Just how far can owners corporation rules go? The rule making powers of an owners corporation

Owners corporation rules are only lawful if the owners corporation has the power to make those rules.

Over the past few months, there have been a number of Victorian decisions that have considered the extent of an owners corporation’s rule making powers:

In August, the Victorian Civil Administrative Tribunal ("VCAT") held that two owners corporation rules that purported to prohibit pets were invalid.

The cases are a timely reminder that the rule making power of owners corporations are not unbridled. Developers preparing owners corporation rules, owners corporations and residents must be aware of the limits to the rule making power of owners corporations.

Prohibiting pets

In an application brought by an owners corporation for the removal of a tenant’s dog, VCAT held that the following owners corporation rules were invalid:

Rule 1: “Pets are not allowed in units.”
Rule 2: “Pets are not allowed on common property.”

Under section 138 of the Owners Corporation Act 2006 (Vic) ("Act"), for a rule to be valid it must be both:

1. for or with respect to any matter set out in Schedule 1 of the Act; and
2. for the purpose of either the control, management, administration, use or enjoyment of:

• the common property; or 
• a lot.

In the Tribunal’s view, and following the decision in Balcombe, to determine whether a rule meets the first criterion, the rule has to have a “sufficiently direct and substantial connection” to one of the rule making powers in Schedule 1 of the Act.

The Tribunal found that Rule 1 was invalid as it was not sufficiently connected to the “health, safety and security” power. Although there was a tenuous connection to the “noise and nuisance” power, the Tribunal found that the exercise of the power was disproportionate to the noise and nuisance it was seeking to prevent.

Whilst Rule 2 was valid in that it complied with the above test, valid rules are of no effect if:

1. they discriminate against a lot owner or occupier; and
2. the discrimination is unfair.

In the Tribunal’s view Rule 2 was plainly discriminatory as it treated animal owners less favourably than non-animal owners. The critical question was whether that discrimination was unfair.

The Tribunal found that Rule 2 unfairly discriminated on lot owners due to the layout of the property – the location of the townhouses (as 6 townhouses with one long common driveway) meant that a rule prohibiting an animal from being on common property effectively prohibited a lot owner from having an animal at all.

Prohibiting short term letting

In Balcombe an owners corporation sought to enforce a rule that prohibited short term letting, and sought an order restraining lot owners from letting their lot for a term of less than 30 days. The lot owners challenged the validity the rule.

VCAT determined that the rule was invalid, and this was reaffirmed on 22 July 2016 when the Supreme Court of Victoria rejected the owners corporation’s appeal. The Supreme Court held that Parliament had not expressed an intention to confer such extensive powers on an owners corporation, so as to allow a rule that prohibited lots being used for short term letting.

Charging for use of common areas

In a related and subsequent proceeding, the applicant sought a ruling that the owners corporation was not permitted to charge $50 per hour to ‘hire’ the business centre in the premises to lot owners and occupiers. There, VCAT was able to deal with the issue succinctly as:

1. there is no power under the Act to charge lot owners and occupiers for the use of common property, other than on the basis of lot liability; and
2. there was no power under the owners corporation’s rules to charge lot owners and occupiers for the use of the business centre.

If the owners corporation’s rules did contain a rule purporting to allow the owners corporation to charge lot owners and occupiers for the use of the business centre, it would be a different question entirely as to whether that rule would be valid under the Act. Unfortunately, as the owners corporation’s rules did not contain such a rule, the extent of an owners corporation’s rule making power was not tested on this point and remains an unresolved issue.

What to do now?

Owners corporations and developers that create additional owners corporation rules should seek legal advice before creating rules which could be subject to challenge. It should be borne in mind that powers to regulate a matter, such as pets, or short term letting, does not empower the owners corporation to prohibit that matter altogether.

Owners and occupiers should not assume that they are bound by rules containing broad prohibitions that impinge on their rights as an owner or occupier.

For more information please contact Mark McKinley.