In July 2016, The Supreme Court of Victoria handed down an important decision in Owners Corporation PS 501391P v Balcombe [2016] VSC 384 (Balcombe case) regarding whether an Owners Corporation had the power to make a rule prohibiting short term letting of apartments.

The Court held that the relevant legislation did not give the Owners Corporations power to make a rule that prohibited the use of residential lots for ‘any trade or business’ because:

• the principle role of an Owners Corporation was to manage and administer the common property of a strata division
• the legislation did not disclose any intention for Owners Corporations to have power to substantially interfere with a lot owners proprietary rights
• any parliamentary intention to provide Owners Corporations with powers that could substantially inhibit the conduct of lot owners on their own lot would need to be expressed in clear and unambiguous language.

Background to the proceeding

The apartments in question have been the subject of significant judicial consideration which we have considered in previous Maddocks articles (Apartment use Classification Key to Fire and Life Safety and Supreme Court Decision on use of Class 2 Apartments for Short Term Accommodation). They are part of a multi-building, multi-storey apartment complex constructed in Docklands and commonly referred to as the Watergate Apartments.

While the majority of the Watergate Apartments are owner occupied, the subject of these legal proceedings are those used as short term serviced apartments. This short term use was opposed by the Owners Corporation who argued its rules prohibited the use of apartments for ‘trade or business’ and that this use gave rise to a nuisance and increased safety risks to owner occupiers.

The matter started with the municipal building surveyor of the City of Melbourne issuing building orders to the owners of the short term accommodation apartments on the basis that the short term use was contrary to the Class 2 status on the occupancy permit and presented a danger to life safety or health of persons using the apartments. The building order required works to be undertaken to upgrade essential safety measures to those required for a Class 3 building.

The building order was the subject of an appeal to the Building Appeals Board (Board). The Board upheld the decision of the municipal building surveyor to issue the order. The Board found that the use of the apartments as short term accommodation had changed their classification from Class 2 to Class 3. In doing so, it considered the definition of ‘dwelling’ and said that a residential apartment occupied for short term use was not a ‘dwelling’.

The Board’s decision was then appealed to the Supreme Court of Victoria in the matter of Paul Salter v Building Appeals Board, Giuseppe Genco and City of Melbourne [2013] VSC 279. The Supreme Court found the Class 2 nature of the apartments did not prevent their use for short-lease arrangements, nor require the apartments to be reclassified as Class 3 buildings. It said the meaning of the word ‘dwelling’ was not dependent on how long an apartment was occupied for. As a result, the use of a Class 2 ‘dwelling’ for short term accommodation did not, on its own, result in a change of use to Class 3. The Court further refused to accept that the building orders issued were appropriate, as the building itself did not present danger to the life, safety or health of people within the building.

This decision was then appealed to the Full Court of the Supreme Court of Victoria by the City of Melbourne. The appeal was dismissed. In Giuseppe Genco and City of Melbourne v Paul Kenneth Salter and Building Appeals Board [2013] VSCA 365 the Full Court held that if a building (or part of a building) is designed for a particular use and classified on that basis, but is later adapted to a different use, the change in use may result in a change in classification. However, their Honours qualified this finding by stating reclassification would likely only be appropriate where the number of re-purposed apartments was sufficiently significant, and where the apartments were so proximate to each other, so as to resemble a residential part of a hotel.

The Court of Appeal noted that a change of use might give rise to a danger to the life, safety or health of the persons using the building in a way which did not previously arise, but that in the present case the evidence had not established that an actual danger existed if the building was brought up to Class 3 requirements. For those reasons, the Court held that the proper course was to remit the matter back to the Board for rehearing to determine whether a review of essential safety measures ought to be undertaken as a result of the short term use.

On the return of the matter to the Board, the Board ordered, by consent, that the building order be amended to require works inside the apartments. It also directed the municipal building surveyor to conduct an inspection of the common areas on the floors where the apartments were situated and determine whether the essential safety measures were adequate taking into account the occupants using short term accommodation on those floors.

It was against this background that the Owners Corporation initiated proceedings in the Balcombe case. Rather than peruse its complaint to the City of Melbourne, the Owners Corporation sought to prohibit the use of the apartments as being contrary to one of the Owners Corporations’ rules. The Supreme Court has now found that the Owners Corporation did not have power to make such a rule.

Implications

It is likely that these decisions have opened the gate for short term letting arrangements to become more common in apartment buildings. In this regard, as long as an apartment owner has obtained any required planning permission to use their apartment for short term letting, they do not require the permission from the Owners Corporation to enter into such arrangements.

Although the Watergate Apartment cases have provided some answers to the legal issues involved in the regulation of short term letting, they highlight the difficulty councils continue to face in undertaking enforcement where there has been an alleged change of use of apartments in a multi storey apartment complex.

Whether or not the use of apartments for short term letting gives rise to a change of use to Class 3 or to safety implications is a question of fact to be determined in each particular instance. Accordingly, where a complaint is received by a council about a ‘change of use’, the municipal building surveyor will need to inspect to assess the number of apartments being used for short term accommodation and whether there are other features of the building and the use which are ‘hotel-like’. The municipal building surveyor (MBS) will also need to assess whether the safety measures in the building are adequate to protect occupants who may be unfamiliar with the building. This may require the MBS to consider any fire engineering design for the building. If the municipal building surveyor forms the opinion that there has been a change of use or that the safety measures are not adequate and therefore present a danger to occupiers, they could require additional safety measures through the issuing of notices and orders.

The ongoing practice of relevant building surveyors classifying multi storey residential apartment buildings as Class 2 at the time of construction needs to be questioned. The fire engineering designs for these buildings are often developed on the assumption that the occupants will be permanent residents who are familiar with the building (as was the case in the fire engineering design for the Watergate Apartments).

It is common knowledge that once apartments in these buildings are sold, there is a reasonable prospect that the lot owner may let the apartment for short term use. The relevant building surveyor and fire engineer that ignores this very real prospect is arguably allowing the building to be built with inadequate essential safety measures to meet the needs of all likely future occupants.

One way to deal with this issue would be for the National Construction Code (NCC) to be amended to create a new or amended classification of building that would apply to residential apartment buildings over a certain number of storeys. Arguably, the essential safety measures for these types of building should reflect the flexible residential uses which may apply to a building of this kind over its life so that adequate safety measures are provided to occupants with a range of characteristics. Any new or amended classification should also define what levels of accessibility would apply to these buildings.

Government reviews

We note that the Australian Building Codes Board is currently undertaking a review of the fire safety requirements for high rise buildings in the NCC which will no doubt consider the issues raised in the Watergate Apartments cases.

The NSW Minister for Planning has also requested the Legislative Assembly Committee on Environment and Planning to undertake an inquiry into the adequacy of the regulation of short term holiday letting in NSW.