Strata property investors can look forward to having more protections and control over their investment property under new strata title laws. Given that there are 72,000 current strata schemes in New South Wales, the Strata Title Law Reform will affect a large number of strata property investors.
The new strata title laws are outlined in the Strata & Community Title Law Reform Position Paper released by the NSW Government in November 2013. The Government aims to table a Bill in the Parliament in early 2014 to legislate the new strata title laws.
Strata property investors will be given strong consumer protections and controls when it comes to dealing with strata managers, owners corporations, property developers and builders. This will be a welcome role reversal because in their role as landlords, strata property investors are continually hampered by the consumer protections and freedoms tenants enjoy under the Residential Tenancy Law.
The new strata title laws in NSW will cover all forms of strata schemes – residential, commercial, industrial and mixed-use schemes; and will cover strata home units, villas, industrial units, shops and offices.
In the newspapers, the headline reforms are ‘Strata laws a good deal for dogs, but bad news for smokers’. These are but 2 of 70 strata title law reforms in all.
This is an overview:
Strata schemes are managed in a legal framework similar to a private company. Strata property owners are like shareholders. At their annual meeting, they elect a committee which acts like a board of directors, and usually appoint a professional strata manager, to manage the finances and the ongoing administration of the strata scheme.
Greater owner participation Currently, strata property owners must attend owners meetings personally or give a proxy to an attendee to participate in decisions. Some investor-owners live interstate or overseas or for other reasons find it inconvenient to travel to owners meetings, yet they want a say in decisions which affect them.
The strata title law reforms are designed to encourage greater owner participation: notices of meeting are to contain a one page summary of key financial information and a short explanatory note for proposed resolutions; modern technology may be used - to give notices electronically; to hold meetings via the internet, on smartphones, on tablets/pads; and to vote by post, email or sms. In addition, tenants will be allowed to attend and participate in, but not vote at, owners meetings.
Increased transparency and accountability Currently, strata schemes are managed in a grey area, legally. The strata title law reforms are designed to increase transparency and accountability. The reforms make the strata committee (the new name for the ‘executive committee’) act more responsibly, like the way a board of directors of a company is required to act -
Committee members must act with due care, skill and diligence for the benefit of all owners (but not be personally liable if they act in good faith); they must act without favour and disclose any conflict of interest in a matter under consideration by the strata committee; and non-owners with a financial interest in a strata scheme (such as strata managers) are not allowed to be members of the strata committee, but may attend meetings if invited. In addition, if more than half of the strata lots are tenanted, tenants will be allowed to appoint a non-voting representative to attend strata committee meetings.
Proxies Currently, a chairman can control a strata committee by gathering up unlimited numbers of proxy forms from owners to ensure that they and their friends ‘have the votes in hand’ to be elected. The strata title law reforms will limit such ‘proxy farming’. The strata title law reforms will allow one person to hold a proxy for only one lot in a strata scheme of 20 strata lots or less; and proxies for up to 5% of the lots in a strata scheme of more than 20 strata lots.
Strata Managers Currently, strata managing agents supplement the strata management fees they charge with third party commissions. The strata title law reforms will require strata managers to disclose third party commissions, such as for taking out strata insurance with a particular insurer. Their strata management contracts will be limited to three year terms, with no automatic roll-overs. Strata managers will be able to be removed more easily by application to the Strata Tribunal.
Initial Levies Currently, property developers selling off-the-plan home units are tempted to set initial levies low to help sales. The strata title law reforms will give the owners corporation the right to recover from the developer the shortfall between the initial levies set by the developer and the actual costs for the first year of the strata scheme. They will not help purchasers who find out that high levies are the norm after the first year.
Unpaid Levies Currently, a strata scheme must use the court process to recover unpaid levies. The strata title law reforms will allow the Strata Tribunal to make payment orders and to garnishee rent to satisfy payment orders.
Building defects, maintenance, redevelopment and renovations
Water leaks running down internal walls and structural cracks in walls and balconies are common building defects in new buildings.
Building defects report Currently, owners corporations in new buildings find it difficult and costly to pursue property developers to rectify building defects. The strata title law reforms will require the property developer/builder to agree with the owners corporation to jointly appoint an independent building defects inspector to prepare a building defects report. Fair Trading NSW will appoint the defects building inspector if they cannot agree. The cost of the report is to be shared equally.
Having one building defects report prepared is designed to save the cost of having two reports prepared and costly disputes where the two competing reports differ.
