Overview

On 15 September 2012, NSW Fair Trading released a discussion paper entitled ‘Making NSW No.1 Again: Shaping Future Communities – Strata & Community Title Law Reform Discussion Paper’ (Discussion Paper).

One of the most significant proposals in the Discussion Paper is to change the way strata schemes can be terminated.

The discussion regarding termination of strata schemes highlights the inherent tension between the need to redevelop urban land for the good of the community and the rights of the individual to hold their property rights free from interference.

It is this tension (and the corresponding fear of Government losing votes from potentially aggrieved lot owners) that has so far prevented legislative reform from occurring.

The need

There is little argument that there is a need to change the way strata schemes are terminated.

About 30% of residential strata schemes in Sydney are more than 30 years old. However, according to Land and Property Information NSW records, only 826 schemes have been terminated since the strata legislation was enacted – a mere fraction of the 70 000 schemes in NSW.

The main reason so few strata schemes have been terminated is because of the difficult process required to terminate a strata scheme.

Currently, a strata scheme can only be terminated by two methods:

  • by order of the Supreme Court; or
  • by application to the Registrar General, which must be supported by a unanimous resolution of the owners corporation.

It is difficult to obtain a unanimous resolution of the owners corporation in such circumstances – particularly in large strata schemes where there may exist many competing individual interests. The proposed solution considers removing the unanimity requirement, in line with the position in foreign jurisdictions. Suggestions given include:

  • introducing two levels of approval with, for example, 80% approval required for schemes of 5 lots or more and 75% approval for schemes with 4 lots or less; or
  • a sliding scale based on the age of the building, for example, 100% agreement for schemes less than 20 years old, with the threshold dropping by 10% for every decade i.e. schemes 20 years or older requiring a 90% majority.

The Headline Issue

The headline issue (it has literally already appeared in a number of newspaper headlines) is the ability of an owners corporation to “compulsorily acquire” a lot against the lot owners will.

Compulsory acquisition requires compensation to be paid. However, the most likely scenario is that lot owners will disagree with the amount of compensation payable for their lot.

The existing Management Act includes numerous provisions which allow lot owners to commence proceedings in the CTTT in relation to decisions made by the owners corporation. One of the most relevant powers of the CTTT relates to caretaker agreements.

Section 183A of the Management Act provides that the CTTT can make orders:

  • that charges payable by the owners corporation under the agreement for the services of the caretaker are unfair; or
  • that the agreement is, in the circumstances of the case, otherwise harsh, oppressive, unconscionable or unreasonable.

Given the broad scope of CTTT powers in the existing Management Act it is reasonable to assume that the CTTT will be given broad powers in relation to the compensation payable to lot owners (and other terms) relating to the termination of the strata scheme. This would mean that “friendly” deals with developers would be prohibited.

Notwithstanding the fact that the Management Act can address the situation where the compensation payable to a lot owner is reasonable, it remains unlikely it will address this situation as lot owners still need to agree to the termination. “The Castle” effect (see below) is the unresolved issue in relation to termination of strata schemes.

The Non issues

As part of the discussion on the proposed legislative reform, two issues have constantly been raised: fraud on a power, and unconstitutionality. For the reasons below, we consider the matters to be “non-issues”.

Fraud on a power

One issue which has received media attention is the issue of the majority removing the minority from their homes. This has been likened to the concept of a fraud on a power.

The NSW Court of Appeal has certainly confirmed that bodies corporate can be in breach of this Corporations Law doctrine (Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46).

However, the argument that a change to the unanimity requirement would amount to a fraud on a power may be difficult to support. The doctrine of a fraud on a power requires the ostensibly valid execution of a power by a majority, accompanied by some underlying motive which results in the minority suffering a detriment. If the statutory mechanism is amended to allow a majority to terminate a strata scheme, and the majority exercise the power, they will be exercising the power for its proper purpose. There would be no question of an underlying motive.

Constitutional Issues

Most of us have seen The Castle and therefore are mindful that lot owners may claim that there is a provision in the constitution or at common law which will protect them from having their homes taken away.

However, despite the outcome in The Castle (and any general “vibe”) it appears clear that the proposed amendments are not unconstitutional.

It is well-accepted that State governments have supreme law-making power, subject only to relevant limitations imposed by the Commonwealth Constitution. These limitations include the fact that the States could not, for example, pass a law that interferes with freedom of interstate trade and commerce in breach of section 92 of the Constitution. While the Constitution includes a guarantee of compensation for acquisition of property (ie section 51(xxxi)), the High Court has confirmed that this guarantee does not apply to State laws.

