Last week, the NSW Government introduced new legislation into parliament that would authorise the collective sale or re-development of freehold strata schemes.  The laws would allow strata scheme sites to be sold or re-developed without the unanimous agreement of the owners.

This is a radical change.  At present, with some limited exceptions, strata schemes are only terminated with the agreement of all lot owners within a scheme.

The legislation comes three years after the release of the Strata and Community Title Law Reform Discussion Paper.  That paper argued that:

  • 30 per cent of Sydney’s residential strata schemes are more than 30 years old;
  • many strata buildings are in need of major renovation or redevelopment; and
  • the community needs more housing, with many sites occupied by older strata schemes being suitable for higher density development.

The new regime is set out in Part 10 of the Strata Schemes Development Bill 2015.

The Government says the proposal is ‘flexible, transparent and fair’.   It says that ‘the process has been designed with numerous safeguards to prevent intimidation, encourage collaboration and ensure that owners receive appropriate compensation’.

These safeguards mean that the new system is complex.  It resembles a game of snakes and ladders, where the process can be halted, or reset at multiple points. 

Additionally, the process is ultimately court supervised.  Every application for the forced collective sale or re-development of a freehold strata scheme will require a Land and Environment Court order before it takes effect.

The steps in the process can be summarised as set out below.

Step 1: Opt-in

Existing freehold strata schemes must opt-in to the scheme, by ordinary resolution at a general meeting of the owners corporation (this step can happen in conjunction with step 3).

Step 2: Submit a strata renewal proposal

Any person (including a developer who is not presently the owner of a lot) may give a strata renewal proposal to an owners corporation. 

Step 3: Strata (executive) committee to consider proposal

Within 30 days after the owners corporation receives a strata renewal proposal, the strata (executive) committee of the owners corporation must consider it at a committee meeting.

Step 4: General meeting to consider the proposal

If the strata committee decides that the strata renewal proposal warrants further consideration by the owners corporation, it must convene a general meeting of the owners corporation.  The meeting is to take place within 30 days.

Step 5: Establish a strata renewal committee

If the general meeting decides that the strata renewal proposal warrants investigation, the meeting must establish a strata renewal committee (elected by the owners).

Step 6:  Prepare a strata renewal plan

The strata renewal committee must prepare a strata renewal plan.  The committee may engage others to help it prepare the strata renewal plan (this could be, for example, the person who initially gave the strata renewal proposal to the owners corporation). 

A strata renewal plan will either be for the ‘collective sale’ or for the ‘re-development’ of the strata scheme.

A ‘collective sale’ plan involves the sale of all lots within the scheme.  A ‘re-development’ plan means that dissenting owners’ lots must be sold, with more tailored arrangements potentially applying for supporting owners (for example, ownership of a lot in the new strata scheme to be created).

A ‘collective sale’ plan must include details such as the name of the purchaser (if known) or proposed sale of the overall site by auction or tender. The plan must provide for the purchase of each owner’s lot for (at least) the ‘compensation value’ for the lot.  Additionally, the amount paid for the sale of the lots and common property must be apportioned among the owners of the lots in accordance with their unit entitlements.  (The Land and Environment Court will have the discretion to vary the unit entitlements where the existing allocation is unreasonable.)

A ‘re-development’ plan must include details such as the name of the proposed developer, financing, arrangements, any planning approvals, requirements for vacant possession and details of the terms of settlement for each owner who supports the scheme. The plan must provide for each dissenting owner’s lot to be purchased for (at least) the ‘compensation value’ for the lot.

The requirement for the payment of ‘compensation value’ (as a minimum) is a significant safeguard.  It is more than just market value.  It includes extra payments equivalent to those that would be paid if a public authority was compulsorily acquiring land. These payments compensate for the special value that the property may have to the owner, out-of-pocket expenses resulting from the forced sale (and the need to acquire a new property) and some compensation (where applicable) for the non-financial disadvantage of losing a principal place of residence.    

