Palm Springs Residences [2007] QBCCMCmr 381 (23 June 2007)

Last Updated: 8 July 2009

Office of the Commissioner for Body Corporate and
Community Management

SPECIALIST ADJUDICATION
(Service Contractor Dispute)

Numbers: 0135A-2007
0309A-2007

Applicant: J PATTERSON HOLDINGS PTY LTD Respondent: BODY CORPORATE FOR PALM SPRINGS RESIDENCES COMMUNITY TITLES SCHEME 29467

O R D E R S 23 June 2007 ORDERS that: (a) resolution number 2, purportedly passed at the Extraordinary General Meeting of the Body Corporate on 11 February 2007, is invalid and of no effect; (b) the purported termination of the Caretaking Agreement referred to in that motion, by letter from the Body Corporate’s solicitors dated 19 February 2007, is invalid and of no effect; (c) any action taken by the Body Corporate in reliance upon the said termination since 19 February 2007 is invalid and of no effect; (d) Application No. 0309A-2007 is dismissed as an order on that application is no longer required; and (e) the Body Corporate must pay the costs of the adjudication within thirty days from the date on which it receives an invoice for those costs. G F Bugden OAM Specialist Adjudicator The above order was appealed to the Brisbane District Court. The appeal no is BD3134/07. The matter was referred back to the specialist adjudicator and a subsequent order was issued (Ref: Palm Springs Residences [2009] QBCCMCmr 247).

FINAL DETERMINATION
23 June 2007

Background

1. On or about 6 September 2001 the Respondent (‘Body Corporate’) entered into a Caretaking Agreement with AJA Pty Ltd (‘Caretaking Agreement’) for a term of five years with four option periods, each of five years.
2. In clause 1.1 of the Caretaking Agreement, the following definition appears:

‘Caretaking – letting business’ means the rights of the Manager in connection with caretaking and letting in respect of the Building including the rights under this agreement, a Letting Deed with the Body Corporate and any agency letting agreements with owners of lots within the Building.’

3. Although that definition appears in clause 1.1, it does not appear to be used anywhere in the Caretaking Agreement. However, recital C of the recitals to the Caretaking Agreement mentions a grant of ‘management rights’. Also, clause 8.1, whicht deals with default, provides for what is effectively an event of default, if the Letting Deed is lawfully terminated’.
4. There is no Letting Deed in the Commissioner’s file and I can only assume that the Caretaking Agreement is accompanied by a Letting Deed and the termination of the Caretaking Agreement will result in a termination of the Letting Deed, or alternatively, a right for the Body Corporate to terminate the Letting Deed.
5. One of the directors of the Applicant is the registered proprietor of Lot 106 in Community Titles Scheme 29467 and attached to that lot are the reception desk and office facilities from which the management rights business is operated.
6. The material on the Commissioner’s file is also incomplete in two other respects:
   1. there is no record of how or when the first five year option in the caretaking agreement was exercised; and
   2. there is no record of how or when AJA 2000 Pty Ltd assigned the Caretaking Agreement to the Applicant.
7. For the purposes of this application I can only assume that the option was exercised and that at some point the Caretaking Agreement, with the consent of the body corporate, was assigned to the Applicant.
8. The Body Corporate served a Notice of Default dated 20 December 2006 on the Applicant in which some 17 events of default were alledged.
9. An extraordinary general meeting of the Body Corporate was then convened to be held on 11 February 2007. There were two motions on the agenda for that meeting. The first related to confirmation of the minutes of the previous general meeting. The second was a motion, proposed to be passed by secret ballot, to terminate the Caretaking Agreement. The motion itself set out in full the wording of the Notice of Default. This meant that the motion itself took up over 4 pages of the Notice of Meeting.
10. Schedule B of the Notice of Meeting contained the following explanatory note:

‘Purpose – the purpose of the extraordinary general meeting is to determine whether the Caretaking Contract (Service Agreement) currently in force between the Body Corporate for Palm Springs Residences, CTS 29467 and the Resident Caretaker, J Patterson Holdings Pty Ltd ACN 108 905 380, as trustee for the Patterson Family Trust (hereinafter referred to as the ‘Resident Caretaker’) is to be terminated by a secret ballot of the Body Corporate.

