintenance; any freehold covenant to pay money would be positive and thus invalid.

Strata and community title legislation was enacted to overcome this problem. As noted above, the legislation not only allows but mandates the imposition of monetary levies on all lot owners. Unlike non-strata owners, who can allow their homes to fall down around them, strata owners, via the OC, have a statutory obligation to maintain and repair common property.^[6] Further, by-laws can contain restrictive and positive obligations — for example, a positive obligation to clean windows or practise permaculture. The result of the requirement to pay levies, and of expansive by-laws, is that strata titles are freehold fee simple Torrens titles burdened by positive obligations that are impermissible for non-strata housing.

While this legislative amendment of the common law and equity is rational for the maintenance of collectively owned buildings, the consequence has been the construction of increasingly complex developments with extensive facilities and services. If you can make people pay for facilities and infrastructure, there is an incentive to provide them, either in response to perceived market demand (eg ‘resort-style’ developments with pools and gyms^[7]) or in response to government incentives (eg planning approvals that preference the private provision of infrastructure, including sustainability infrastructure). That is why, in contrast to traditional suburbs in Australia where there might only be a public park, the facilities in new high-rise buildings and master planned estates can include private pools, gyms, country clubs and electricity networks.

3.2 Limitations in Easement Law

In addition to overcoming the limitations in orthodox freehold covenant law, strata and community title overcome limitations in easement law. Like restrictive covenants, modern easement law has its roots in the Industrial Revolution: the rapid and unplanned development of densely populated British cities necessitated the express or implied creation of property rights that allowed one landowner to walk, drive or run pipes across another owner’s land.^[8] Running pipes over others’ land for the outward passage of sewage and inward passage of clean water became particularly pressing after the mid-19th century medical realisation that cholera was waterborne. As a result, easement law, most notably the cardinal rules in Re Ellenborough Park,^[9] is well adapted to giving one landowner limited rights to cross or run pipes or wires over another person’s land, but it is not well adapted to allowing the collective use of land and facilities^[10] or the use and maintenance of complex modern equipment.^[11]

Strata and community schemes allow developers to avoid the complexities and limitations of easement law because schemes have common property. The common property is held by the OC as agent for all lot owners as tenants in common,^[12] and tenants in common have a right to ‘occupy the whole’. This means that all lot owners, and their tenants, will automatically have the right to use (and obligation to pay for) common property, including fixtures, such as pools, gyms or solar panels. There is no need to draft complex easements granting those rights or obligations.

Finally, the cherry on the cake of strata and community title is that unlike easements and covenants that require enforcement by an individual owner of benefited land against an individual owner of burdened land, often in a superior court with equitable jurisdiction, enforcement of obligations and restrictions in strata and community schemes is done by the OC, often assisted by a professional strata manager. If resort must be made to legal enforcement, this is usually done in a tribunal such as the NSW Civil and Administrative Tribunal (‘NCAT’), at considerably less expense than litigation in a superior court.

3.3 Effect of Strata and Community Title Legislation

At the end of this section, it should be clear that unlike traditional doctrines of the common law and equity, strata and community title legislation actively facilitate the collective ownership of land and infrastructure, including sustainability infrastructure. This is because strata and community title schemes:

• have land on which to site sustainability infrastructure: common property;
• allow for the collective ownership of land and sustainability infrastructure on it — common property is held by the OC as agent for lot owners in proportion to their unit entitlements, and as infrastructure will invariably be a fixture, and part of the common property, it will also be owned by the OC as agent for lot owners;
• allow for collective use of infrastructure — the OC holds common property and fixtures on it for lot owners as tenants in common; tenants in common are entitled to ‘occupy the whole’ so lot owners (and their tenants) automatically have the right to use infrastructure;
• ensure maintenance and repair of infrastructure on common property through payment of statutory levies;
• have a collective body (the OC) to take responsibility for the use and maintenance of the infrastructure; and
• have a set of rules (by-laws) that can regulate the use of infrastructure.

We will now turn to two case studies that illustrate these legislative provisions in action.

