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Defects Don’t Wait for Committees: Why the Most Expensive Decision is Often Doing Nothing

A water stain appears on a ceiling.

A crack forms in a basement wall.

An owner mentions a balcony that “doesn’t quite feel right”.

None of these issues appears urgent. Yet some of the most expensive building defect claims begin with symptoms that initially appeared minor and manageable.

The issue is raised at a committee meeting, noted in the minutes, and discussion is deferred pending further information.

Three months later, the issue is raised again.

Then again.

Before long, years have passed.

For many owners corporations, this is how building defect claims are lost, not because the defects were hidden, but because nobody appreciated how quickly time was running out.

The Silent Countdown

One of the greatest misconceptions in strata is that a building defect only becomes a problem when it becomes serious.

In reality, the clock often starts long before the defect is discovered.

Water continues to penetrate. Damage continues to spread.

By the time an owners corporation decides the issue is serious enough to investigate, it may discover that the defect is larger than expected, the rectification costs have multiplied, and the critical legal rights are approaching expiry. In many cases, the cost of delay far exceeds the cost of obtaining expert advice in the first place.

Under Victorian legislation, claims relating to defective building work are generally subject to a 10-year long-stop limitation period running from the issue of the occupancy permit or certificate of final inspection. Once that period expires, rights can be lost regardless of how significant the defect becomes or when it was discovered.

The consequence is simple: while committees debate whether an issue is worth investigating, the limitation period continues to run.

The building does not pause.

The defect does not pause.

The clock does not pause.

Why Owners Corporations Delay

Most committees do not ignore defects deliberately.

The reality is that owners corporations are required to make collective decisions, often with limited budgets and competing priorities.

Committee members are understandably reluctant to spend money investigating what may turn out to be a minor issue. Lot owners may question the need for expert reports where damage appears cosmetic. Managers are often balancing competing views from stakeholders who have very different risk appetites.

The result is a cycle familiar to many strata professionals:

Monitor the issue.

Wait for more information.

See if it gets worse.

Revisit it at the next meeting.

Unfortunately, by the time the issue is undeniably serious, the options available to the owners corporation may be significantly reduced.

The Cost of Waiting

Early investigations are frequently viewed as an expense.

In reality, they are often one of the most cost-effective investments an owners corporation can make.

A properly scoped expert investigation can identify whether an issue is:

a maintenance problem;
an isolated defect;
evidence of a broader systemic issue;
a safety concern; or
something requiring urgent legal consideration.

More importantly, an investigation provides certainty.

Without expert advice, committees are often making decisions based on assumptions rather than evidence.

The question should not be “Can we afford to investigate?”

It should be “Can we afford not to?”

Small Symptoms Can Reveal Large Problems

Some of the most significant defect claims begin with seemingly minor complaints.

A recurring leak may indicate widespread waterproofing failures.

A cracked wall may reveal structural movement.

A loose balcony tile may expose more extensive construction defects.

By the time visible damage becomes widespread, rectification costs have often increased dramatically and critical evidence may have been lost.

Owners corporations should be particularly cautious where they observe recurring water ingress, widespread cracking, façade deterioration, fire safety concerns, balcony defects, roof failures or repeated complaints relating to the same building element.

These issues do not necessarily mean a major defect claim exists.

They do, however, justify asking whether further investigation is required.

Information Creates Options

Obtaining an expert report does not mean litigation is inevitable.

In fact, many investigations confirm that issues can be managed through maintenance programs or targeted repairs.

The real value lies in understanding the problem early enough to make informed decisions.

When owners corporations act early, they preserve options.

When they wait, those options can disappear.

The Question Every Committee Should Ask

Perhaps the most important question for any committee is not whether a defect exists.

It is whether enough has been done to understand the risk.

Because while committees may meet every few months, building defects continue to develop every day.

By the time a defect becomes impossible to ignore, it may already be too late to preserve every available remedy.

This article was first published on June 23, 2026 and was written by Julia Moroz, Partner and Jade Holding, Paralegal in our Melbourne office.

