Posted by Grant Beaumont on November 6, 2015

DEVELOPER ALERT: Proposed changes to strata legislation

Alert Sign

The Minister for Innovation and Better Regulation, Mr Victor Dominello, has recently introduced the Strata Schemes Management Bill 2015 and Strata Schemes Development Bill 2015 into the New South Wales state parliament. With some modest amendments, the bills have passed through both houses of parliament. After various changes of responsible ministers, several rounds of consultation and significant industry and community input, we have draft legislation. While the government has not adopted all recommendations of industry bodies such as Strata Communities Australia (NSW) and the Real Estate Institute of New South Wales, the proposed laws significantly update strata laws in this state. This is the first major review since 1996 and is long overdue.

The following outlines the relevant proposed changes that may be of interest to developers and owners of properties that are proposing a strata subdivision:

Initial Maintenance Schedule – The original owner is required to hand over an initial maintenance schedule to the owner’s corporation. While the owner’s corporation is not required to follow it, it can be used by the developer when determining whether a particular defect or damage is the developer’s responsibility. Developers will need to accept that by providing a complete maintenance schedule that will protect their interests, they will also be required to ensure that an appropriate budget for such maintenance work is provided for. There are further ramifications for underquoting the estimate of strata levies (below). Ultimately, there may be potential implications if the owner’s corporation chose not to adopt the maintenance schedule submitted by the developer and the building resulted in economic loss.

Building Inspection reports and building bonds (Applies to residential/mixed schemes that are not subject to Home Warranty Insurance) – An independent building inspector is to be engaged to inspect building work and provide an interim report within 12 to 18 months to identify defective work from which the developer (the principal contractor) is required to repair defective work. A building bond of 2% of the contract price is required to be lodged for buildings over three storeys in height. The bond may be used (in part or full) to cover defects that were not repaired as of the date of the inspector’s final inspection.

Motion on agenda to consider defects until warranty expires – The owner’s corporation will be required to consider a motion on the agenda of each annual general meeting that relates to building defects and their rectification until the expiry of the statutory warranty period.

Developer is not entitled to vote on matters concerning building defects – When consideration is given to action in relation to building defects (that needs to be considered annually), the developer is not entitled to exercise a vote in relation to such matters.

Limitations on who can be on the strata committee. A person appointed by an owner for the leasing of a lot may not be appointed to the strata committee.  A person appointed as a building manager cannot be elected to the strata committee. Furthermore, the appointment of a building manager will expire at the first annual general meeting (if appointed during the initial period) or ten years after their appointment (unless terminated earlier). In addition, a person that is connected with the original owner or building manager may not be appointed to the committee unless that connection is disclosed.

In-house strata management prohibited – The developer (or person connected with the developer) may not be appointed as the strata manager for ten years after registration. A strata manager appointed at the first annual general meeting may be appointed for a term of no more than 12 months.

Restrictions on use of proxies by developers – Provisions with contracts of sale (or other contracts) requiring an owner to give a proxy or vote in a particular way will be unenforceable and void

Termination of appointment of Building Manager and Strata Manager – The Tribunal will have the power to terminate the contracts of buildings managers and strata managers.

Original owner required to set realistic budgets – The original owner may be required to compensate an owners corporation if it is found later that the estimates and levies determined during the initial period were inadequate.

Tribunal can reset unit entitlements – Should the Tribunal find that the unit entitlements set are wrong, the Tribunal has the power to order an original owner to compensate owners for the overpayments, as well as their costs in pursuing the application.

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The other big announcement relates to the termination of strata schemes. The provision applies to both residential and non-residential strata schemes. This will be of great interest to developers as the opportunity to engage with strata schemes to develop their sites will increase. In the past, 100% support of lot owners was required; the proposed legislation (in broad terms) simply requires a special resolution (no more than 25% voting against the motion). Simply? Well, not exactly, “simply”, so that will be a topic for another day.

The above measures are clearly designed as consumer protection measures and will significantly change the way that developers and new lot owners interact. Unscrupulous developers should be stopped from exploiting naïve purchasers and many of the above measures will go toward achieving that objective. However, those that have stood behind their product and acted fairly may find some of the above measures to be burdensome and expensive.

The above is a very high level overview; Beaumont Strata will be carefully monitoring any changes to the draft legislation as it passes through parliament. Should you wish to discuss, we would welcome that opportunity.

About the Author, Grant Beaumont

Grant Beaumont

As Director of Beaumont Strata, Grant is passionate about the management of Commercial & Industrial Property. With an enthusiastic attitude toward innovation, and adoption of modern practices, the businesses have significantly developed in terms of the internal processes, creating business efficiencies and enhancing the customer experience for clients and customers. In addition, he handles much of the administration side of the businesses, comprising legal, accounting, human resources and office matters.

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