On 28 November, the Supreme Court of NSW delivered its judgment in Smith v Owners – Strata Plan No. 3004  NSWSC 1599. The judgment related to the application of sections 106(1) and 106(5) of the Strata Schemes Management Act 2015 (NSW) (SSM Act), and whether the principal of the mitigation of loss (that is, the duty imposed on a person seeking damages to take reasonable steps to reduce its loss) applies in respect of s 106(5).
Section 106(1) provides that an owners corporation has a duty to repair and maintain common property. Section 106(5) provides that contravention of this obligation by an owners corporation entitles a lot owner to damages for “any reasonably foreseeable loss”. Her Honour, Justice Mitchelmore, ultimately confirmed that s 106(5) of the SSM Act involves the application of mitigation.
In 2003 the plaintiffs, Jennifer Ann Smith and Ross Harold Smith (Smiths) purchased a unit in Mona Vale (Unit) as tenants in common. Mr Smith decided to replace the carpet in the Unit and upon removing the carpet discovered damage to the magnesite flooring. Mr Smith then removed a substantial part of the magnesite flooring.
The Smiths commenced proceedings in the Local Court against The Owners – Strata Plan No. 3004 (Owners Corporation) for breach of the s 106(1) duty to “properly maintain and keep in a state of good and serviceable repair the common property” under the SSM Act and sought compensation for loss of rent suffered from 24 September 2017 to 31 January 2021.
At first instance, Magistrate Farnan held that damages for loss of rent was reasonably foreseeable, however, reduced the loss of rent recoverable from the Owners Corporation to a period of three months. In justification of this reduction, Magistrate Farnan found that, although it was reasonably foreseeable that the Smiths would lose some rent as a result of the Owners Corporation’s failure to maintain the common property, it was not reasonably foreseeable that the Unit would remain vacant for the entire time the repairs remained outstanding. In the Magistrate’s opinion, the Smiths had made a choice to remove the entire flooring of the Unit; that choice was not a consequence of the breach of the s 106 duty; and the Owners Corporation was not liable for the consequences of that choice.
- in construing the words “reasonably foreseeable loss” in s 106(5) of the SSM Act as meaning whether or not it was actually unreasonable as a matter of fact for the Owners Corporation not to have foreseen the relevant loss; and
- that there was nothing in the evidence to prove on the balance of probabilities that it was reasonably foreseeable that they would not put tenants in the Unit.
As a defence, the Owners Corporation alleged that the Smiths failed to mitigate their loss by:
- failing to notify the Owners Corporation of the defects until 7 April 2018;
- upon discovering the defect, failed to replace the carpet and to take steps to allow the Unit to be on the rental market while the defects were fixed; and
- without consent performed works on and altered the common property, rendering the Unit as uninhabitable and unable to be on the rental market from 5 October 2017.
Her Honour held that the Magistrate did not misconstrue s 106(5) of the SSM Act. Section 106(5) provides a lot owner with a right of recovery from the owners corporation for “any reasonably foreseeable loss suffered by the owner as a result of a contravention of this section by the owners corporation”. The language in this provision is consistent with the method of measuring damages in tort. In reaching the determination, Her Honour considered the legislative history and affirmed that there is absent in the terms of s 106(5) any statutory intention to exclude the application of the duty to mitigate losses.
Did the Smiths fail to mitigate their loss?
Her Honour confirmed that the Magistrate did not err in limiting the number of damages recoverable by the Smiths for loss of rent as there was nothing hazardous which rendered the Unit as unlettable and that the Smiths made a “commercial decision” to leave it vacant while the defective floors were fixed.
The Smiths failed to establish that the Magistrate erred in her determination, therefore the Summons was dismissed. The key take aways from this case is for lot owners to be aware of the duty to mitigate their losses. They should notify an owners corporation of any defects in the common property (and particularly those that impact their lot directly) as soon as they become aware of them, and if necessary take steps to minimise the impact of defects.
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