Strata Scheme collective sale – History in the making

Application by the Owners – Strata Plan No 61299 [2019] NSWLEC 111

Case update

On 8 August 2019 the NSW Land & Environment Court approved of a strata renewal plan for the collective sale of all of the lots comprised within and forming part of SP61299, ordering that each lot in the strata plan was to be sold to the purchaser in accordance with a Deed of Agreement entered into between the purchaser and the Strata Renewal Committee and the terms of the conditions of sale attached to that agreement. This is despite the fact that not all of the lot owners (who were mostly investors with some being overseas) agreed to the sale of all of the lots within the building.

The building itself comprised a 25 level 159 lot strata development which included 119 serviced apartments, a retail lot used as a cafe, hotel reception and lobby, office, gymnasium, storage room and 34 basement car spaces. Various common facilities included a heated swimming pool, spa and sauna.

All but one of the lots were leased to a tenant which ran a serviced apartment business, but none of the owners (or any other interested party entitled to appear in the proceedings such as mortgagees) who were not in support of the strata renewal plan appeared as part of the proceedings.

Background

Since the legislation underpinning the collective sale and strata renewal plan reforms was introduced in November 2016 under the Strata Schemes Development Act, everyone has been waiting with baited breath for such a case to be handed down. There has actually been several successful collective sales since 2016 (which have not required Court intervention due to unanimous support being obtained) as well as some unsuccessful ones, largely due to developers deciding for various reasons that the purchase was commercially unviable.

Looking back, the strata renewal reforms were originally designed to empower strata owners to make a collective decision about what to do with buildings as they age. Previous to that, owners had no choice but to either unanimously agree to a sale or face hefty special levies in order to fund works programs to cure the particular problem the building was suffering from. This led to frustration, disputes, general apathy and stagnation.

Reducing the level of support needed to sell, add or change common property has always been closely followed and was generally considered unfavourable and viewed with caution in years gone by. In more recent times, it is has been accepted that decisions concerning common property can be made by special resolution, where no more than 25 per cent of the value of votes are cast against a motion. This is probably why the threshold for deciding what numerical value of votes was required to approve a collective sale was also set at the 75% threshold – to be consistent with current contemporary thinking and existing regimes.

Note also that under the Strata Schemes Development Act the Court is empowered to give effect to a renewal plan which involves the redevelopment of a strata scheme. That is, where a strata scheme is ultimately terminated and the building is either demolished and rebuilt or significantly remodelled, such that the existing owners of the ‘former’ strata scheme are entitled to buy back into the newly created scheme. A case of this kind is yet to come before the Courts.

So what are the key take outs from this Case ?

1. The processes and procedures involved leading up to a determination being made by the Court are aimed at protecting owners interests and are extremely prescriptive and technical. Both Owners Corporations and their respective renewal and strata committees (including their representatives and advisors) need to be extremely thorough and methodological in their approach in terms of document preparation, submission and general governance. There is very little (if any) margin for error.
2. Whilst the decision in this case gave effect to a collective sale of all of the lots in the strata scheme, that there is a common misconception that the legislation applies to staged acquisitions where some but not all, of the lots are being acquired or where some of the lots are already owned by the proposed purchaser who is seeking to buy out a number or all of the remaining lots.
3. As the majority of the lots were leased, the Court had discretion as to whether to grant the sale of the lots on a vacant possession basis. As the proposed sale contracts were being sold on a going concern basis and subject to tenancy, the Court didn’t have to look at this issue. If a term of the sale does require vacant possession to be obtained, then that should be stipulated out right in the renewal plan.
4. The order for the sale of the lots attaches to the land and binds the owners corporation, each owner of the lots, any registered mortgagee as well as the purchaser.
5. Tenants have to be given written notice after the Owners Corporation makes a decision to apply to the Court for an order for sale.
6. The outcome of the valuations (there are two) required to support the renewal plan have to be made on a just equitable basis (and be consistent and in accordance with the regulations).
7. The Court has power to make ‘any ancillary or consequential order that it considers appropriate or necessary to give effect to the strata renewal plan’. In the current case, this extended to amending and reallocating some of the unit entitlements for some of the lots in the strata scheme.
8. Upon termination of the strata scheme, the assets of the former Owners Corporation are based on the former lot owners shares proportional to their unit entitlements of their former lots as tenants in common. The balance of the administration fund must be distributed to the lot owners in accordance with their respect proportional ownership of the assets.

Commentary & Critique

Whilst this is a significant step forward in relation to the concept of facilitating urban renewal in NSW and the decision of the will of the people being recognised, it is interesting to note that the Court ordered that the owners of the lots were required to sell their lots in accordance with a Deed of Agreement which had been entered into at some time between the purchaser and the Strata Renewal Committee which was attached to the Strata Renewal Plan. The judgment said very little about this agreement or how it came into existence. Nor did it comment as to what the content of the agreement was or what its terms were.

Under s164 of the SSDA the function of a strata renewal committee is to prepare a strata renewal plan for consideration by the owners corporation (in accordance with the provisions of Part 10 of the Act). In exercising those functions, the Strata Renewal Committee is empowered to ask the secretary of the Owners Corporation to request a general meeting in order to approve of any powers and functions that the Strata Renewal Committee proposes to take.

Based upon the facts as set out in the judgement, it is unclear whether at any of the meetings held by the Owners Corporation in approving of the various processes required, authorised the Strata Renewal Committee (effectively on behalf of the Owners Corporation) to enter into an agreement directly with the purchaser.

As the powers and duties of a Strata Renewal Committee are limited to those set out in part 10 and had come to an end (as set out in accordance with s167(d)) when the Owners Corporation decided to apply to Court for an order to give effect to the strata renewal plan, if no such authorisation had been given to the Strata Renewal Committee, doubt arises as to what bases the Court relied upon which would otherwise have the effect of ratifying the Strata Renewal Committee’s power to firstly, enter into an agreement with the purchaser and secondly, to give effect to and re-enliven the terms of an agreement which had by the operation of 167(d), been effectively terminated due to the renewal committee being disbanded upon lodgement of the application.

It is also unclear as to whether the Owners Corporation had previously ‘opted in’ to the renewal process. For strata schemes registered prior to November 2016, the Owners Corporation is required to hold a general meeting either before or at the meeting which considers the strata renewal proposal. As there were no opposing parties to the application appearing in the proceedings, the legislation in practical terms, has not been fully tested.

Until these types of issues are aired and resolved in future cases, we would suggest for the time being that either Owners Corporations expressly authorise their renewal committees to enter into agreements with developers (and possibly the sales agent) and consider every action and function that may need to be delegated to the renewal committee or to adopt the rather classic approach by requiring each lot owner to enter into separate but interdependent call option sale agreements with the developer containing conditions precedent for the sale being subject to the issuing of an order by the Court giving effect to the strata renewal plan.

This article was written by David Stott, Partner.