3.4 Case Study A: Jindibah Community

Jindibah is an intentional, ecological community inland from Byron Bay, New South Wales.^[13] The 113 acre site was a disused dairy farm, bought by six people in 1994, and subdivided under the original Community Land Development Act 1989 (NSW) (‘CLD Act’) into 12 individual, 2 acre housing lots and 90 acres of common property.^[14]

The community had an ‘environmental enhancement and management plan’ to guide the ecological repair of the land through rainforest regeneration and sustainable agriculture. Each year, hundreds of rainforest trees were planted, totalling 12,000 today, while environmental weeds were consistently controlled. An agricultural buffer zone was planted along one boundary to prevent spray drift from a neighbouring macadamia plantation and a rough bush track was replaced with an internal road. Twelve housing lots have been landscaped and are used by owners to suit their own needs, whether with play spaces for children, vegetable plots or a pool. Founder, Christobel Munson, said,

While this property could easily have ended up as an unprofitable farm running beef cattle (as often happens when city people relocate to the country and don’t know what to do with the land), we’ve found a way that 12 households can each care for their own lot, so each garden is loved and flourishing. The trees we’ve planted on the remaining common land have brought the rest of the land back to life, attracting lush flora and abundant fauna in the wildlife sanctuary it’s become, while providing shade for the agisted cattle and horses. The creek, now shaded by mature trees, attracts us to sit, or swim, or simply enjoy nature’s bounty.^[15]

This ecological and social achievement has been facilitated by the community title legal structure. First, community title allows for the individual ownership of land. As privately owned property, the housing lots can prima facie be used by their owners as they please (subject to the management statement) and can be sold.^[16] One of the key benefits of community title for intentional communities is that, unlike cooperatives or trusts, individual members have a Torrens title fee simple that they can easily sell on the public land market, allowing free exit from the community and the financial means to acquire a home elsewhere.

Second, community title creates collectively owned land — the common property — which in Jindibah includes the internal road and bridges,^[17] agricultural equipment, a wastewater system, meeting hall and swimming hole, as well as the regenerated land which makes up the bulk of the site. The common property, and any fixtures on it, must be managed by the neighbourhood association (the body corporate)^[18] and must be maintained and repaired^[19] through the payment of annual levies by lot owners.^[20]

Third, community title schemes have management statements (by-laws) that regulate the use of both lots and the common property.^[21] In what has to be one of the most poetic parts of the Torrens register, the management statement for Jindibah begins thus:

Jindibah is a local Aboriginal word meaning both ‘wisdom’ and ‘tawny frog mouthed owl’ … This community is being created with ecological sensitivity and, hopefully, the wisdom of the owls, for a few compatible people who share the same vision and objectives …^[22]

The management statement goes on to regulate both lot and common property. For example, homes on lot property must be single storey, built in earth-toned colours and have solar hot water and water-efficient plumbing and appliances and a minimum water storage facility. The neighbourhood association is responsible for implementing an environmental enhancement and vegetation management plan, and while owners are responsible for removing noxious weeds on their lots, if they do not do so the neighbourhood association may do so in their stead. Interestingly, the management statement contains an ‘Acknowledgement of Rural Uses & Practices’, which may be carried out early in the morning or late in the evening. They include logging and milling, piggeries and poultry farms, cattle dips, clearing and cultivation of land, weedicide and pesticide spraying, slashing, and the use of tractors, chainsaws and motorbikes. Incoming purchasers must initial this section to indicate their understanding of ordinary rural land activities, and their agreement to them. While all lot owners have access to NCAT pursuant to the legislation,^[23] the management statement creates a system of alternative dispute resolution, at community level, through discussion, mediation, negotiation or counselling.^[24]

For other ecological communities structured with strata or community title see:

• Narara Ecovillage (DP270882), an intergenerational, ecological community on the Central Coast of New South Wales, just north of Sydney.
• Currumbin Ecovillage (SP280228), a sustainable ecovillage in the Currumbin Valley, Queensland, with a village centre, reduce/reuse/recycle (RRR) centre, pool and centralised wastewater treatment system.
• Crystal Waters (CTS 20926), a 640 acre permaculture village on the Sunshine Coast, Queensland, with 83 one acre lots, expansive common property, eco-accommodation and camping, and a monthly food market.^[25]

3.5 Case Study B: Embedded Networks

At the other end of the housing spectrum from small intentional eco-communities are large-scale high-rise strata schemes. Governments are particularly concerned to ensure that these buildings contain sustainability infrastructure, including ‘distributed energy resources’ (‘DER’). DER are privately owned renewable energy assets that produce and/or manage power behind the meter at household or business level. The most common examples are rooftop solar panels, battery storage, thermal energy storage, electric vehicles and chargers, smart meters, and home energy management technology.^[26] In its report, Unlocking the Potential of Distributed Energy Resources, the International Energy Agency (‘IEA’) found that DER are in the process of transforming global energy markets.^[27] As noted at the beginning of the chapter, it is often easier to construct housing from the outset with sustainability infrastructure than to retrofit existing housing. DER is a good example of this.