The building defects inspector is to prepare the building defects report between 12 and 18 months after the date the occupation certificate is issued. The time frame is designed to identify building defects early and to avoid arguments about whether the defects are the result of the new building work, or the result of wear and tear or a lack of proper maintenance. This will apply to all new strata schemes.
Building defects bond Currently, the statutory warranties under the Home Building Act apply only to major/structural defects in new strata developments of up to 3 storeys high. Strata owners in new high rise buildings have no warranties and are faced with costly litigation against builders who may have ceased to trade, or with rectifying building defects at their own expense. The strata title law reforms will require high rise property developers to put up a bond equivalent to 2% of the contract amount for the building work. The bond is to be held in trust by an independent third party until the building defects inspector agrees that the building defects have been rectified. The question remains – is 2% a sufficient retention sum?
Property developers who retain ownership in the strata scheme will not be able to vote on matters relating to building defects.
Maintenance schedule Owners corporations must prepare a 10-year sinking fund plan for future maintenance and capital works. The strata title law reforms will require the builder/developer to provide a maintenance schedule, as well as a building manual, building plans and certificates of title for the strata scheme at the first annual general meeting.
Redevelopment Currently, the owners of a strata scheme must be unanimous to terminate, sell or redevelop the strata scheme. In what is a contentious proposal, the strata title law reforms will lay down a process for collective sale / renewal where the owners can proceed to terminate the strata scheme by a 75% majority vote. Voting is to be one vote per strata lot. While a 75% majority vote is what is required for a shareholder resolution to wind up a company, a 90% threshold which applies to compulsory share acquisitions in a public company takeover might be more suitable.
This process is designed for strata buildings where the cost of repairing or maintaining the building is more than the cost of re-building, or where the land is re-zoned to high rise (allowing more than 3 storeys) which means that the land value is greatly increased, making it ripe for redevelopment.
Rules for renovations Currently, any work to be done to a wall, ceiling, floor, window or door requires owners corporation approval. The strata title law reforms will set out model rules to allow minor or cosmetic changes (picture hooks, hand rails) without approval; model rules for internal changes (bathroom renovations, recessed light fittings) where notice is required; and external or structural renovations (air conditioners, hardwood flooring, internal wall removal) where approval is required.
By-Law review Strata by-laws are the rules which mainly govern the behaviour and use of the strata property by residents. Landlords should attach a current set of strata by-laws to every property lease. This requirement is often overlooked because it is difficult to know what the current strata by-laws are. The strata title law reforms propose that all strata schemes must review their by-laws at the first Annual General Meeting after the new strata title law comes into force. This opportunity should be taken to adopt an up to date set of by-laws.
Consolidated set of strata by-laws Currently, strata schemes have a variety of standard strata by-laws, and often a number of changes of by-laws. The strata title law reforms propose that strata schemes keep a consolidated set of strata by-laws and register a new set at the Land Titles Office every time there is a change of by-laws.
Model by-laws Responding to community concerns, the strata title law reforms propose an updated set of model by-laws which are designed to: (1) clarify that cigarette smoke which drifts into a residential lot may be regarded as a nuisance or a hazard and that the offender may be given a breach notice; (2) permit wooden or other hard floors to be installed only with owners corporation approval (the exceptions being the kitchen or bathroom); (3) permit small pets (cats, small dogs, birds and fish) as the ‘standard’, but allow strata schemes to limit or ban pets; (4) limit overcrowding to no more than two adults per bedroom; (5) identify items of common property that owners are responsible for maintaining and repairing.
Notes: The new pet friendly model by-law will not override the landlord’s right to say ‘sorry, no pets’. It is a lost opportunity that noise issues have not been addressed in the model by-laws.
Parking Owners corporations already have parking by-laws. The issue is enforcement. The strata title law reforms will enable owners corporations to invite Local Council rangers to issue parking fines to owners of vehicles parked illegally in visitor car-spaces and elsewhere on the common property of the strata scheme.
The strata title law reforms mean that strata property investors will have more protections and control over their property investment – they can be more involved in the management of the strata scheme; initial building defects and ongoing maintenance will be easier to identify and repair; and tenants will be more accountable to the owners corporation for cigarette smoke, overcrowding and illegal car parking.
Currently strata title law reform is proposed only in New South Wales. The Western Australian Government has announced it is looking at strata title law reform. It is likely that other State Governments in Australia will make similar announcements, and select what they find attractive from the NSW strata title law reforms for their own use.