See Explanatory Schedule submitted by the Committee attached.’

11. The explanatory schedule referred to comprised a single page with the following headings:
    • Why the vote?
    • Type of vote
    • The vote
    • Caretaking Agreement and Letting Agreement
    • Continuity of Caretaking and Letting Agreement

The last two headings are the most significant. They contain the following information:

‘Caretaking Agreement and Letting Agreement

The Service Contract (Caretaking Agreement) Clause 8.1.6, and the Letting Agreement Clause 9.7 are cross termination clauses causing the Letting Agreement to terminate contemporaneously with the termination of the Caretaking Agreement.

Continuity of Caretaking and Letting Agreement

If through the Extraordinary General Meeting the Body Corporate votes to terminate J Patterson Holdings Pty Ltd, it is the committee’s intention to maintain the continuity from the current Caretakers’ and Letting Agents’ to the new Caretakers’ and Letting Agents’ by appointment of a relieving Caretaker/Letting Agent until the Body Corporate votes on the future arrangements.’

12. It is fair to say that, on the basis of the information contained in the Notice of Meeting (including the wording of the notice of default containing 17 alleged events of default), the Caretaker appeared to be grossly underperforming in relation to its obligations under the Caretaking Agreement. Furthermore, there was no information accompanying the Notice of Meeting that sought to put any view or response on the part of the Caretaker. Nor was there any information about which (if any) of the alleged events of default had been rectified.
13. On or about 19 January 2007 the Applicant provided a detailed response to the Notice of Default. None of the information contained in that response appears to have been conveyed to unit owners at the time the notice of extraordinary general meeting was sent out.
14. After the notice of the meeting was given, but before the date of the meeting, a communication was sent to all unit owners with the heading:

‘COMMITTEE COMMUNICATION TO ALL OWNERS’

EGM 11 FEBRUARY 2007’

The wording of this communication is significant. It read as follows:

‘This EGM has been called on a Sunday for the convenience of all owners as J Paterson [sic] Holdings Pty Ltd claim that weekday meetings prejudice some owners. Unfortunately SSKB cannot be represented on the weekend.

QUESTION: Why is the Committee putting the owners through the inconvenience and expense of another EGM and secret ballot to terminate the Caretaker?

ANSWER: Because the Committee (who are elected to protect the interests of all owners) firmly believe that termination of J. Patterson Holdings Pty Ltd is in the best interests of Palm Springs Residences and all owners. The cost of unnecessary expenditure and rectifying the culminating damage to Palm Springs Residences by retaining J. Patterson Holdings Pty Ltd far exceeds the cost of the EGM and secret ballot.

PENDING COSTS

1. Repair fire doors due to inadequate or no
   cleaning by the Caretaker. $12,000.00
2. Reline swimming pool due to incorrect chemical balance
   by Caretaker $10,000.00
3. Premature replacement carpets due to inadequate cleaning $26,100.00
4. Replace swimming pool chlorinator due to inadequate
   salt in pool $1,450.00
5. Dig-up and clean drain to pool podium $3,000.00
6. Additional secretarial costs to SSKB.
   (Account pending, estimate) $2,000.00
7. Clean grounds (Estimate $3,000.00) $3,000.00
8. Restore gardens (Suns cost $8,000.00) Estimate
   $5,000.00 $5,000.00

This is not a complete list, but -------------TOTAL $62,550.00

All defaults are valid, current and on-going. Enclosed are photographs taken at 10.00am Sunday 21 January 2007 showing some of the defaults claimed by the Caretaker to have been rectified.

1. Garage perimeter drain. 2. Oil in Caretakers car space. 3. Garage exit fire door. 4. Garage exit steps. 5.. Swimming pool podium level drain. 6. Beach foot wash. 7. Grass thatched due to inadequate cutting.

