Owners corporations and the struggle of short term leasing

‘Short term leasing’ does not always carry a positive connotation. For many apartment owners, the term conjures thoughts of an increased number of undesirables in the building they call home. With the rise of the sharing economy, the issue of how owners corporations and their members can regulate or ban short term leasing is becoming increasingly important.

It was only in June this year that the Supreme Court of Victoria determined that the short term subleasing of apartments through Airbnb, without the landlord’s consent, was a breach of the lease which entitled the landlord to terminate it.

However, the short term leasing economy has recently had a victory. On 22 July 2016, the Supreme Court of Victoria held that an attempt by an owners corporation to ban short term leasing was unlawful.

Background

Mr Balcombe, the owner of several apartments in the Watergate building in Docklands, was using several apartments as short term accommodation (a similar arrangement to serviced apartments). The business was operated from his own apartment within the building. The Owners Corporation (‘OC’) rules (‘Rules’) specifically prohibited short term leasing, providing that owners could not lease their apartments as residential accommodation to the same person for periods of less than one month.

Initially, the Melbourne City Council took action against Mr Balcombe in the Building Appeals Board on the basis that the short term leasing re-classified the building
(a residential building) as a hotel, which was not permitted under the planning permit. The Building Appeals Board agreed with the Melbourne City Council. Mr Balcombe appealed to the Supreme Court of Victoria Court of Appeal, which overturned the decision, finding that using apartments for short term leasing does not change the nature of the apartments.

The OC subsequently commenced proceedings against Mr Balcombe in the Victorian Civil and Administrative Tribunal (‘VCAT’), arguing that the use of the apartments as short term accommodation was against the Rules, specifically Rule 34.

Member Rowland, after considering case law, took the view that the OC could only lawfully make rules which were permitted pursuant to the Owners Corporations Act 2006 (Vic), the Subdivision Act 1988 (Vic) and the associated regulations. After considering the legislation, he concluded that the OC did not have the right to make a rule banning short term leasing of lots. His finding specifically stated:

I conclude that neither the body corporate under the Subdivision Act 1988 nor the owners corporation under the 2006 Act had the power to make Rule 34. It is therefore an invalid rule.

The OC appealed Member Rowland’s determination to the Supreme Court of Victoria.

Supreme Court of Victoria

The OC submitted, among other things, that the Rule preventing short term leasing was validly made in line with the regulations that allow an owners corporation ‘to take any action necessary or desirable’.

His Honour Justice Riordan disagreed with the OC and took the view that, while the regulations do provide a broad scope for making rules, that scope is predominantly focused on the management, maintenance and insurance of the common property. They generally do not concern the control of or the use of private apartments. As such, the Rule which sought to prevent short term leasing was without basis and therefore invalid.

It should be noted that in reaching his conclusion, His Honour contrasted the Victorian and NSW strata title legislation, noting that the Victorian Parliament appears to have intentionally decided that uses of apartments should not be controlled through the rules of the owners corporation.

What does this mean?

Until the legislation or regulations change, it appears that the ability of owners corporations to regulate or prevent short term leasing will remain limited. Owners of apartments in strata title arrangements will remain free to lease their apartments for short periods of time.

For those seeking to buy in an apartment building, it should be acknowledged that other apartments in the building may be used as short term rentals.

Similarly, developers who are selling apartments should not make promises to purchasers that short term leasing will not be permitted, as their ability to keep those promises now appears to be rather limited.

Authored by John Wellington, Special Counsel and Leong Chan, Special Counsel, Melbourne.


Related Articles

COMMISSION SHARING AGREEMENTS BY ANY OTHER NAME

Commercial Directions

Introduction Whether described as commission sharing, referral or consultancy agreement, real estate agents and other unlicensed persons in Victoria who wish…

Continue reading

Restrictive covenants in Victoria

Commercial Directions

Can they be varied or removed? What are they? Restrictive covenants are  a tool for protecting neighbourhood character and restricting long…

Continue reading

Owners corporations and the struggle of short term leasing


‘Short term leasing’ does not always carry a positive connotation. For many apartment owners, the term conjures thoughts of an increased…

Continue reading