With Australia’s richest man set to sell his strata management business, it appears not all are happy with the 90 changes to strata laws which came into effect in New South Wales on November 30.
In September, Harry Triguboff’s real estate development company Meriton announced it was selling its strata management business in response to one of the changes which render the developer of a strata scheme or any related parties ineligible to serve as a strata manager for at least the first10 years of a strata plan. That change, Triguboff said, would make it impossible for companies like his to manage complexes they develop from a strata perspective.
Whilst this particular aspect of the changes might be disliked by at least one billionaire, the reforms extend beyond that and cut across matters such as strata management accountability, unit owner protection, dispute resolution, electronic communications, tenant participation, parking, renovations and the collective sale and wind up of a strata scheme. According to Fair Trading NSW, they will impact around two million industry professionals, strata owners and residents in strata titled townhouses and units.
The two biggest areas of change surround collective sales and redevelopments, and defect bonds.
A collective sale occurs where owners of units within a strata scheme reach a collective agreement to sell their holdings, typically in response to an approach by a developer. By contrast, a redevelopment involves a collective agreement to redevelop the strata scheme in a way that requires its replacement with a new strata scheme. For example, an agreement could be entered into with a developer for the replacement of an existing strata building with a new strata scheme, with unit owners having the opportunity to buy back into it.
According to Jean-Paul Fraticelli, a senior associate, accredited property law specialist and head of strata and community title law at National property and commercial law firm Madison Marcus Law Firm, the termination of a strata scheme under the previous legislation could only be achieved through an application to either the Registrar General of Land Titles or the Supreme Court. Applications to the Registrar General had to be signed by all lot owners and a number of other stakeholders, and thus required unanimous agreement between all lot owners.
On the other hand, Supreme Court applications could be made by any individual owner, but whether or not the application was granted was at the Court’s discretion. Fraticelli says he is unaware of any case where an application was granted without the unanimous agreement of all lot owners.
The upshot, Fraticelli says, is that unanimous agreement among lot owners was needed before a collective sale could proceed – something which is difficult to achieve in cases of large strata schemes or schemes where elderly residents may be reluctant to move. Indeed, he says that as at 2012, data from the NSW Government indicated that at a time when 71,000 strata schemes were in place, only 826 such schemes had ever been terminated.
Under the new laws, however, collective sales or redevelopments will be able to take place if at least the owners of 75 percent of lots agree to do so. For this to happen, owners must receive at least fair market value for their property and be given at least 60 days to consider the proposal. Furthermore, all plans and approvals are checked by the NSW Land and Environment Court, which makes the final decision as to whether the proposal should proceed. The new rules will apply to both residential and commercial developments.
Fraticelli says the benefits of making collective sales and redevelopments easier could be significant. From the viewpoint of owners, he said such agreements can provide an effective exit strategy in cases where the building’s condition has deteriorated and there is insufficient money held in the capital works fund to cover the cost of necessary works. This situation is not unheard of in Sydney, where some buildings the subject of strata schemes are more than a century old.
At a broader level, he says this could facilitate the renewal of older and potentially under-utilised properties along with the creation of new housing supply in cases where the renewed complex will involve additional storeys.
“It might be a 15-lot development right now, but you may (under a renewal) be able to fit 50 to 100 units on it,” Fraticelli said.
In addition, both Fraticelli and Peter Rusbourne, a commercial property and business law specialist at Sydney-based property and commercial law firm Watkins Tapsell Solicitors point out that these changes will impact commercial leases in addition to residential leases.
When a commercial strata scheme is terminated, Rusbourne says, the commercial lease will also be terminated and commercial tenants will lose long term leases or leases with options over long periods and be required to vacate the premises. This, Rusbourne says, could expose the landlord to action for damages with respect to the tenant’s loss of commercial premises and consequential potential loss of business or livelihood.
The other large impact area involves a ‘defects bond’ which developers will have to lodge with NSW Fair Trading in respect of residential and mixed use developments. Equal to two per cent of the construction cost of the building, this will act as a form of security to cover any costs associated with defective building work.
The developer must also table a maintenance schedule at the first annual general meeting of the owners and implement a process of identification and rectification of defects. As part of this process, they must engage an independent inspector who will carry out an examination of the building and issue an interim report outlining all defects found in both lot areas and common areas. This will be followed 20 to 24 months later by a final inspection and report which will outline any areas from the initial report which have not been rectified.