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More Regulation, More Enforcement, More Compliance: Will the Owners Corporations Reforms Fix Governance?

The Victorian Government’s response to the statutory review of the Owners Corporations Act 2006 (Vic) represents the most significant proposed overhaul of owners corporation governance since the legislation commenced almost two decades ago.

The headline reforms have attracted considerable attention. Licensing of Owners Corporation managers. Expanded investigative and enforcement powers for Consumer Affairs Victoria. Increased penalties. New disclosure obligations. Enhanced governance requirements. A new duty for initial owners (i.e., developers) to act in the best interests of subsequent lot owners.

Collectively, the reforms signal a clear shift towards greater regulation of the sector.

The underlying assumption appears straightforward: stronger regulation will lead to better governance.

The reality may be more complicated.

There is little doubt that some reform is necessary. The Expert Panel that undertook the review identified recurring concerns regarding transparency, conflicts of interest, record keeping, procurement practices and the conduct of some managers and committee members. Many practitioners working in the sector have encountered situations where stronger oversight would have been beneficial.

Yet governance failures are often symptoms rather than causes.

In practice, many disputes arise not because there are insufficient laws, but because owners have competing interests, limited engagement with governance processes, and differing expectations about how their communities should operate.

No amount of regulation can entirely eliminate those tensions.

The proposed licensing regime for owners corporation managers is perhaps the most significant structural reform. Supporters argue licensing will improve professional standards, increase accountability, provide greater consumer protection, and align the regulation of OC managers with other real estate professionals that require a licence.

Those objectives are difficult to oppose.

Although the design, scope and implementation of the licensing regime are yet to be determined, licensing inevitably creates additional compliance costs and barriers to entry. Smaller management businesses may face increased regulatory burdens, while larger operators are likely to be better positioned to absorb compliance costs and administrative requirements.

The result may be greater professionalisation of the industry, but potentially less competition.

The proposed expansion of Consumer Affairs Victoria’s powers raises similar questions.

The Government has indicated support for stronger enforcement mechanisms, including greater investigative powers and the ability to take direct regulatory action in certain circumstances. This may improve accountability and deter misconduct.

However, regulatory intervention is rarely cost-free.

The more expansive the regulator’s role becomes, the more important it will be to ensure consistency, procedural fairness and clear guidance regarding expectations. Otherwise, there is a risk that uncertainty increases rather than decreases.

The uncertainty could cause confusion and increase compliance costs. Again, the incidence of compliance burdens on smaller operators could adversely affect their ability to perform their functions and remain competitive.

Perhaps the most interesting aspect of the reforms is what they reveal about the evolution of strata living itself.

When the act commenced in 2007, strata communities were generally smaller and less complex. Today, many owners corporations manage assets worth tens or hundreds of millions of dollars. They oversee sophisticated building systems, substantial maintenance obligations, extensive contractual arrangements and increasingly complex compliance requirements.

In many respects, modern owners corporations resemble small corporations more than neighbourhood committees. The sophistication and complexity of the assets is only set to increase and, with it, the nature and scope of the duties of owners corporations.

The Government’s response appears to acknowledge this reality. Increased regulation is being proposed because the stakes are now significantly higher and growing.

The critical question is whether the reforms address the root causes of dysfunction.

Governance failures often emerge long before a regulator becomes involved. They arise when communication breaks down, factions become entrenched, meetings become adversarial and owners lose confidence in decision-making processes.

Licensing, enforcement powers and increased penalties may address some symptoms. Whether they improve day-to-day governance within communities remains to be seen.

The reforms undoubtedly represent a significant moment for the sector. The challenge now is ensuring that increased regulation translates into better outcomes rather than simply additional compliance obligations.

Good governance cannot be achieved through legislation alone.

It ultimately depends on informed owners, capable managers, effective committees and a willingness to engage constructively with differing views.

The legislation may change. The problems of collective action probably will not.