DER in large strata schemes are often included as part of an ‘embedded network’. Embedded networks are private energy networks that allow for the onsite generation of energy (eg with solar panels or trigeneration plants) or discounted bulk purchase of energy from the grid, with savings being passed on to residents within the network.^[28] To the extent that embedded networks rely on renewable energy (generated on site or purchased) and to the extent that they use energy saving systems (eg heat pump hot-water systems), they contribute to our efforts to reach net zero.

Currently, most new large strata schemes in New South Wales are constructed with embedded networks, which have increased exponentially in recent years in response to state governments and local councils looking favourably on new developments with sustainability features.^[29] Unfortunately, embedded networks have not operated well in practice and have been subject to consistent consumer complaint, and consequently parliamentary and regulatory inquiries.^[30] Residents inside networks have found themselves paying high, opaque energy bills, and are unable to escape the embedded network and source energy from alternative providers, benefiting from market competition. Ironically, OCs have also found that they are not receiving any of the renewable energy generated on site, because it is being sold back to the grid, and they are prohibited from installing further sustainability infrastructure, such as additional solar panels.^[31]

These problems have their root in the use — or more accurately misuse — of strata title legal structures: specifically, developers causing OCs to sign service contracts with third-party companies that apartment owners will ultimately have to pay through levies.

Developers are currently allowing third-party companies, called embedded network operators (‘ENO’), to install sustainability infrastructure in strata schemes at no cost to the developer. ENOs do this in return for the developer causing the OC to enter a long-term contract with the ENO. Pursuant to that contract, the ENO will run the embedded network for the OC, bulk purchasing energy from the market and/or managing its onsite generation, and then onselling it to residents in the building or even back to the grid. The terms of these contracts are negotiated at the construction stage, prior to the registration of the strata plan that creates the OC. Once the OC is in existence and controlled by the new apartment owners, the first annual general meeting will be held.^[32] The owners who are present (usually a minority) will be shown the embedded network contract for the first time and told to sign it as a necessary part of the functioning of the building.^[33] Lay apartment owners are unlikely to understand its legal significance or the complex infrastructure to which it relates.

The problem with this practice is that the longer the ENO and body corporate contract, and the more it allows the ENO to charge the OC, the more infrastructure the ENO will be prepared to provide the developer for free. Of course, the developer will not have to pay the ENO–OC contract it negotiates; apartment owners will have to pay it through levies. The practice of developers selling OC contracts, for cash or in-kind payments, is likely a breach of the fiduciary duty that developers owe OCs they create;^[34] however, it has plagued strata developments in one form or other (eg contracts for strata and building management, security services, landscaping) for decades.^[35] Apartment owners have repeatedly found themselves forced to pay for uncommercial OC contracts from which they cannot escape.

These practices exist because developers and the strata industry recognise that the thing that makes strata title different from non-strata titles — namely, the statutory obligation to pay levies for the maintenance and repair of common property and the management of the scheme, highlighted at the beginning of the chapter — is effectively an income stream that can be tapped. The more common property, facilities and services that a developer provides a scheme, the more levies owners will have to pay to meet the OC’s statutory obligations. The OC will frequently need third-party companies to help it discharge those obligations, particularly in large schemes with extensive common property and large numbers of owners. To that end, the OC will form contracts with strata and building managers, security service providers, landscapers and increasingly sustainability infrastructure providers. These contracts will be paid via annual levies.

To the extent contracts for infrastructure and services are negotiated robustly by OCs made up of owners, they present no problem. For example, Stucco, the student cooperative apartments owned by the University of Sydney, retrofitted its building with solar panels and an embedded network, which has provided considerable savings for residents.^[36] However, most new developments have contracts for infrastructure and services that were negotiated by the developer, prior to the creation of the OC, in return for a kickback. Those contracts are frequently uncommercial and exploitative of owners and tenants, compromising people’s access to functional and fair housing, and in the case of embedded network contracts, ironically compromising their ability to source renewable energy.