Following this, the owners corporation reclaims the bond back from NSW Fair Trading and is entitled to use as much of this money as is necessary in order rectify any remaining defects from the initial report before returning any leftover sum to the developer.
The new bond regime will apply to residential or mixed use development (not commercial developments) with respect to which the construction contract was entered into after July 1, 2017. Importantly, it only applies where owners do not have access to home warranty insurance (i.e. buildings above three storeys in height).
From the viewpoint of unit holders, the new bonds will help to fill a gap which existed whereby owners of high-rise apartment buildings were not covered by home warranty insurance which can be claimed where the builder in fact dies, disappears, or becomes insolvent.
Nevertheless, the bonds will have negative implications for developers and potentially builders and subcontractors. Mark Yum, a partner at Madison Marcus Law Firm and head of construction and infrastructure says that developers will have to allow for the impact of the new bonds within their feasibility studies. In response, he says developers may try to push responsibility back onto builders, who may have to wait longer for the return of retention monies paid under building contracts. This, in turn, could result in cash flow impacts down the chain as builders delay payment of retention monies back to their subcontractors.
Furthermore, Rusbourne says this might not actually work entirely as intended in practice. That’s because of a loophole whereby the bond will not in fact apply where the ‘initial period’ does not end within 12 months after completion of the building works. This ‘initial period’ begins where a strata plan is registered at the land titles office and concludes where one-third of the unit entitlement has been transferred to someone other than the developer.
Because of this, the developer could potentially avoid the obligation to pay a defect bond by pushing back or delaying some sales so that the initial period does not in fact end within 12 months after completion of the building works and the new bond regime therefore does not apply. Where this happens, owners would have no greater protection than they do under the current regime, he says.
A further area of change revolves around strata management accountability. In addition to the aforementioned prohibition on developers and related parties being strata managers for at least the first 10 years of a strata scheme, new requirements limit the term of strata manager appointments to one year in the initial strata period and three years thereon after. They also require managers to disclose any commissions received in respect of insurance. Furthermore, tenants will have the right to have representatives attend owners corporation meetings (in a non-voting capacity).
Watkins Tapsell commercial litigation lawyer and managing partner Sonja Daly says these changes are designed to prevent situations where unit owners become stuck with managers with whom they are unhappy over a duration of long-term contracts.
“There’s a lot of strata schemes out there that have had strata managers who might have been placed for 10 years or more and they (unit owners) are just local people but there is not much they can do about it (if they are unhappy),” Daly said.
Other areas of change include model by-laws, including new model rules relating to things like keeping pets and dealing with cigarette smoke; removal of a requirement for approval for cosmetic renovations to common property; a new ability for the strata scheme (for a fee) to engage local council services in enforcing parking restrictions; the enabling of owners to use electronic communications for things such as online voting, emailing meeting papers and using phone-in for meetings; and more options for dispute resolution.
Obviously, the changes impact different stakeholders in different ways. Whilst developers will benefit from greater redevelopment opportunities associated with the collective sale reforms, they will have to wear the cost associated with the defect bond and will lose any opportunities to act in a strata management capacity.
Residential tenants may find smoking rules more restrictive but might find it easier to have pets and will benefit from having representation in OC meetings as well as through greater amenity associated with better parking enforcement and faster/easier renovations.
Commercial tenants, however, face a greater prospect of forced relocations and associated disruption to their business courtesy of the collective sale reforms, whilst strata managers obviously face stricter accountability requirements.
Arguably the biggest winners, however, appear to be the lot owners. Whilst some owners who would prefer to remain in place when a collective sale proposal is forwarded face the prospect of having to sell anyway if over 75 per cent of unit owners agree to the sale, owners stand to benefit as through better accountability of strata manages and better amenity through some of the amenity changes.
Far more importantly, though, they will benefit from the higher level of protection afforded by the developer bonds along with the much greater potential to benefit from the renewal or redevelopment of their complex through the collective sale reforms.
Speaking particularly of owners, Rusbourne says they should ensure they are aware of the changes and have an exit strategy with regard to leases which will expire in the event of a collective sale.
Throughout New South Wales, laws relating to strata have undergone fundamental change.
Whilst these have a cost for some stakeholders, they appear to offer significant improvements in many instances to the system as a whole.