This article was first published on June 24, 2026, and was written by Julia Moroz, Partner and Shuja Jamal, Solicitor in our Melbourne office.

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Victorian Owners Corporations Reform: Six Changes Every Committee Member Should Be Watching

The Victorian Government has now responded to the Expert Panel Review of the Owners Corporations Act 2006 (Vic), signalling significant changes for Owners Corporations, lot owners and managers across the state.

While legislation is still to be drafted, the Government has accepted or supported many of the Panel’s recommendations. For committee members and lot owners, understanding the direction of these reforms is important.

The table below summarises some of the key proposed changes.

Topic	Current Position	Proposed Changes	Why it Matters
Financial Hardship	No formal statutory hardship process exists.	Introduction of a financial hardship framework for owners experiencing genuine hardship.	May affect levy recovery processes and debt collection strategies.
Owners Corporation Managers	Registration is not currently required.	Introduction of a licensing or registration framework.	Increased professional standards and greater regulatory oversight.
Consumer Affairs Victoria Powers	Limited enforcement powers in some areas.	Expanded investigative and enforcement powers.	Greater ability for regulators to intervene in governance disputes and misconduct.
Committee Governance	Existing obligations apply but enforcement can be difficult.	Enhanced governance and disclosure obligations.	Greater accountability for committee members and decision-making processes.
Proxy Voting	Limit of proxy votes to 1 per person for OCs with 20 lots or less, or 5% of lots for OCs with more than 20 lots.	Restriction on multiple employees and associates of the same organisation exercising proxy votes beyond the existing proxy cap.	Addresses the issue of voting blocs controlled by OC managers, building managers and developers.
Dispute Resolution	Many disputes ultimately proceed to VCAT.	Improved dispute resolution pathways and earlier intervention options.	Potentially quicker and less costly resolution of disputes.

These reforms reflect the growing complexity of strata living in Victoria.

Modern Owners Corporations are responsible for managing significant assets, substantial budgets and increasingly complex compliance obligations. The Government’s response recognises that governance structures established almost 20 years ago may no longer be adequate for many contemporary developments.

Importantly, these reforms are not yet law. Further consultation and legislative drafting will occur before the proposed changes take effect.

For Owners Corporations, managers and advisors, now is a good opportunity to review existing governance practices and consider how future reforms may impact the operation of their schemes.

The next stage of the reform process will be particularly important, as the detail contained within the legislation will ultimately determine how these proposals operate in practice.

This article was first published on June 24, 2026 and was written by Julia Moroz, Partner and James Cooper, Law Graduate in our Melbourne office.

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Hybrid Loan Agreements in Strata Schemes: Why the Current Structure Does Not Work

Introduction

There are strata financiers marketing a product known as “hybrid” loan – structures in which an owners corporation (OC) borrows money from both a commercial lender and from individual lot owners within the scheme, variously called “Lending Owners”, “Participating Lot Owners” or “Self Funding Owners”. In this article I will use the generic term “Lending Owners”. On the surface, the concept has appeal: lot owners who prefer a special levy to fund their share of major capital works can do so directly without having to participate or contribute to the loan entered by the owners corporation.

However, in their current form, these arrangements are incompatible with the strata legislation in both New South Wales and Victoria. The legal problems are significant, and the consequences for owners corporations, lot owners and financiers alike could be severe.

How Lending Owners agreements are structured

To understand the legal difficulties, it helps to understand how the product attempts to work.

Consider a scheme with ten lots of equal unit entitlement that needs to fund $100,000 for capital works. Three lot owners volunteer to fund their proportionate share – $10,000 each – directly. Under a hybrid loan arrangement:

The commercial lender advances $70,000 to the owners corporation;
Each of the three participating Lending Owners lend $10,000 to the owners corporation under separate loan agreements; and
All loan agreements – between the OC and the lender, and between the OC and each Lending Owner – carry the same interest rate and repayment terms.

Reviewing these agreements in light of the strata legislation with which they must comply reveals fundamental terms of the agreements a Court would hold to be void.

