El Khouri: An Owners Corporation Can't Levy You to Fund Litigation Against You

If your owners corporation is suing you and decides to raise a special levy to fund the legal fees, you might assume you have to pay your share. The NSW Supreme Court has now made clear: that's not always reasonable. The El Khouri decision is a watershed for any owner caught in a strata dispute.

What was happening

The dispute was between the owner of a penthouse lot and the owners corporation over an exclusive-use by-law for two balconies and a rooftop terrace with Sydney Harbour views. The detail of that dispute is interesting but the standout part of the decision — and the part most relevant to other schemes — is what the Court said about the OC's special levies.

The litigation levies

While the proceedings were running, the owners corporation raised two special levies that included substantial legal-fee components:

• 8 November 2021 — special levy including $200,000 for legal fees
• 27 April 2023 — special levy including $375,000 for legal fees

The penthouse lot had a unit entitlement of 21.11%. The lot owner's share of those litigation costs alone came to $121,382.50.

What the Court decided

The Supreme Court held that the levies were unreasonable and unjust. The reasoning was direct and useful for any owner. Quoting from paragraph 236 of the judgment:

The Court relied on Section 87 of the Strata Schemes Management Act 2015, which lets the Tribunal (or Court) vary contributions if they're inadequate, excessive or unreasonable.

The lot owner's contribution to the litigation portion was reduced by $121,382.50 — effectively, that share of the legal-fee levy was wiped out.

The earlier authority

The Court applied the principle from Cleggatt v The Owners – Strata Plan No 35541 [2013] NSWTTT 359, where the Tribunal had previously found it would be "quite unjust" for a lot owner to be obliged to contribute, in part, to the payment of an owners corporation's legal costs in proceedings against them.

The El Khouri decision elevates that principle to Supreme Court authority.

What this doesn't mean

It's important to be careful with what El Khouri did and didn't decide:

• It does not mean every special levy that contains some legal cost is unreasonable.
• It does not mean lot owners can refuse to pay levies they don't like.
• It does not prevent owners corporations from suing lot owners — including for unpaid levies.
• What it does mean: where the OC raises a specific levy to fund complex, prolonged litigation against a specific lot owner, that owner can apply under Section 87 SSMA to have their share of the litigation portion varied or removed.

The other parts of the decision (briefly)

For completeness, the case also dealt with:

• A sunset clause in the exclusive-use by-law — the Court found it unjust under s149 SSMA and remitted the question of the owner's continued exclusive use to NCAT.
• A $6.5 million damages claim by the lot owner's executors for home loan interest — that claim failed because the critical obligations under the by-law hadn't been met.
• A reminder that an exclusive-use by-law can be challenged as oppressive even by a subsequent purchaser — applying the principle from Cooper v The Owners – Strata Plan No 58068 [2020] NSWCA 250.