Step 7: General meeting to consider the strata renewal plan

Once the strata renewal plan has been prepared, the strata renewal committee must convene a general meeting of the owners corporation to consider the plan.  The meeting may amend the strata renewal plan or decide to return the plan to the strata renewal committee.  If the meeting wants the plan to proceed it may (by ‘special resolution’) decide to formally give the plan to the owners for their consideration. A ‘special resolution’ is one where at least 75 per cent of the value of the votes cast are in favour.

Step 8: Strata renewal plan formally given to owners

The owners who support the strata renewal plan may then give the owners corporation’s returning officer a ‘support notice’.  This notice must be signed by both the owner and each registered mortgagee or covenant chargee of the owner’s lot.  It cannot be supplied:

  • sooner than 60 days; and
  • later 3 months,

after the owner has formally been given the strata renewal plan.

The strata renewal plan will lapse if at least 75 per cent of the owners do not provide support notices within the 3 month timeframe. This means that small schemes with only two or three lots will require unanimous agreement before they can be terminated under these provisions.

Car parking/storage lots are excluded from this 75 per cent calculation.

Step 9: Strata renewal plan recorded on title

Land and Property Information must be notified if 75 per cent support for a strata renewal plan is achieved within the 3 month period.  The fact that a strata renewal plan is in existence will then be noted on the title of the common property.

From this point, the support notice given by an owner will bind future owners (ie, if the ownership of the lots changes during subsequent stages of the sale/re-development process).

Step 10: General meeting to discuss Court application

A general meeting of the owners corporation must then take place.  This meeting will decide whether to apply to the Land and Environment Court for an order to give effect to the strata renewal plan.

Step 11: Application made to the Court

Dissenting owners, their registered mortgagees or covenant chargees must be notified of the application and may file an objection with the Court. If the strata renewal plan is for a redevelopment of a strata scheme (ie not just for a ‘collective sale’) the local council may file an objection as well.   

Unless the court otherwise orders, the reasonable costs incurred by a dissenting owner in making an objection to the Court are payable by the owners corporation.  The owners corporation cannot levy a contribution for these costs on a dissenting owner.

Step 12: Mediation in the Court

The Court may arrange for a mediation or conciliation conference to see if any dispute can be resolved by agreement.

Step 13: Court order made

The Court must make an order giving effect to the strata renewal plan if it is satisfied on key matters, including:

  • whether the plan has been prepared in good faith,
  • whether the required processes have been followed;
  • if the plan is for a collective sale:
    • the proposed distribution of the proceeds of sale apportioned to each lot is not less than the ‘compensation value’ of the lot; and
    • the terms of the settlement under the plan are just and equitable in all the circumstances;
  • if the plan is for a redevelopment:
    • the amount to be paid to a dissenting owner is (at least) the larger of:
      • the compensation value of the owner’s lot;
      • an amount equal to the value to the dissenting owner if that owner had been a supporting owner.
    • the terms of the settlement under the plan (as those terms apply to any dissenting owner) are just and equitable in all the circumstances.

Step 14: Sale in accordance with the Court order

If the Court makes an order giving effect to a ‘collective sale’ strata renewal plan, the owners of each lot in the strata scheme must sell their lot.

If the Court makes an order giving effect to a ‘redevelopment’ strata renewal plan, the dissenting owners of lots in the strata scheme must sell their lots.

The Court may order that compensation be paid to a tenant whose lease is terminated as consequence of the process.

Final comments

Each matter must go to the Land and Environment Court for an order authorising implementation - even if the dissenting owners are passive.  The Court will want to be satisfied that procedural steps in the process have been carried out properly. This will require careful management by a developer and an owners corporation to ensure that everything stays on-track.

The new regime will not apply to land that is the subject of a strata development contract.  It will also not apply to retirement villages. 

It should be emphasised that this legislation is still only a proposal, albeit one that has the clear support of the government. There is a chance that it may be blocked or amended in parliament.  Additionally, if it gets through, there may be some delay before it becomes actual law. 

Further detail is likely to become clear when regulations are prepared before the legislation comes into effect. 

For example, it is not yet apparent whether the owners’ consent requirement for development applications under planning legislation will be changed.  This would be necessary if a development consent for the re-development or replacement of a strata building was to be obtained before funds were committed to the costly process of buying out the dissenting owners.