Pool maintenance.

Pool test readings have been excellent since 18th December as your committee engaged Swimart to maintain the pool from that date. The caretaker is already paid by you, the owners, to complete this work, but the pool could not be left unsafe over the holiday period.’

15. That communication was accompanied by seven photographs.
16. In an attempt to respond to that communication and to the notice of extraordinary general meeting, the Applicant circulated a letter dated 31 January 2007 to the investment owners in the community title scheme. That six page letter sought to explain how the various alleged defaults had been satisfied. However, that communication was only sent to investment owners and would only have been received about a week before the date on which the meeting was to be held. Indeed, it may have been received by some owners after they had returned their voting papers for the secret ballot.
17. At the extraordinary general meeting on 11 February 2007, the motion to terminate the Caretaking Agreement was passed by secret ballot. Twenty-seven votes were cast in favour of the motion, seven votes were cast against and one unit owner abstained from voting on the motion.
18. By letter dated 19 February 2007 from the Body Corporate’s solicitor, Heiser Bayly & McDonald, the Body Corporate gave notice terminating the Caretaking Agreement. Subsequently, on 20 February 2007, the Body Corporate appears on a ‘without prejudice’ basis to have allowed the Applicant sixty days to sell its business and the associated unit.
19. In an ‘update to owners’ dated 20 February 2007 the Body Corporate advised that the Caretaking Agreement had been terminated and that the sixty day grace period had been allowed. The Body Corporate also proposed the following options for ongoing arrangements in relation to the community title scheme:
    1. That owners form a management company to operate the management rights in respect of the building.
    2. That the Body Corporate grant the management rights to a company consisting of any owners who may be interested in employment of the necessary persons to complete the various duties.
    3. That the Body Corporate grant the existing caretakers agreement to new caretakers.
    4. That the Body Corporate grant an amended form of agreement to new caretakers, but for a five year period.
    5. That the Body Corporate grant a one year contract only to new caretakers that would be renewable at the option of the Body Corporate.
    6. That the Body Corporate contract out the caretaking duties, (i.e. pool, gardens, lawns, common property) and place the rental pool with a local real estate agent.
    7. That the Body Corporate employ an on site caretaker and letting agent who would effectively be an employee rather than a contractor.
20. The update to owners also pointed out the difficulty in acquiring the caretaker’s unit and office in order to achieve any of the above arrangements. The significance of this update is that it addresses the predicament created by the termination of management rights so far as investment owners are concerned. In essence, investment owners are heavily reliant upon the continuation of an effective letting service within the building in order to obtain the returns that they anticipate from their investment. Any interruption to the internal management arrangements has the potential to impact adversely on the investment owners. This is obviously a factor that needs to be taken into account by any body corporate committee that is considering outright termination of management rights within their building.
    

Application

21. Shortly after the extraordinary general meeting, on or about 13 February 2007, the Applicant made application to the Commissioner for an order ‘to have the resolution passed at the EGM held on 11/02/07, terminating the service contract (Caretaking Agreement), set aside.’ In the same application the Applicant sought an interim order restraining the Body Corporate from taking any action in reliance on the resolution passed on 11 February 2007 to terminate the Caretaking Agreement or making any attempt to replace the managers, or to sell the Caretaking Agreement or the Manager’s unit.
22. On 28 February 2007 I made an interim order restraining the Body Corporate from acting in any way in reliance upon the resolution of its extraordinary general meeting of 11 February 2007 that purportedly authorized termination of the Caretaking Agreement with the Applicant. In my reasons I expressed concern as to the appropriateness of the remedy being sought by the Applicant. I observed that the Applicant sought to ‘set aside’ the resolution rather than challenge the right of the Body Corporate to terminate the Caretaking Agreement.
23. Subsequent to the making of the interim order, the Applicant sought to amend the application pursuant to section 245 of the Act to seek a remedy in the alternative to the original remedy sought. The alternate remedy was to set aside the termination of the Caretaking Agreement on the grounds that it was unjust and unreasonable and against the rules of natural justice. In support of that alternate remedy, the Applicant pleaded the value of the management rights, which were said to be worth $1.9 million.
24. Following its purported termination of the Caretaking Agreement, the Body Corporate reduced the amount of remuneration being paid each month to the manager. This prompted a further application by the Manager (No. 0309A-2007) in which the Manager sought reimbursement for the moneys deducted by the Body Corporate. The application also sought:
    100. joinder of that application with the original application (No. 0135A-2007); and
    4. a further interim order to the effect that the deductions should cease until a final order has been made.
25. On 10 May 2007, in respect of the second application, I made orders refusing the interim order, joining the second application with application number 0135A-2007 and, with the consent of the parties, dispensing with the calling for submissions and other preliminary matters.
26. In the event the Body Corporate paid the deducted fees to the Applicant and the need for any order on the second application has since passed.
    

