Financing Building Defect Litigation in NSW Strata Schemes

Financing any form of litigation is expensive, and building defect litigation is no exception. Because these cases often involve multiple rounds of testing, expert reports, and investigations, the associated fees can make them one of the most costly types of legal action for an owners corporation.

Using Reserves

Building defect cases usually arise early in the life of a strata scheme, when capital reserves are often low or non-existent. However, if funds are available in the sinking (capital works) fund, they may be used to finance litigation—but only to the extent that the claim relates to repair, replacement, restoration, or maintenance of major components for which the fund was established.

Bank Loans

Some banks will lend money to strata schemes for the purpose of maintaining and repairing common property. However, this type of lending generally does not extend to financing defect investigations or litigation. Owners corporations and community associations are also prohibited from giving security for such loans, which makes this funding pathway more challenging.

Solicitor’s Finance

Unlike the practice in the United States, Australian construction defect lawyers are unlikely to finance outlays such as testing, repairs, or barristers’ fees. This is due to restrictions in Australia on contingency or success fees. In addition, advancing money for outlays or extending credit for ongoing work can create conflicts of interest, as the lawyer then has a financial stake in the outcome of the case.

Conclusion

Financing building defect litigation can be one of the most difficult challenges for strata schemes. While sinking fund reserves may provide some support, other avenues such as bank loans and solicitor’s finance remain limited. Careful planning and early legal advice are critical to navigating these complex cases effectively.

Before You Spend: the Approval Rule

Funding is only half the problem. An owners corporation or strata committee must not obtain legal services requiring payment unless a general meeting has passed a resolution approving it, and that resolution has to approve the spend either with unlimited costs or up to a stated maximum (section 103(1)). For defect litigation, where costs escalate across rounds of testing and expert reports, a capped approval can stall a case midway – so the cap needs to be set with the likely run of the matter in mind.

There are practical exceptions:

• Approval is not needed to obtain legal advice before commencing legal action (section 103(3)(a)). A committee can take advice on the merits first.
• Approval is not needed to recover unpaid contributions and related costs (section 103(3)(b)).
• Urgent action to protect the owners corporation’s interests can proceed without approval where the cost does not exceed $10,000, or another amount set by the regulations (section 103(2)).

Thanks to Teys Lawyers for insights on this topic.

Source: Strata Schemes Management Act 2015 (NSW), section 103.