It is exciting news to hear that the QLD government is proposing to change its body corporate laws to allow apartment owners to undertake community title renewal / collective sales under a model likely to be based on the existing NSW laws.

It is now over 6 years since NSW introduced amendments to the Strata Schemes Development Act providing a process where a strata scheme can be sold in one line with the support of 75% of lot owners and approval by the Land and Environment Court.

Dentons is pleased to share some observations on what has worked well in NSW and what could be improved; the latter suggestions we hope can have some influence as the QLD legislature considers its proposed legislation.

Background

Under the NSW legislation there is an Owners Corporation led process which (by way of a very high-level summary):

1. begins with a proposal for the redevelopment or collective sale of all lots in the strata scheme which can be submitted by any person (a strata renewal proposal);
2. allows the Owners Corporation to decide to investigate the proposal and elect a committee to oversee the process (the strata renewal committee);
3. provides for the preparation of a plan which contains the complete commercial terms of what the redevelopment or sale involves and is supported by a valuation (the strata renewal plan);
4. a process by which the strata renewal plan is provided to all owners, with owners who support the plan being asked to sign a support notice and procure any registered mortgagee to also sign a support notice;
5. subject to 75% or more of lot owners having signed a support notice, an application being made to the Land and Environment Court of NSW for the approval of the plan.

By far the most common application of the legislation commercially is that a developer purchaser who the participating owners / Owners Corporation contracts with, undertakes the process with a view to a sale on agreed terms. The developer purchaser is usually selected either by direct negotiation or through a competitive marketing process.

What is working well

Since 2016 the existence of the legislation has had a substantial and positive impact for many strata owners and has assisted in unlocking land in popular suburbs for development. Before the legislation came into effect, there were limited cases of large strata schemes being sold (getting 100% agreement with any group of owners is not easy; once the number exceeds 30 or 40 owners it is close to impossible). Due to the requirement of 100% agreement, the most common scenario on smaller schemes was that the last person or persons who held out in selling would receive substantially more for their property than the majority.

Having a legislative framework where a sale could be achieved with 75% support had an almost immediate effect where a large number of collective sales were achieved co-operatively without requiring the Court process. Many, many groups of owners were able to sell with 100% agreement. Removing the ultimate ability of a single owner to torpedo a sale helped significantly to encourage groups of owners to meet, organise and with assistance, sell as a collective.

Dentons has assisted over 45 groups of owners in NSW who have successfully achieved a collective sale without having to commence the legislative process. The transactions have included:

• sales where a row of apartment blocks are all included and sold in one line, unlocking significantly sized development land;
• smaller blocks where the land area, location and zoning of the strata scheme have allowed owners to sell for a price several multiples of the current market value of their unit;
• sites where strata schemes have been sold with freehold properties to create the development site;
• blocks of apartment where redevelopment is subject to a planning outcome and a long term agreement with a developer is entered into.

We would expect a similar outcome in QLD, where the introduction of similar legislation will be a catalyst for opportunities for community title owners and developers.

The second thing that has worked very well in NSW is that the process has provided a platform for negotiation and mediation. As a result, a majority of parties who commence the legislative process reach agreement without requiring a Court order. This is why, after 6 years, there is (at the time of writing) still only one case in New South Wales which has resulted in an actual Land and Environment Court judgment. It is undoubtedly a positive aspect of the legislation that so many transactions are successfully being concluded contractually without requiring a decision from a Judge.

There are some strata schemes that are so large that it is not realistically possible for a contractual agreement to be reached. In those cases, the Court process is invaluable. The (again, at the time of writing) only judgment to date given by the Land and Environment Court of NSW is the decision in Application by the Owners – Strata Plan No 61299 - a case where Dentons acted for the Owners Corporation of the building 252 Sussex St in Sydney which comprised of 159 lots and over 100 different owners, many of whom resided overseas. With this many owners it was never realistic to achieve 100% agreement without the assistance of the court process. The decision in this case approving the sale back in 2019 increased the confidence of many to carry out a similar collective sale process.

What can be improved

The NSW legislation could be improved in a number of ways. These are our main three suggestions:

1. The legislation applies to all forms of strata (other than retirement villages) but is really most suited to residential schemes given it doesn’t effectively deal with the issue of what is to happen to tenants. The expectation is that in any sale the rights of tenants will be governed by the terms of their lease. Practically and commercially this is rarely a problem in residential schemes as residential leases rarely exceed 12 months and most transactions have a longer time frame. Commercial leases will often have a 5 + year term with options to renew, far exceeding the time frame of any proposed redevelopment.

This is a difficult issue to deal with, particularly if leases have uncommercial terms or have been put in place with a related party / to deliberately obstruct a sale. At a minimum we recommend that the Court should expressly have the power to disregard any lease on uncommercial terms where there is evidence it was entered into in order to derail a collective sale.

2. The legislation requires a valuation which is not more than 45 days old at the time of the meeting to consider the strata renewal plan and a second time not more than 45 days from the date of application to the Land and Environment Court is made.

We doubt the legislature understood just how costly these two valuations are.

They are not valuations such that you may obtain for stamp duty purposes or for a loan application. They are highly complex because an analysis of two distinct issues is required: firstly, the “compensation value of each lot”, which is similar to the compensation a government authority must pay when compulsorily acquiring property, and secondly, the “market value of the whole building and its site at its highest and best use”. This second limb is significantly more complex than the first limb because it requires consideration to be given to planning controls and regulations. Some valuers require input from other consultants, such as from town planners.

Overall, these valuations are an expensive and time-consuming exercise. A simple valuation required once and not twice (if the first valuation is less than 6 months old), which assesses the market value of each lot and establishes that each owner is to receive well above this amount should suffice for the purpose of allowing the Court to assess this aspect of the proposed sale.

3. Finally, the legislation contains strict time periods throughout and it is not clear to what extent the Land and Environment Court is entitled to exercise a discretion to disregard minor and/or innocent issues. Examples of common mishaps include:

a. a strata manager not issuing minutes of an EGM within the time required after the EGM;
b. a delay in obtaining mortgagee consent to a support notice, making the support notice out of time.

It appears to us unjust that any such minor event in a process that goes for over 12 months could be an automatic reason for a plan not to be approved where there is no actual disadvantage or impact on any dissenting owners. Greater clarity on the Court’s discretion would be very helpful.

Questions or comments

Please contact us if you would like to discuss any aspects of strata renewal.