Evidence

27. The evidence in this matter comprises the following:
    5. the Commissioner’s files, which in the original form in which they were forwarded to me contained around 1,500 pages;
    6. information and documents provided to me during the course of the adjudication, including during the course of three meetings of the parties; and
    7. verbal evidence provided by persons nominated by both parties, such evidence having been taken at the meetings I have referred to.
28. It is not surprising that both parties in this matter tell conflicting stories. If one accepts the evidence of the Body Corporate on face value, we are clearly dealing with a caretaker who is totally incompetent and totally underperforming when judged against the requirements of the Caretaking Agreement.
29. On the other hand, if we take the evidence of the caretaker at face value, it is the victim of a Body Corporate that is determined to rid itself of the Caretaking Agreement and will go to any extremes in order to do so.
30. It is clear to me that the Body Corporate in this matter has gone to extremes in order to extinguish this Caretaking Agreement. The tenacity with which it, via the members of its Committee, have pursued the caretaker are remarkable to say the least. There is nothing more telling than the fact that the Body Corporate’s submission in response to application no. 0135A-2007 occupies an entire folder of the Commissioner’s file and comprises some 494 pages.
31. The energy and enthusiasm of the Chairman and other committee members in contesting the application is a further indication of the vigour with which the caretaker has been pursued. Add to this the attempts to defeat this application by taking technical points, such as the lack of authority of a director to sign the application and the validity of the amendment allowed by the Commissioner, it is clear that the Committee (if not a majority of unit owners) are very determined to rid themselves of the caretaker.
32. However, there is also clear evidence that for a substantial period of time the Caretaker has underperformed. I say this having regard to the list of duties in the Caretaking Agreement and his current level of remuneration, which I understand currently stands at a little over $54,000 per annum, excluding GST. The extent of the duties appear to be extensive having regard to the level of remuneration. However, despite this, it is still strongly arguable that the caretaker’s performance has fallen short of what is both required and reasonable.
33. In response to this the caretaker may well say that the Body Corporate made it impossible for it to perform. There may be some truth in that response, but it does not justify the decision of the caretaker to completely shot-off the normal communication process simply because it thought it was being pursued and the communications would be used against it.
34. It is another issue as to whether or not the default notice was justified. From the evidence presented, it may well have been the case. It is yet another issue whether the Applicant failed to remedy the alleged defaults in the default notice that subsequently led to termination of the Caretaking Agreement. I find it is unnecessary for me to determine those issues for the purpose of disposing of this application. However, I will say more about that shortly.
35. It is also relevant to note that, in dealing with the performance issues associated with the Applicant, the Body Corporate had two options available to it:
    1. To serve a notice to remedy and in the event of failure to remedy, proceed to terminate the contract (which is the approach that was adopted by the Body Corporate).
    2. To serve a notice under Division 8 of Part 2, Chapter 3 of the Body Corporate and Community Management Act 1997 (‘Act”) requiring transfer of the management rights.
36. The first option (i.e. the one chosen by the Body Corporate) was always going to be the most difficult. It would inevitably lead to an application such as the current application, which seeks to protect an asset of substantial value. After all, if an adjudicator or the Court dismisses an application such as the present one, they are effectively with the stroke of a pen wiping away this valuable asset. It is obvious that such an order cannot be made lightly.
37. On the other hand, the second option had the potential to resolve the problem of the underperforming caretaker but had the disadvantage of leaving the management rights in place for around another twenty years.
38. It is clear to me that the Body Corporate committee, which is comprised substantially if not entirely of resident owners, prefers to see the management rights extinguished rather than passed on to another caretaker. Whatever the motivation for this, it has serious implications for the investment owners within the Scheme. As I have already said, those owners potentially could suffer financial loss as a consequence of cancellation of the management rights.
39. It follows that a committee must act even handed and in the interests of all owners, including the caretaker, when dealing with issues such as the present one.

