Apartment blocks are being unlocked for redevelopment – this presents opportunities, and challenges, for owners and developers alike!

There is a shortage of housing, the Australian dollar is cheap and foreign buyers seem keen to buy our real estate. The NSW government has announced changes to strata laws to enable strata owners to redevelop their apartment blocks. Unit owners have to muster 75% of units and follow the process set out in the new Strata Schemes Development Act 2015 (NSW) (the Act).

The new forced sale regime has safeguards. Read on if you are interested…

So – what’s the deal?

Historically, consent to sell or redevelop a strata scheme was required from all lot owners. This led to ‘hold outs’ by individuals that just refused to move despite the fantastic price offered by developers.

Now however, under the Act, owners of freehold strata schemes can collectively force the sale of all lots in their strata plan without unanimous consent required from all lot owners. That is, 75% of the lot owners in a strata scheme can band together to collectively sell or redevelop all the land.

For example: if an apartment block has 20 units, only 15 owners need to agree to the sale!

Why now?

NSW State Government is encouraging urban renewal and facilitating an alternate way of replacing aging apartment buildings across NSW. This is envisaged to provide higher-density accommodation in areas of major infrastructure.

Is it applicable to me?

Strata schemes that came into existence after 30 November 2016 are automatically covered by the provisions of the Act. But not to fear, existing strata schemes that came into existence before 30 November 2016 can ‘opt in’ to the relevant provisions.

How do I go about a collective sale or redevelopment?

The process is bureaucratic and consists of several procedural steps. In a nutshell, however, owners must:

1. Vote to opt into the process (if a pre-2016 strata scheme)
2. Initiate the collective sale/renewal process
3. Form a strata renewal committee
4. Develop a Strata Renewal Plan
5. Consider the plan
6. Approve the plan
7. Sue the hold outs

In more detail

Any person or organisation (including developers) can give a written ‘strata renewal proposal’ proposal for the collective sale or redevelopment of a strata scheme to a strata committee.

The strata committee must consider the proposal at a meeting of the committee and provide each owner of a lot with the proposal and a copy of the minutes.[1] If the strata committee decides the proposal warrants further consideration, it must convene a general meeting of the owners corporation.[2]

General meeting

The owners’ corporation must pass a motion, with at least 50% support, that the proposal warrants investigation and, by resolution, establish a ‘strata renewal committee’ to prepare a ‘strata renewal plan’ for the strata scheme and elect its members.[3]

The strata renewal plan

The strata renewal plan must include:[4]

• A general overview of the strata renewal proposal to which it relates
• A full and frank statement by the proposed purchaser or developer of the intended use of the strata land
• If the plan is for a collective sale of the scheme, it must provide details of the purchaser and sale price details
• If the proposal is for redevelopment, it must provide details of the developer, details of any planning approvals etc

Compensation value – a floor on the sale price

In a collective sale, the purchase price of each owner’s lot must not be less than the ‘compensation value’[5] for the lot, which is determined by having regard to[6]:

• The market value of the land
• Any special value of the land
• Any loss attributable to severance
• Any loss attributable to disturbance and solatium
• Any increase or decrease in the value of any other land at the date of the acquisition by reason of the purpose for which the land was acquired

General meeting approval

The plan is then considered by the owners corporation[7] and the strata renewal committee convenes a further general meeting of the owners’ corporation to consider the plan. The plan requires at least 75% support before it can be distributed.

Support notice – 75% approval

Once the Strata Renewal Plan is distributed however, (the important part) at least 75% of the owners of the lots must give a support notice, supporting the renewal plan. This effectively approves the plan and the secretary of the owners corporation must:

• Inform the Registrar-General and all owners
• Convene a general meeting of the owners corporation to decide whether to apply to the court for an order to give effect to the plan (the owners must then resolve to apply to the court for the order)

The court may grant orders either accepting or rejecting the strata renewal plan.

Risks

Investors should consider tax implications arising from sales, particularly where the property was recently acquired.

Sales proceeds may not necessarily be calculated on the value of the unit ‘as is’ but according to the lot’s “unit entitlement”. This has the potential for disputes.  As a practical matter, disputes should be minimised if the sale proceeds are calculated on an independent agreed valuation for a particular lot.  The Act provides a means to assess fair value and the Court will have the ultimate say.

Things to take away

When considering a ‘strata renewal proposal’ and a proposed acquisition of a strata site, developers should take the following steps:

1. Understand the necessary requirements for the owners’ corporation and under the Act
2. Strategically engage with owners to ensure maximum take up
3. Consider the best entity in which to hold the assets
4. Have a comprehensive project framework to manage the acquisition and subsequent development

In any event, the recent changes have the potential to put apartment owners on the road to make a tidy capital growth and developers grinning all the way to the bank.

If you want to find out more about the collective sale or renewal process or if you have a project in mind, contact Peter McNamara.

You might also be interested in converting your company title block to strata, an outline of the process can be found here.

Useful Links

Strata Schemes Development Act 2015 (NSW)

Land Acquisition (Just Terms Compensation) Act 1991 (NSW)