Posted on July 9, 2013 by
It is now more than 50 years since strata titles legislation commenced in NSW under the Conveyancing (Strata Titles) Act 1961.
Many strata schemes are now approaching their ‘use by’ date with the schemes in need of termination and/or re-development. Nevertheless, the current law requires 100% support to wind up a scheme in many cases. As the Department of Fair Trading prepares to release its Policy Position Paper on strata law reform, this article considers the options that are available for strata title reform on termination.
Current law on termination
Owners of older strata schemes face an increasingly difficult choice: do we spend more on maintenance , or is it time to terminate the scheme, demolish the units, and start again?
Section 51 of the Strata Schemes (Freehold Development) Act 1973 (SSFDA) sets out a procedure whereby any proprietor, mortgagee or owners’ corporation may apply to the Supreme Court of NSW to terminate a strata scheme.
The section contains a complete regime for dealing with such applications to ensure that lessees, mortgagees and creditors of the strata schemes have their interests recognised when a strata scheme is terminated.
The NSW Supreme Court has developed principles for dealing with such applications. For a summary of the main cases, see Mary Erling v Owners of Strata Plan No. 8891  NSWSC 824. However, the lack of certainty surrounding such litigation, and its expense, has meant that the procedure has only been used five (5) times since the SSFDA was enacted in order to terminate a strata scheme (source: Strata and Community Title Law Reform Discussion Paper, NSW Fair Trading, September 15, 2012 (Reform Paper) page 23).
In 1993, s51A of the SSFDA was introduced. This allowed an application to be made directly to the Registrar General to terminate a scheme. The advantage of this procedure is that a court order is not required. The disadvantage, however, is that 100% support of the strata owners, registered lessees and registered mortgagees is required.
Out of over 71,000 strata schemes registered in NSW under the SSDFA since 1973, only 826 have been terminated under section 51A (source: Reform Paper page 23).
Practically speaking, without unanimous support from all owners, there is no means of terminating a strata scheme short of potentially costly litigation under section 51.
The Property Council of Australia in its paper Strata Title Renewal, 2009 (at page 5) has referred to this as the ‘strata title straitjacket‘. The Property Council points to more than half the strata housing stock in NSW being more than 20 years old with some company title conversions reaching a century. Without a deadlock provision, strata owners are locked into a scheme without a cost effective way of escaping.
Possible Solutions: Renewal Plan
The Property Council of Australia advocates enshrining in legislation a new procedure based on a ‘Renewal Plan’.
The Renewal Plan would deal with development applications, building funding, relocation during construction, and buy out of dissenting owners.
Termination of the scheme would be initiated by a member of the strata, or possibly a third party developer engaged by some of the owners.
A Notice would be issued to all members and mortgagees and the Renewal Plan prepared.
The plan would be vetted by a ‘Strata Schemes Commissioner’ to ensure that all necessary information is prepared and presented in it. However, the Commissioner would not have a power to approve or reject the plan as this would remain a matter for the Court.
The Renewal Plan would then be put to all owners. The Property Council wants such a Plan to be approved on a 75% vote. Dissenters would be compensated under an agreed valuation formula specified in the Renewal Plan.
To my mind, however, this option has limited appeal. It assumes that the potential development yield from a site will increase and that a new building can be constructed largely on the profits realised from the sale of additional units in the new scheme. The existing owners, or at least some of them, will effectively be underwriting the Plan. If there is a market downturn or some unexpected problem during construction, the owners will be the underwriters of the developer’s Renewal Plan.
Possible Solutions: Singapore’s outright sale legislation
In 1999, Singapore introduced amendments to its strata legislation which allowed termination and re-development on the basis of outright sale of the entire strata to a developer.
Singapore’s Land Titles (Strata) Act is based upon the NSW Conveyancing (Strata Titles) Act 1961. It would not be difficult to draft provisions to amend our current strata legislation consistently with Singapore’s.
The Singapore model does away with the negotiation stage and partnership with the current owners. In the Singapore model some current owners may call in a developer, and it is the developer who puts together a plan which involves buying out all the owners and discharging any liabilities. Current owners may or may not be involved in the proposal, but the important point is the responsibility for the success of the scheme lies with the developer. All owners have their interest bought out at an agreed rate, and unless an owner then invests in the developer company or the project, that is the end of their involvement in the strata.
