A novel set of provisions – the strata renewal process
From 30 November 2016, Part 10 of the Strata Schemes Development Act 2015 (“the Act”) commenced and allows for a “collective sale” or “redevelopment” of an entire strata scheme, despite considerable concerns expressed by various representative groups. The provisions aim to wind up and terminate eligible freehold strata schemes where the required level of support is reached (at least 75% of lot owners, not including separately titled utility lots).
For lot owners in dissent of the strata renewal plan, a subsequent order of the Land and Environment Court (LEC) can be made against the wishes of dissenting lot owners to involuntarily alienate their interest in their lot/s and interest in common property. The order can only be made if all lot owners receive minimum compensation and the strata renewal plan (being a plan prepared by the strata renewal committee in accordance with the provisions of the Act and its Regulation) is “just and equitable” in all the circumstances.
The LEC is ultimately responsible for granting the order and must grant an order to give effect to a strata renewal plan where the Court is satisfied of all matters contained in ss 182(1) of the Act. Once the order is made, the collective sale or redevelopment is binding on the lot owners and their successors in title.
The strata renewal process applies to freehold strata schemes irrespective of use (residential and commercial strata schemes). It does not apply to leasehold strata schemes, strata schemes subject to staged development and a scheme where one or more lots form part of a retirement village. Strata schemes with less than 4 lots are unable to meet the voting threshold and do not come within the provisions of Part 10.
Solicitors and other advisors will be expected to advise lot owners on the unique legal issues and risks to their client. This practice note discusses some important considerations for solicitors advising lot owners participating in a strata renewal process.
The 10 Bullet Points
Part 10 of the Act contains 37 sections, and is to be applied in conjunction with other specific clauses in the Strata Schemes Development Regulation 2016. For the LEC to make an order for a collective sale or redevelopment, most of part 10 of the Act will be relevant as the procedure is intended to be exhausted before an order can be made by the LEC to give effect to the strata renewal plan and ultimately the winding down of the strata scheme. So, if a client decides to either participate or dissent to a strata renewal plan, the key elements of advising the lot owner would include a detailed advice of the following issues:
1. Collective sale or redevelopment – Where a strata renewal proposal is made, the first question is what form the strata renewal is proposed to take, being either a collective sale or a redevelopment.
For developers, a “collective sale” translates into another means of site acquisition as it comprises of a sale of the whole strata scheme to the developer.
A “redevelopment” is broadly defined as “a redevelopment of the whole strata scheme in a way that alters the scheme to the extent that its termination and replacement by a further strata scheme is necessary”. An example of a redevelopment may comprise of a joint venture or other arrangement between the participating lot owners in a strata scheme to knock down and rebuild the strata scheme according to the strata renewal plan. As the former common property and lots will no longer be in physical existence, a new strata plan would be required to be lodged, terminating the former scheme.
2. Minimum compensation – For most lot owners, the compensation price will be the most important factor to consider and the developer is required to provide an indicative sale price upfront where a proposal is for collective sale is made.
Under the strata renewal provisions, lot owners are guaranteed minimum “compensation value”. Compensation must be no less than market value plus an additional sum calculated using modified principles from s 55 Land Acquisition (Just Terms Compensation) Act 1991. Section 55 lists the relevant matters that are to be considered in determining an amount of compensation,
including any special value, disturbance and relocation costs. A valuation from an independent valuer with appropriate experience or expertise is required to form part of the strata renewal plan and a further valuation is required to be attached to the application for the order with the LEC. For a collective sale, the amount paid for the sale of the lots and common property is to be apportioned among the owners of the lots in their respective unit entitlements; ss 171(1) of the Act.
To assist clients in coming to an early decision to assess whether they are interested in proceeding down the path of strata renewal, lot owners should have a clear idea of the price they are willing to accept, and more importantly the price they will not accept for the collective sale of their lot.
3. Costs of strata renewal process – Once the compensation value for each lot is considered, the costs of the strata renewal process should be identified. There is a requirement for the strata renewal proposal to include an estimate of the total costs of obtaining an order from the court to give effect to the strata renewal plan, however other likely costs may include legal costs prior to commencement of proceedings; costs of an independent valuation; due diligence costs; meeting costs; costs of preparing the strata renewal plan, including the specialists reports; costs of the returning officer; and where an agent is used, potential costs for fees and commission. The reasonable legal costs of the proceedings of dissenting owners are payable by the owners corporation, whom cannot impose a levy to fund these costs; s188 of the Act.
