Most developers will be aware of the new strata renewal provisions for the collective sale of a strata scheme introduced by Part 1 of the Strata Schemes Development Act 2015 (“the Act”) and Part 6 of the Strata Schemes Development Regulations 2016 (“the Regulations”).
Whilst most would consider these new provisions a boon for developers, what may be less obvious is the legislature’s expectation that the developer carry the financial burden of the risks associated with any attempted collective sale of a strata scheme.
In summary, the stages involved in a collective sale are as follows:
• Stage 1: Strata Renewal Proposal prepared and submitted;
• Stage 2: Proposal considered, and Strata Renewal Committee established;
• Stage 3: Strata Renewal Plan collectively prepared;
• Stage 4: Strata Renewal Plan considered by owners; and
• Stage 5: Application to the Court to give effect to Strata Renewal Plan.
Whilst developers will incur costs associated with the acquisition (and or control) of the 75% threshold of unit entitlements in a strata scheme (whether by way of conditional contracts, option agreements or other agreements with the lot owners), there are additional significant costs.
Those costs include:
i. Preparation of Strata Renewal Proposal (“Proposal”);
ii. The costs of obtaining an Order from the Supreme Court of NSW to give effect to the Strata Renewal Plan (“Plan”);
iii. The costs by way of monetary contribution that the developer needs to pay the Strata Renewal Committee or the Owners Corporation for its costs and expenses;
iv. The costs in preparing the feasibility analysis which most likely would involve some design and planning expert’s input; and
v. The costs associated with delay.
Lapsing of a Proposal or Plan
A timing issue arises because, if a Strata Renewal Proposal and or Strata Renewal Plan lapses, then the developer is prohibited from submitting that proposal or a substantially similar proposal to the Owners Corporation for at least twelve (12) months after the Proposal or Plan lapses.
A Proposal or Plan will lapse if the Strata Committee decides that it does not warrant further consideration. There are however, provisions that if the Strata Committee decides that the Plan does not warrant further consideration, and those Strata Committee members have less than the 25% of the unit entitlements, then there is an opportunity for the developer to seek to have the decision reconsidered by all members of the Owners Corporation rather than merely the Strata Committee.
A Plan will also lapse within three (3) months after it has been submitted to the Owners by the Owners Corporation, if the threshold of a 75% vote in favour has not been obtained.
Minimising Risk In order to minimise the risk, the developer will need to ensure that it has secured units that, when combined, have voting for at least 75% of the unit entitlements. When owners holding 75% of the unit entitlements vote in its favour, that is deemed to have provided the required level of support needed for a Court to order the Plan to take effect.
The Plan however, lapses if the Owners Corporation decides not to apply to the Court for an order to give effect to the Plan, or if the Court decides not to make the order.
Termination of the Strata Scheme
If the developer is successful in having the strata renewal plan approved by the Owners Corporation and having the Court give effect to the Plan thereby terminating the strata scheme, the rights and liabilities of the Owners Corporation will vest in the developer. This will include any liability of the Owners Corporation to pay the reasonable costs of the proceedings incurred by dissenting owners. The developer will also need to notify the Registrar-General of the termination of the strata scheme.
Whilst the legislation does make the collective sale of strata schemes possible, developers need to be aware of the substantial outlay in costs required, simply to be in a position for the Owners to consider a strata renewal proposal and plan and the risk that, notwithstanding any significant investment, the Proposal and or Plan may not proceed.
Gil Baron is the founder and principal of Baron + Associates, with 34 years practicing experience across commercial and residential developments. Baron + Associates acts for numerous leading developers and high net worth individuals, most notably Bondi’s Pacific development, Sydney’s most successful launch of a residential offering in a mixed-use development.
Baron + Associates
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