The Issues

40. All of this leads me to the issues that need to be determined in relation to this application. They are:
    1. Was the application properly made or did it require authorization of a resolution of its Board of Directors?
    2. Did the Body Corporate go about the passing of the resolution on 11 February 2007 in a proper way that was appropriate to the outcome being sought?
    3. If it did not do so, is the consequence of its failure to do so such as to render the resolution invalid?
    4. If the resolution is valid, does the Applicant have standing to make this application, because it is no longer a caretaking service provider? (This was a late submission from the solicitor for the Body Corporate and one that the Respondent has not had an opportunity to make submissions.)
    5. If the resolution is valid, should it otherwise be set aside?
41. Associated with the fifth issue, is the question whether the amendment reportedly made by the Commissioner under section 245 of the Act was a valid amendment and therefore enables the fourth issue to be considered by me. Also relevant to the fifth issue is whether or not the Notice to Remedy was validly given by the Body Corporate and whether it was complied with by the Applicant, thus making it inappropriate for the Caretaking Agreement to be terminated.
42. I have already disposed of the first issue. Although the 2 directors of the Applicant were estranged at the time the application was made, the director who was alleged not to have participated in the decision to make the application says that she was informed of the application and concurred with it. Even in the absence of that I would not be prepared to deny the implied right of a director of a company to take action to protect a very valuable asset, if not the only asset, of the company by making an application such as the present one.

Relevant Law

43. On the question of the second issue, the provisions of Part 4 of the Body Corporate and Community Management (Accommodation Module) Regulation 1997 (‘Module’) are relevant; this being the module that applies to the Body Corporate.
44. Section 49(3)(e) of the Module requires notice of a general meeting to be accompanied by explanatory material required under section 40C of the Module. There is nothing in section 40C that requires explanatory material to accompany the notice convening the extraordinary general meeting of 11 February 2007. However, section 40C(7) provides as follows:

‘A notice of a proposed general meeting may be accompanied by explanatory material given by the committee, other than an explanatory note mentioned in subsections (2) to (5), if the material is contained in a schedule of the committees explanatory material that is separate from the explanatory schedule.

Example for subsection (7) –

The schedule of committees explanatory material might contain general explanatory material but does not relate to a particular motion stated in the voting paper, or information relating to a motion.’

45. Furthermore, section 40C(8) provides as follows:

‘Explanatory material may accompany a voting paper or a notice of a proposed general meeting only if required or permitted under this regulation.’

