The Strata Schemes Development Act 2015 that commenced on 30 November 2016 offers significant benefits to the development industry by way of a new process that enables lot owners to end outdated strata schemes for sale or redevelopment purposes.
Previous strata legislation placed considerable constraints upon the ability for strata buildings to be sold or redeveloped, because the end of a strata scheme required the support of 100% of lot owners. The Act makes the redevelopment process more achievable for both owners and developers by requiring the support of only 75% of lot owners to end a strata scheme.
A flow chart of the process is provided at Figure 1. In short, the process allows for developers to:
- put a proposal to an owners corporation to end a strata scheme (a strata renewal proposal); and
- be involved with the owners corporation in the preparation of the corresponding strata renewal plan.
Although terminating a strata scheme is now more readily achievable, the extent to which the process can and will be effectively used for a single scheme may not be as widespread as anticipated. This is particularly the case for a strata scheme involving a small block of land. The planning controls that apply to such land are likely to limit its redevelopment potential.
Role of the Land and Environment Court
As a checks and balance for the lowering of support to 75% of the lot owners, new powers have been conferred on the NSW Land and Environment Court (Court) to determine and approve strata renewal plans. Proceedings are within the Court’s Class 3 jurisdiction.
After following the extensive process in the Act, if the required level of support for a strata renewal plan is obtained, the secretary of the owners corporation, or a member of the strata renewal committee (the committee elected by the owners corporation to investigate and develop the strata renewal proposal), may convene a general meeting of an owners corporation to:
- decide whether to apply to the Court for an order to give effect to the strata renewal plan; and
- resolve by special resolution (75% or more in favour) that the owners corporation may apply to the Court for the order.
If the plan is for the redevelopment of the strata scheme, developers will need to disclose to the Court, by way of a declaration, the nature of any relationship (personal or commercial), that it may have with an owner of any lot in the scheme.1
The Court must give effect to the strata renewal plan if it is satisfied that the plan was made in good faith; the steps taken in preparing the plan and in obtaining the necessary support were carried out in accordance with the Act, and that the amount to be paid to a dissenting owner is not less than the compensation value2 of the owner’s lot or an amount equal to the total consideration that would accrue to the owner in relation to the redevelopment, whichever is greater3. The Court must not make an order giving effect to the strata renewal plan if it is not satisfied of the relevant matters.4
The Court may vary the strata renewal plan and make an order giving effect to the varied plan but only if the variation is of a minor nature and does not affect the plan in any substantial way, and written agreement to the variation has been given by the owner of each lot who supported the original strata renewal plan.5
Proposals and plans can lapse
Developers need to be aware that there are circumstances whereby a strata renewal proposal or a strata renewal plan can lapse (see 2).
If a proposal or plan lapses, then the developer is unable to submit that proposal (or a proposal that is substantially similar) to an owners corporation for at least 12 months after the proposal or plan lapses.6
It is therefore essential that developers engage in due diligence with the relevant strata managers and owners corporation before submitting a strata renewal proposal. Developers can reduce the risks of a proposal lapsing by first reviewing strata records, researching market sales in the area, reviewing the value of the land and importantly, discussing appropriate compensation to be paid to the lot owners.
Termination of the strata scheme – effect on developers
The rights and liabilities of the owners corporation vests in the developer in accordance with the strata renewal plan and the order.7 This could include the liability of the owners corporation to pay the reasonable costs of the proceedings incurred by a dissenting owner.8
It is the developer’s responsibility to provide the Registrar-General with notice of the termination of the strata scheme.9
The real picture
Despite the legislation making it easier for strata schemes to be terminated and for owners corporations to accept a strata renewal proposal, it remains to be seen how popular the process will be, particularly for a single owners corporation.
Many older strata schemes to which the legislation is aimed are generally on smaller blocks of land, with the existing buildings built close to the boundary. It is not uncommon for such older apartment buildings to be less than 3 to 4 metres from an apartment building on adjoining land.
This raises the question whether such smaller blocks of land can be redeveloped on their own for the purpose of larger apartment buildings, having regard to the relevant planning controls that apply to the land and, in particular the requirements of State Environmental Planning Policy No. 65 – Design Quality of Residential Apartment Development and the Apartment Design Guide.
Some older apartment buildings, particularly inter-war buildings may also be identified as contributory items in a heritage conservation area. As such, before development consent for the demolition of such buildings can be granted, developers will be required to address and satisfy each of the requirements in the Court’s planning principle in Helou v Strathfield Municipal Council (2006) 144 LGERA 322. Those principles include that the consent authority consider whether the building is structurally unsafe, and if the building is or can be rendered structurally safe, what is the scope for extending or altering the building in a way that would have a lesser effect on the integrity of the conservation area than demolition.
It follows that in addition to the property due diligence referred to above, it will also be essential for developers to carry out a planning due diligence, with the assistance of architect(s), planner(s), traffic engineer(s), potentially heritage consultants and lawyers to ascertain the development potential for any site and in particular the achievable yield.
In early 2017 there was media coverage about the owners of four older apartment buildings in Cronulla joining together to sell their land to a developer for $54 million.
We anticipate that as in the Cronulla example, the owners corporations of two or more adjoining properties will in many cases need to be the subject of strata renewal proposals in order for a redevelopment proposal to be viable.
2. “Compensation value” means the compensation to which the lot owner would be entitled under section 55 of the Land Acquisition (Just Terms Compensation) Act 1991. This includes more than just the market value of the lot. It includes compensation to relocating and purchasing a new property.
3. Section 182(1).
4. Section 182(4).
5. Section 182(2) and (3).
6. Section 190.
7. Section 185(4)(b).
8. Section 188(1).
9. Section 185(4)(e).
Liability limited by a scheme approved under Professional Standards Legislation.
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