The next question will be who will pay these costs, and what costs will they pay? There is scope for the developer to contribute to the OC’s costs of developing a strata renewal plan, although there is no requirement for the developer to so.
Both time and money will be wasted by the developer/proponent and strata renewal committee if:
- a strata renewal plan is prepared and then lapses for any reason listed in s 177 of the Act; or
- where the application is made to the court but the LEC refuses to grant the order because the strata renewal plan was not ‘just and equitable’ in all the circumstances.
Over time, a lack of commitment from lot owners and loss of interest by a developer during the process may also jeopardise the outcome for the parties and potentially result in wasted costs. Lot owners with specific financial concerns would be best advised to seek expert financial advice.
4. “Just and equitable in all the circumstances” – A court order giving effect to the strata renewal plan cannot be made unless the court is satisfied that it would be just and equitable in all the circumstances. This requirement is repeated in clause 36 of the Regulation which states that “a court must be satisfied of the effects of the strata renewal plan are just and equitable in all the circumstances despite any difference between a valuation contained in the plan and any valuation that accompanied the application for an order to give effect to the plan”.
Furthermore, the court cannot make an order to give effect to the strata renewal plan where it is not satisfied of the relevant matters listed in s 182 of the Act. Matters that may be likely be considered by the court as not being “just and equitable” may include:
- Unreasonable conduct of the developer or proponent.
- A failure or consistent failure to follow the proper procedures, including the issue or form of notices, or a lack of follow through with the various timescales set in Part of 10 of the Act and the Regulation.
- Invalid meetings and/or invalid resolutions.
- A failure to disclose pecuniary interests and/or a questionable relationship between parties preventing the strata renewal plan from being prepared in good faith.
- An invalid support notice that is not able to be cured or an illegitimately procured support notice.
The strata managing agent will be of vital assistance to the owners corporation and strata renewal committee during the strata renewal process. The court also has the broad power to make a range of ancillary orders pursuant to s 186 of the Act. Such orders may include directions of the matters listed in ss 186(2) of the Act.
5. Buying back into the scheme – The legislation contemplates that lot owners may potentially buy back into the scheme for a collective sale or redevelopment. This is likely to take the form of an option to purchase and details of such are to disclosed in the strata renewal proposal submitted by the developer or proponent; ss 156(2) of the Act and clause 30(1)(i) of the Regulation.
It is likely that some elderly residents will face genuine concerns about appropriate alternative accommodation and their ability to afford a repurchase back into the strata scheme. In factoring the affordability, lot owners buying back into the strata scheme will need to be advised of any additional duty, tax or other financial implications associated with the purchase. It also likely that an option to buy back into the scheme will be subject to any order of court and council approval given at the time the strata renewal plan is being prepared, as a site acquisition has yet to occur by the developer.
6. Tenants – If an order is made by the court giving effect to the strata renewal plan, leases of lots are terminated on the day stated in the strata renewal plan; ss 184(6) or 185(7) of the Act. The termination of the lease does not affect any other right or remedy under the lease, in other words the clauses of the lease or applicable legislation governing the lease will determine other rights the parties may have.
7. The better option – There is a better option. Where unanimous consent of all the lot owners to terminate the strata scheme can be achieved, and where the termination does not appear to have significant competing interests (particularly regarding the division of common property), an application to the Registrar-General can be made directly with LPI at relatively low costs avoiding the provisions of Part 10 entirely. The added benefit for terminating a strata scheme unanimously provides potential for meaningful collaboration between lot owners and potentially saved costs for avoiding the strata renewal process. This option should always be put to the owners corporation prior to commencing down the path of the strata renewal process.
8. Office of the Registrar-General (ORG) – ORG have published a number of useful practical resources through their website including a summary of steps for the strata renewal process and a guide to preparing a strata renewal plan.
9. Land and Environment Court Practice Note – The LEC has released a useful practice note for Strata Schemes Development Proceedings that will assist the parties. The practice note is available on the Court’s website.
10. Strata Renewal Advice and Advocacy Program – The Office of Fair Trading has established a hotline dedicated to assist vulnerable lot owners by providing free advice and advocacy services.
At the time of writing there have been no applications made in the LEC to give effect to a strata renewal plan. Practitioners, developers and lot owners wait eagerly for the first application in this Court to be made to serve as instructional guidance of the practical operation of the legal complexities consequent on Part 10 of the Act.
Special Counsel | Nolan Lawyers
Kye is also an adjunct lecturer in the Applied Law Program at the College of Law