46. It is significant to note that the Body Corporate chose to set out the terms of the notice of default in full as part of the motion to terminate the Caretaking Agreement, without any information as to whether or not any of the alleged defaults had been rectified. Furthermore, the explanatory notes that accompanied the notice of meeting, as permitted by section 40C(7), are not particularly helpful in assisting a unit owner to determine whether or not it is justifiable to terminate the caretaking agreement.
47. The material incorporated within the notice of meeting is quite damning of the Applicant and in the absence of other material, would be very persuasive in favour of an affirmative vote. The notice of meeting does not set out a balanced assessment of the situation and it makes no mention of the denials of the applicant in relation to the alleged defaults.
48. The committee communication to all owners that was sent out after the notice was sent out but before the meeting was due to be held does not correct the situation. Indeed, it is even more damning of the applicant. In particular, it alleges that the Applicant has cost the Body Corporate (and therefore the collective owners in the scheme) at least $62,550. It also states that ‘all defaults are valid, current and ongoing’. It makes no mention of the denials of the Applicant and it graphically illustrates what the Body Corporate claims are the ongoing defaults, by means of seven photographs that accompanied the communication.
49. During the course of taking evidence on these applications, the eight items of costs listed in the committee communication were tested by me. Based on the information that testing brought to light, it is clear to me that in respect of many of those items, the Body Corporate would have great difficulty in a court of law establishing liability on the part of the Applicant, on the balance of probabilities.
50. Even if the Body Corporate were successful in establishing that liability, there would be substantial argument as to the quantum of any damages and there is no doubt in my mind that the amount recoverable by the Body Corporate would be substantially less than the $62,550 alleged in the committee communication.
51. To this extent, the committee communication is misleading. It would almost have certainly created a negative attitude in the minds of owners as regards the Applicant and the Applicant’s performance. It would almost certainly have influenced the vote of otherwise fair minded unit owners.
52. The communication distributed by the Applicant to investment owners within the scheme, in my view, would not necessary have corrected the situation. This is because;
    8. it was competing with an official communication from the committee of the Body Corporate, presented in the strongest possible terms; and
    9. it was only distributed to investments owners and therefore was not available to other owners.
53. It is my conclusion that the committee (and therefore the Body Corporate) attempted to get around the prohibition in section 40C(8) of the Module by doing two things:
    10. incorporating into the wording of the motion to terminate the Caretaking Agreement the terms of the notice of default; and
    11. sending around the separate communication to all lot owners.
54. In doing these two things, the Body Corporate has clearly contravened the prohibition in section 40C(8), which appears to have been inserted by the legislature to ensure the fair presentation of issues that owners are being asked to vote upon. This circumvention of the requirements of the Module directly impact on the validity of the resolution purportedly passed on 11 February 2007.
55. In addition to that, the unit owners were seriously misled by the way in which information intended to help them in their voting decision was presented to them. That information was such as to virtually guarantee the passing of the motion, as was most likely the clear intention of the committee. This is a serious defect in any circumstances, but more so when the subject matter of the motion has such devastating effects for one of the unit owners.
56. In my view, that resolution is invalid. That being the case, the purported termination of the Caretaking Agreement by the Body Corporate on 19 February 2007 is also invalid. It follows that the Caretaking Agreement is still on foot and both parties are still legally obliged to observe its terms.
57. I direct the Applicant’s attention to my comments about its performance under the Caretaking Agreement. On the day it has been successful, but had the members of the committee acted differently in their efforts to terminate the Caretaking Agreement, they may well have been successful.
58. I propose to make declaratory orders in support of the above findings. Because those orders are consistent with the original outcome sought by the Applicant in application 0135A-2007, it is not necessary for me to consider whether the Commissioner’s amendment of the application pursuant to section 245 of the Act is a valid amendment. Nor is it necessary for me to consider whether:
    50. at the time of the purported termination of the Caretaking Agreement the Applicant was still in default under the default notice previously served by the Body Corporate; or
    13. the Applicant has standing as a caretaking service contractor.

Costs

59. This has been an expensive exercise for both of the parties. Section 280(2) of the Act says that the Applicant is responsible for the costs of the adjudication, unless the adjudicator otherwise orders. There is clearly an argument that the costs should follow the event and in the past, specialist adjudicators have adopted that argument.
60. Personally, as I have said before, I think other matters must also be taken into account. An important matter is the conduct of the parties in relation to the proceedings. In this matter, I have found shortcomings in the conduct of the Body Corporate in the way in which it went about the meeting of 11 February 2007.
61. These proceedings are a direct result of the way in which the Body Corporate, through its committee, chose to conduct itself. This in itself, in my view, requires that a costs order be made against the Body Corporate in relation to the costs of the adjudication. I propose to include such an order.
    

G F Bugden OAM
Specialist Adjudicator