The only way to argue that the proposed new strata laws are invalid will be to argue that the State governments are not in fact supreme, in the sense that they cannot pass laws that are inconsistent with fundamental common law rights. This argument was run, unsuccessfully, in Durham Holdings Pty Ltd v State of New South Wales (2001) 205 CLR 399. In that case, the NSW government passed a law acquiring the applicant’s coal interests, without paying full compensation. The applicant attempted to argue the right to compensation for the acquisition of property is a fundamental common law right, and the NSW government could not pass a law which was inconsistent with that right.

The High Court unanimously rejected this argument on two grounds which are relevant in the context of the proposed new strata laws:

  • first, the Court refused to acknowledge that the guarantee of compensation for acquisition of property is a fundamental common law right; and
  • second, the Court did not accept that the NSW government was restricted from enacting laws that are inconsistent with fundamental common law rights in any event.

Given these matters, we do not see any scope for arguing that the proposed new strata laws are a breach of a constitutional guarantee, or a fundamental common law right.

Systems in other jurisdictions

Singapore system – a model for Australia?

The Singaporean system does not have a unanimity requirement, but provides a right of objection to members of the minority. Briefly, the process is as follows:

An application for a termination order is made to the Strata Titles Board by a prescribed percentage of the proprietors of the lots. A 90% majority is required where the building has been occupied for less than 10 years, and 80% where it has been occupied for more than 10 years.

A proprietor or a mortgagee may object to the application within 21 days of the application being made. After receipt of the objection, the Board must mediate matters between the objectors and the applicants. Where the mediation is unsuccessful, or 60 days of mediation elapse (whichever occurs first), the Board must order that the sales process cease.

The proprietors may then make an application to the High Court, and the High Court must approve the application unless it is satisfied that:

  • an objector will receive less than he/she paid for the lot after stamp duty, legal fees and shared costs due to the collective sale are subtracted from the proceeds; or
  • that the proceeds of sale for any lot received by an objector will by insufficient to discharge a mortgage in respect of that lot.

The High Court has a discretion to require compensation be paid to objectors up to a capped amount of 0.25% of the proceeds of sale, or $2000, whichever is higher. However, this can only occur with the consent of the applicants.

Collective sale, or redevelopment?

While a potentially useful model, the Singaporean system only allows for a collective sale to a developer.

The advantage of requiring a collective sale is that the developer will probably have the funds to develop the site, furthering the policy of urban renewal. A small group of unitholders is less likely to have the extensive capital required to renovate, and the risk of insolvency may be greater.

Nevertheless, in principle, it may be unfair to deprive a majority of owners from acquiring the units of dissenting members of a strata scheme and redeveloping a unit block themselves, or in conjunction with a developer, should they have the agreement and ready capital available.

Other jurisdictions also provide some guidance for terminating a scheme without unanimous resolution.

New Zealand

New Zealand’s unit title scheme was originally modelled on NSW’s strata legislation, but was changed in 2010 to allow, among other things, a unit plan to be cancelled by application to the Registrar following a special resolution (75% or more of the eligible voters who vote) passed by the body corporate in favour of the cancellation. All unit owners have the right to object to the cancellation by appealing to the High Court. The High Court may authorise a unit plan cancellation if it is satisfied that the plan is just and equitable to the rights and interests of any creditor of the body corporate and every person who has an interest in the unit plan.

UK

In the UK, the Commonhold and Leasehold Reform Act allows for the winding up of a scheme by a resolution passed with at least 80% of the members voting in favour. Where the winding up resolution is approved with less than 100% support, a court order is required to determine the terms and conditions on which the termination is to proceed and to specify how the assets of the commonhold association will be distributed.

USA

Most North American condominium legislation provides for termination of a scheme following a resolution passed by at least 80% of the unit owners. For example, in Florida 80% of unit owners may vote in favour of a termination plan, and the plan will go ahead unless 10% of unit owners object to the plan by negative vote, or by lodging an objection. Mortgagees do not need to approve the plan, provided their liens will be fully satisfied under the proposed plan.

Next Steps

The deadline for submissions or comments on the discussion paper is 15 November 2012. An exposure draft bill is expected to be released in July 2013, and introduced into Parliament in the spring session.