Under these agreements, the owners corporation raises levies on all lot owners to fund the repayment of both principal and interest on its loan obligations. However, the agreement creates a mechanism by which Lending Owners do not pay those levies using actual currency. Instead, the OC grants each Lending Owner a “credit” equal to the levy amount, which is then offset against what the OC owes the Lending Owner in principal and interest repayments. In effect, the two obligations – the Lending Owner’s levy liability and the OC’s loan repayment obligation – are netted off against each other, with no money actually changing hands.

It is this offset or “credit” mechanism that sits at the heart of one of the legal problems in both jurisdictions (I have referenced this other mechanism at the end of this article).

Why hybrid loans do not work with Strata Legislation?

The core legal problem is the ultra vires credits

Both the Strata Schemes Management Act 2015 (NSW) (see s.100) (SSMA) and the Owners Corporation Act 2006 (Vic) (OCA) (see s.25) grant owners corporations the power to borrow money. But neither Act grants any power to an owners corporation to credit a levy obligation against a debt owed by the OC in the manner these agreements require.

Strata legislation, for both New South Wales and Victoria, is quite prescriptive in how the finances of a strata scheme are managed, both in how funds are raised and how funds are expended. There is no power prescribed in either jurisdiction which authorises a strata scheme to grant a “credit” to a lot owner.

This is not a minor technical deficiency, neither is it something that can be resolved by contract or by a resolution at a general meeting. An act that is ultra vires (literally “beyond the powers” of the owners corporation) is unlawful, and the consequences flow through the entire structure of the loan agreements.

Consequences from the ultra vires “levy credit”

1. Lending Owners Become Unfinancial

In both New South Wales and Victoria, lot owners who fail to pay their levies become “unfinancial” – a status that, among other matters, strips them of the right to vote at general meetings. Because the levy credit is of no legal effect, the Lending Owner’s levy remains formally outstanding regardless of the offset arrangement in the loan documentation. The Lending Owner is therefore in default of their levy obligations.

The irony is stark: the lot owners who agreed to fund the scheme’s capital works – and who have in fact advanced their own money to the OC – find themselves classified as non-paying owners, unable to participate in the democratic governance of their own scheme.

2. Record Keeping and Audit Obligations Cannot Be Met

Strata legislation in both states imposes detailed obligations on owners corporations to keep accurate financial records and to reconcile their bank accounts. The New South Wales legislation specifically requires the OC to record every transaction of money received or disbursed, and each year to reconcile those transactions against the OC’s banking records.

The credit mechanism creates an insurmountable problem: because no money actually moves when the offset is applied, nothing appears on the OC’s bank statement. The owners corporation, treasurer or auditor cannot verify a bank reconciliation that does not reflect the notional credits, and an auditor cannot sign off on accounts that cannot be reconciled. In Victoria, the legislation requires the accounts to provide a true and fair view of the OC’s financial position – something that cannot be achieved if the offset arrangements are not properly reflected in the records.

3. Void or Unenforceable Loan Agreements

The OCA 2006, section 202 states that any contractual term that purports to “exclude, modify or restrict the operation” of the Act is void. If the Lending Owners’ loan agreements are found to have this effect – by, for example, purporting to relieve a Lending Owner of a levy obligation the Act requires to be paid – those terms may be struck out entirely.

There is a similar provision in the New South Wales legislation, see s.270 of the SSMA.

The consequences of this would be dramatic. If key provisions of the contract (i.e. the loan agreement) are void, the agreement becomes unworkable. Monies advanced to the OC by both the commercial lender and the Lending Owner may no longer be subject to any enforceable repayment obligation, potentially causing the lenders to commence urgent legal proceedings to protect funds advanced.

Additional issues

Taxation: An Additional Concern

Even setting aside these structural legal problems, Lending Owners face a tax complication that many may not anticipate. In ATO Product Ruling PR2024/2, the Australian Taxation Office confirmed that interest received by a participating lot owner – even when received by way of a credit rather than as an actual cash payment – constitutes assessable income in the hands of the Lending Owner in the year the credit is applied.

