From 30 November 2016 the new Strata Schemes Development Act 2015 NSW (the Act) will introduce a "Strata Renewal Process" enabling a 75% majority of lot owners to force a sale or redevelopment of a strata scheme. The Act attempts to put in place controls to protect the 25% of dissenting owners from receiving anything less than the market value for their strata unit.

Just compensation or not?

Under the Act, the litmus test to ensure a fair market value is paid to owners is imported from section 55 of the Land Acquisitions (Just Terms Compensation) Act 1991 NSW (Section 55). The primary function of the Just Terms Act is to benefit statutory authorities when compulsorily acquiring land. However, the valuation considerations involved in a collective sale or redevelopment are very different to a compulsory land acquisition by a statutory body.

When the provisions of Section 55 are used to assess the compensation value of a strata unit, the concept of market value becomes relevant. Evidence of valuations will be used to assess the market value. Valuers use accepted concepts to determine a market value such as "highest and best use". It is unlikely that "the highest and best use" of a dissenting owner's lot is as great as the developer's use upon redevelopment of the whole of a strata scheme.

Another consideration not dealt with under Section 55 is the time it will take for a Court to make orders giving effect to a plan for a collective sale or redevelopment. Under the Act the initial proposal (which sets the selling price) will be many months, if not years, away from the time the developer completes the development (if at all). As we have seen recently the market value today may be very different from the market value even a few months later.

Fortunately, Section 55 does include a component for "disturbance" when calculating the compensation value of a property. This may include legal costs, stamp duty and relocation fees. However "disturbance" may not address other unique costs or losses such as CGT, other claims and liability arising from terminated leases that will no doubt be incurred by many lot owners as a result of forced sales under the Act.

Without further safeguards, the Act with its embedded "just compensation" provisions is likely to favour developers over lot owners.