In brief
The NSW Government's proposed reforms to strata title laws may impose greater obligations and costs on developers that could be passed on to buyers, adding pressure to property prices. The NSW Government's view, however, is that these impacts will be offset by a reduction in disputes. Partner Nicholas Cowie and Senior Associate Sharon Heffernan look at the key proposed reforms.
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Background
According to the NSW Government's position paper, released by NSW Fair Trading in November 2013, there are currently more than 72,000 strata schemes in NSW comprising $350 billion in assets and accommodating approximately two million people. Half of NSW's population is expected to be living or working in a strata or community scheme within the next 20 years. The reform process has involved an online consultation forum, the release of a discussion paper, a submissions process, and roundtable meetings with key stakeholders in the sector including builders and developers. There has been general agreement that the existing strata laws require comprehensive reform.
Proposed reforms
The proposed reforms target the key areas of governance, managing the built environment, budgets and levies, by-laws and managing disputes. A number of the reforms are intended to shift greater responsibility on to developers at the outset to facilitate the ongoing operation of the strata scheme, limit the ability of developers to have ongoing influence on the strata scheme, reduce the number of disputes relating to building defects and make it easier for strata scheme owners to have recourse to developers if building defects are not rectified. The following proposed reforms are particularly noteworthy for developers.
- Establish a process for the sale or renewal of a strata scheme where there is less than unanimous support from the owners. The current NSW strata laws require agreement by 100 per cent of lot owners to terminate or renew a strata scheme, which limits the scope for redevelopment and urban renewal for strata schemes in ageing and dilapidated buildings. The proposed reform would lower the threshold to initiate a collective sale or renewal of a scheme to 75 per cent of lot owners, with each lot having one vote. The process would be overseen by an independent Strata Commissioner at the Land and Environment Court and there would be conciliation and mediation to encourage consensus.
- An independent defects report must be paid for by the developer/builder and obtained between 12-18 months after the occupation certificate is issued. The aim of this reform is to ensure that any defects are identified and rectified early rather than years later when it becomes less clear whether the defect is the result of the initial building work, wear and tear or lack of proper maintenance.
- The developer of a high-rise strata building must pay a bond or arrange for a bank guarantee to be provided, equivalent to 2 per cent of the contract amount for the building work, which will be held in trust until the expert who has prepared the independent defects report agrees that identified defects have been rectified.
- Various restrictions on the rights of the developer and people connected with the developer to vote on matters relating to building defects are proposed.
- The developer/builder will be obliged to provide a maintenance schedule in relation to the common property together with any documents that are reasonably necessary to enable or assist the owners' corporation to run the scheme and maintain the building. While non-adherence with the maintenance schedule by the owners' corporation does not remove a builder or developer's liability for any building defects, the maintenance schedule can be used as evidence in any subsequent Tribunal or court hearing.
- A registered Building Management Statement will remain in place if a part of the building is subdivided by a strata plan and there will be no need for registration of a further Strata Management Statement. All new Building Management Statements and Strata Management Statements must provide for allocation of the cost of shared facilities and disclose the cost apportionment method used. In a staged strata scheme a strata development lot may be subdivided by a further strata development lot.
- Unit entitlements must be determined by independent valuation rather than by the developer, again adding cost.
- Realistic levies must be set in the initial period and for the first year after the initial period ends, otherwise the owners' corporation may be able to take the developer to the Tribunal and be awarded compensation.
- A limit on the term of strata management contracts to three years is proposed. There have been complaints about long-term contracts being entered into with agents who have essentially been chosen by the developer and who act in the interests of the developer rather than the strata scheme owners. While agency agreements automatically terminate at the first AGM, owners' corporations may feel pressured by the developer into accepting a particular agent, and feel that they have little opportunity to identify alternatives. Some agency contracts also include terms such as automatic rollovers that make it hard for owners to replace the agent. Automatic rollovers will no longer be allowed, managing agents will be required to disclose any links to the developer and any other potential conflict of interest and will no longer be allowed to be appointed to the committee.
There are a number of other proposed reforms that will impact on by-laws and initial budgets and levies for new strata schemes, the detail of which will be fleshed out in the draft legislation.
Status
It was originally anticipated that a draft Bill would be introduced into Parliament in early 2014; however, a ministerial reshuffle has slowed progress and led to a new round of lobbying. It is now expected that the draft Bill will not be introduced until August 2014.
A separate paper outlining proposed reforms to community title laws is expected to be released in the next few months as well.