The developer’s proposal is put to the owners as a whole and an 80% vote is required to proceed, increasing to 90% if the scheme is less than 10 years old.
The Strata Titles Board has an administrative role in ensuring that arm’s length valuations are obtained. The Board’s only power to veto a sale is if an owner will not be able to discharge its mortgage on sale to the developer.
Possible Solutions: the ‘do nothing’ option
Consideration also needs to be given to the ‘do nothing’ option. While section 51 has not been widely used, this may be because of its relative novelty. Under section 51, a liquidator is appointed for the scheme who then sells the land and improvements to a purchaser and accounts to all the creditors and mortgagees under the scheme.
Take an example of an older strata which faces higher and higher maintenance costs. If some, but not all, owners see no future, they can approach the Court to bring the situation to a close. In this regard the situation is similar to co-owners of Torrens land who are in disagreement about selling. One wants to hold the property, while two other joint owners want to sell. Section 66G of the Conveyancing Act allows an owner, even a minority of the owners, to approach the Court and ask for orders to sell. Presumably, if the remaining owners see a benefit in the strata continuing as it is, this may give them an opportunity to buy out the owners who are not comfortable with the strata’s current direction.
The lack of use of section 51 is, in one sense, surprising. In one of the early cases, Young J remarked that ‘solicitors very often nowadays consider an order under section 51 under the Act a mere formality which is hardly to be taken seriously’: see Pritpro Pty Limited v Willoughby Municipal Council BC8601177 at page 2.
Much of the discussion in the Reform Paper and the submissions made by various pro-development groups centres on the need to remove the 100% de facto vote now required under NSW strata laws and reduce it to what the Property Council calls a ‘reasonable threshold‘. To the Property Council the reasonable threshold is 75%.
In New York the voting requirement is 80%, the same as Japan, while in Hong Kong the threshold is 90%, with administrative bodies having the discretion to lower this to 80% in certain circumstances.
Some detail needs to be given as to what these voting majority thresholds mean. Are they based on unit entitlements, or the number of voters? Will there be some qualification to voting rights? For example, some property developers retain ownership of units so as to maintain voting power in their schemes to thwart building claims by fellow owners. Will such developer ‘voting blocks’ be allowed to force re-development schemes where ‘mum and dad’ owners want to maintain the strata as it is?
The thresholds in other jurisdictions also need to be seen against the background of the schemes in those countries. The jurisdictions identified above have high density strata developments and owner occupiers appear to be in the minority.
For example, the Singapore outright sale legislation occurs against a background of that nation’s unique housing need. Singapore is a nation of 4.5 million people occupying 685 square kilometres. 84% of the population live in government owned or acquired housing. Only 16% of strata development is privately owned.
Contrast this with the NSW experience where the overwhelming majority of strata development is privately owned and run, either for owner occupiers or for owners renting out to tenants. (Source: Cathy Sherry, Termination of strata schemes in New South Wales – Proposals for reform (2006) 13 APLJ 227 at 231).
How would such a voting system fare in New South Wales where there is a proliferation of smaller schemes? In this State there are 20,163 strata schemes with only 2 lots, out of over 71,000 schemes (source: Land & Property Information Newsletter, March 2012). A further 17,065 contain only 3 to 5 lots. Strata title is also freely used currently by both investors and owner/occupiers. Will it continue to be used so freely with a change to voting rights?
Motivation for termination
Within the debate on the issue there has been a confusion of two separate and discrete reasons for dissolution. The development lobby is keen to emphasise the first situation: the problems faced by the owners of a strata scheme which is older and its maintenance costs are mounting. Easier termination of schemes will allow quicker re-development.
However, this assumes that the lot can yield a larger number of units. Developers offer the distressed strata owners a way out predicated on re-development paid for by the increase in the potential number of units. But what if there is no greater potential yield? If the true purpose of the change to termination is to allow renewal of existing stocks of strata units, this option assumes that zonings have allowed more intensive development. If there has been no change to the zoning, then no renewal will occur no matter how easy the termination procedure is.
If termination becomes easier, pressure may mount on Councils to allow more intensive, higher density zoning to pay for re-development. Owners of a 12 unit scheme in an area which allows no more than tweleve units now as it did 40 years ago may lobby for a change to zoning which will increase the yield to 24 or 30. Currently, owners/occupiers of strata units are content to leave zoning where it is, and are often the loudest voices against further intensification. With a change in law to make for easier termination, owners may have a financial insentive to seek higher density where they live.
