Two exposure draft bills, the Strata Schemes Development Bill 2015 and Strata Schemes Management Bill 2015, aimed to reform strata living in New South Wales have been released for consultation. They will be supported by Regulations which have not yet been made public.

If enacted, the new legislation will make significant changes to the administration of a strata scheme and the carrying out of strata development.

The legislation will introduce:

  1. defects regime to make developers accountable for defects in a new building by the provision of a compulsory bond of 2% of the contract price for the building works for at least two years after completion. It will also require a developer to commission the carrying out of defect inspection reports by independent building inspectors; and
  2. a regime to facilitate the collective sale or redevelopment of freehold strata schemes. This new regime is proposed to enable urban renewal and to realise the redevelopment opportunities of ageing buildings reaching the end of their useful life without unanimous agreement of all lot owners.

There are also some additional consumer driven changes which may impact developers of strata schemes. These include:

  1. deeming a building management statement a strata management statement following the registration of a strata plan within a building;
  2. rendering void provisions in contracts or ancillary contracts or arrangements provisions which require purchasers to cast a vote at a meeting of the owners corporation at the direction of another person;
  3. limiting the number of proxies that can be held by a person to 5% of the total number of lots; and
  4. imposing obligations on developers to set realistic levies during the initial period of the strata scheme and imposing penalties for breach.

Building Works – developer obligations

A developer must lodge a building bond in the amount of 2% of the contract price for the building work carried out to construct a strata scheme before an occupation certificate can be issued for the building. The building bond is required to secure payment of the costs of rectifying defective building work identified in a final inspection report. Failure to provide the building bond will attract a maximum of 200 penalty units.

A developer must pay for two inspection reports to be commissioned which identifies defects in the building works and how the works can be rectified. The first report is to be completed within 12 to 18 months of completion and the second and final inspection report is to be carried out within 18 months to 2 years of completion. The inspection report must be undertaken by an independent licensed building inspector. Penalties will apply to developers for non-compliance with the requirements to obtain the reports and rectify defects.

Amounts of a building bond may be paid from the building bond to an owners corporation to meet the costs of building work to rectify defective building work identified in a final inspection report. The balance of any building bond must be paid out or refunded not later than two years after the completion of building work or within 60 days of the final inspection report being given to the developer, whichever occurs later.

The Tribunal has powers to make orders in relation to the payment of the bond and the granting of access to the developer to enable it to carry out rectification work.

Collective sale and renewal

The current law allows for the termination of a strata scheme under certain circumstances such as when there is unanimous support from all the owners. Under the proposed reforms, 75% of owners can agree to end their strata scheme. Importantly this is based on number of owners in the scheme, not value of unit entitlements.

By establishing a process for collective renewal and sale, lot owners will be empowered to realise the full potential of their strata building and enable urban renewal to occur. The media has placed considerable focus on the proposed regime.

There are several stages to the collective sale and renewal process. These are:

  1. Vote to opt into the process

The new process will apply only to existing schemes if the owners corporation agrees to opt in. If the majority of owners (50% or more) don’t support the decision, no further action can be taken.

  1. Initiate the collective sale/renewal process

A proposal to sell or redevelop a scheme must first be considered by the strata committee (currently known as the ‘executive committee’). A general meeting of all owners is then called to consider the proposal.

  1. Form a strata renewal committee

If the majority of the owners agree to pursue a proposal, a committee is elected to investigate and develop the proposal. The committee can appoint professionals such as valuers, lawyers, and tax experts to assist them.

  1. Develop a collective sale/renewal plan

The strata renewal committee must then develop a plan containing the prescribed information to help lot owners make a decision on the proposal. The plan will need to contain information such as the amount that each lot owner will receive under a collective sale, the proposed settlement date and arrangements for moving out of the building.

  1. Consider the plan

Owners will have a minimum of 60 days to consider the plan and seek independent advice. Owners in favour of the plan can sign a support notice and submit it to the owners corporation. The plan lapses if it is not supported by 75% of owners within 12 months.

  1. Apply for orders to give effect to strata renewal plan

Any owner or the owners corporation itself can make an application to the Land and Environment Court for an order to give effect to the strata renewal plan or to consider the strata renewal plan. The Court can approve, reject or make changes to the plan as it considers appropriate. The Court will also examine the amount to be received by each owner. For a collective sale or for dissenting owners in a renewal the amount must be no less that which the owner would have been entitled to under section 55 of the Land Acquisition (Just Terms Compensation) Act 1991. The sale price to be paid to an owner will be apportioned in accordance with unit entitlement.

Levies and unit entitlement schedules

New laws will require developers to set realistic levies and estimates of future levies during the initial period of a strata scheme.

Changes will be introduced which require a schedule of unit entitlements to be accompanied by a certificate from a registered valuer which support the calculation of unit entitlements based on value.

Drafting of by-laws and strata management statements

The legislation encourages developers to register a memorandum with the by-laws which details items of common property and lot property. This practical initiative seeks to avoid confusion over an owners corporation’s and an owners responsibility for repair and maintenance of items within a building.

The legislation introduces new concepts of types of resolutions required to enable owners to carry out building works by owners within their lot.

Given the overhaul of the legislation we recommend that developers review their standard by-laws to take into account the proposed new legislation.

Strata Management Statements

A building management statement will automatically be deemed a strata management statement when a stratum lot in a building is subdivided by strata plan. This removes the need to prepare and register a strata management statement when a building management statement has been registered against the title. However, it means that the building management statement will need to contemplate the strata legislative framework in which it will operate if a part of a building has been subdivided by strata plan.

Proxies and contract provisions

The proposed changes will limit the number of proxies that can be held by a person to 5% of the total number of lots and render void provisions in contracts or ancillary contracts or arrangements provisions which require purchasers to cast a vote at a meeting of the owners corporation at the direction of another person and.

Developer provisions in building management statements and strata management statements which give developers rights to complete staged developments will need to be reviewed to ensure that they are not rendered void by the new legislation.

When will the changes come into effect?

It is anticipated that the legislation will apply from 1 July 2016.