This means lot owners who have lent funds to their owners corporation must declare the interest component of any levy credit as income in their annual tax returns. For a lot owner who entered the arrangement expecting a straightforward way to fund their share of works without ongoing tax complications, this may come as an unwelcome surprise.

What Happens When a Lending Owner Who Has Lent funds to their Owners Corporation Wants to Sell?

A further practical difficulty emerges if a lot owner who has lent to their owners corporation wishes to sell their lot during the term of the loan. The Lending Owner loan agreement is a contract between that individual and the owners corporation (and the strata lender). An incoming purchaser is not a party to that agreement and cannot automatically step into the Lending Owner’s position.

Arranging an assignment of the loan will require a deed of assignment executed by the Lending Owner, the incoming purchaser, the owners corporation and the strata lender. The OC would need to convene a general meeting to pass the necessary resolution. Coordinating four parties – including a strata lender and a body corporate manager – in the course of a property sale is, to say the least, a significant practical burden that the current products do not adequately address.

What Should Happen Next?

The “hybrid” loan product, in its current form, is not compatible with the strata legislation of New South Wales or Victoria. Owners corporations that have already entered into these arrangements face considerable uncertainty, and those considering doing so should seek independent legal advice before proceeding.

For the product to have a viable future, it would need to be fundamentally redesigned to eliminate the levy credit mechanism and replace it with an arrangement that operates within the strict framework that strata legislation prescribes for the collection, management and recording of levy funds. That is no small task – but it is the necessary starting point for any structure that seeks to involve lot owners in the funding of their scheme’s capital works and ensures compliance by the owners corporation, the strata manager, the treasurer and the auditor.

There are further problems not covered here including:

These products bear all the hallmarks of Managed Investment Schemes (MIS). If the regulator holds them to be MIS – the question becomes whether the finance companies promoting them will be able to deal with the very onerous added costs of compliance – and any penalties that might be applied under the MIS regime?
Commercial lenders promoting these loans will need to be very clear that such a complicated offering is clearly described in their Target Market Determination under Part 7.8A of the Corporations Act 2001 (Cth).
These loan products raise the problem of split interests (those owners who are Lending Owners and those owners that are borrowing the funds) which need consideration in light of legislative requirements to manage conflicts of interest.

Owners corporations and their committees, strata managers, auditors and financiers alike should approach existing hybrid loan arrangements with caution and ensure that appropriate legal and financial advice is obtained to protect all parties involved.

This article is written by Gerard Doyle, Partner at Bugden Allen and was first published on 19th May 2026.

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Q&A: Can an appointed administrator break a tied vote at an AGM?

Question: What is the administrator’s role at an AGM?

An administrator has been appointed to our body corporate under orders. If owners vote on a motion at an AGM and the vote is tied, for example, two owners vote to appoint a body corporate manager and two vote against, can the administrator use any additional powers to make the decision and break the stalemate?

Answer: It comes down to the terms of the appointment.

It comes down to the terms of the appointment. If an administrator has been appointed to run an AGM and that’s it, then the short answer is no. If they’ve been appointed to run the body corporate, then maybe.

When I’m running a body corporate, and I run an AGM, I want the body corporate to get back to a state of functionality, so I’ll run the AGM and get everybody participating to show them how it should normally be done.

If we then reach a stalemate, I follow the Act. If I’m the chairperson, I’ll do what is in the best interests of the body corporate. An administrator is trying to retrain the body corporate to adopt a habit of being functional, where possible. On the other hand, if a body corporate is so dysfunctional that the administrator has to fix a raft of issues first to get it to a state of functionality, it’s best to concentrate on just getting stuff done and then build from there.

Watch the Webinar here: QLD: Administrator appointments to make the troublemakers pay in a body corporate | LookUpStrata

This article by Queensland Partner Michael Kleinschmidt first appeared in May 2026 edition of The QLD Strata Magazine from LookUpStrata Pty Ltd.

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