This brings in the second motivation. While the need to re-develop is a legitimate concern, it often occurs that rezoning makes it possible to build 20 units land which had once only been allowed to support 10 units. Owners, especially investor owners, are interested in the re-development potential. Presumably this experience is what prompts variation in voting in Singapore. Normally the vote to terminate in Singapore is 80%, but this is increased to 90% if the scheme is less than ten years old. Why would a developer be petitioning for the termination of a strata less than ten years old? Because the property could now support significantly more units.
No doubt there are cases where there is an overlap. Older, higher maintenance schemes may be in areas where rezonings have intensified potential land use.
There is conflict between owner/occupiers who simply want to be allowed to live in peace, and investors who see an opportunity to increase their profit by knocking down and starting again.
This can lead to a situation where unfair tactics are used to scare away the owner/occupiers. See for example the submission to the Department of Fair Trading’s ‘Review of Strata and Community Scheme Laws’ which closed on 22 November 2012. The submission of Therese Smith dated 17 September 2012 shows the extent to which some enthusiastic investors might go:
Over a period af many years (name excised) have been infiltrating strata controlled buildings, especially older buildings and have consistently vetoed proposals for improvements….that leaves the field open for these absentee landlords to shut down all improvements and run the building into the ground…It appears they have been sitting, waiting for a law change when it will be legal to force Aunt Doris out of her home.
This is the classic situation: all the other owners have agreed to take the money and leave a developer to make a profit out of a re-development. One lone owner who wants nothing more than to be allowed to live in peace stands in the way. In that situation, who prevails? Should the Court force ‘Aunt Doris’ out?
Challenges facing legislative change
The legislature needs to move carefully on this issue. Amendments to strata legislation which allow for a fundamental change to strata rights on the basis of a majority decision may undercut the value of strata ownership. If a scheme can be terminated more readily than is the case now, potential purchasers and lenders may think twice before committing to future strata purchases.
This is all the more likely if the proposal the government pursues leaves any liability for re-development with the existing owners. The Singapore model has the advantage that the former owners simply sell their interest and leave the re-development to the new owner. If the developer fails it is the developer’s problem alone.
Any option which has the existing owners being a party to the new scheme, such as the Property Council Renewal Plan carries with it the chance that existing owners (and their mortgagees) will be de facto guarantors of a speculative development.
To illustrate the point, an example of what can potentially happen was played out in the company title unit dispute in Dungowan Manly Pty Limited v McLaughlin  NSWCA 180. The case involved a charming old three storey heritage flat building at Manly. By 2000, there was a need to undertake work to restore the building. The newly elected chair of Dungowan proposed a complete re-development adding an additional three storeys and eight luxury units. The sale of these eight units, it was hoped, would pay for the complete restoration of the other flats within the complex. The chairman acted with the support of the majority of the other owners of the company but Mr and Mrs McLaughlin disagreed. Their attempts to injunct the re-development failed. They were of the view that the owners themselves should pay for the restoration, and that the eight additional units might not cover the costs of the restoration and as it turned out, they were right. The project stalled for a want of buyers at the commencement of the global financial crisis. Ultimately the McLaughlins received compensation and consequential orders for the loss of their unit. Other owners did not.
The practical point of the case is that whenever there is a re-development proposed, and the existing owners are part of the proposal, they risk, some probably unwittingly, becoming part of a speculative venture.
Will change compromise the perception of strata title?
Less financially astute purchasers may decide to ‘opt out’ of a Renewal Plan. If so, their compensation would be determined by a formula set by the developer, with or without sanction from a Government appointed ‘Strata Commissioner’. If the owner decided to stay in, he or she becomes a de facto underwriter of the scheme as discussed.
In either case, it seems to this writer that purchasers and lenders will perceive strata title to be a less stable form of land ownership than it is now. Lender’s Loan to Valuation Ratio (LVR) may decrease for strata if there is a perception that a strata scheme may be overtaken by a Renewal Plan or an outright buyout.
Mortgagees may be concerned if their borrowers decide to remain in a Renewal Plan if the Plan ultimately fails and the value of the unit they are lending against drops. Mortgagees may even respond to amendments to strata legislation by requiring borrowers to seek their instruction on how to vote on re-development plans.
We wait with interest the government’s Policy Position Paper on strata reform