In their statutory form, both strata and community titles originated in New South Wales, Australia. The first strata titles legislation was enacted in 1961 when the New South Wales Parliament passed the Conveyancing (Strata Titles) Act 1961. The first community titles legislation was enacted when the CommunityLand Development Act 1989 and the CommunityLand Management Act 1989 were passed by the same Parliament. Since 1961 all other Australian states and territories have passed strata titles legislation, although it is known by different names in some jurisdictions (e.g. building units titles, community titles and unit titles). During the 1990’s a number of states expanded their strata titles legislation to include community title type subdivisions, although, unlike New South Wales, most of them did not use separate statutes.
The three principal Australian jurisdictions are New South Wales, Victoria and Queensland. New South Wales and Queensland both have “third generation” legislation. New South Wales replaced its 1961 legislation in 1973 and the 1973 legislation was substantially changed in 1996. Queensland’s first strata titles legislation was passed in 1965 and replaced in 1980. The 1980 legislation was subsequently replaced in 1997. Victoria’s first strata legislation appeared in 1967, followed by community titles legislation (called “Cluster Titles”) in 1974. These were replaced in 1988 by a consolidated subdivision statute which was partly replaced in 2006 (by a new Owners Corporation management statute).
Ongoing reviews of strata and community titles legislation are common in all Australian jurisdictions as governments try to meet the demands of home unit owners for resolution of the inevitable problems of communal living.
The lots are effectively parcels of “airspace” usually bounded by floors, walls and ceilings as defined on a plan drawn by a surveyor and registered in the local titles office; hence, the use of the term “strata”. The common property is everything that is left after the lots are taken out of the original land parcel. Because of this approach the plan does not actually define the common property. One has to identify the lots before being able to define the common property. Sometimes there are structural features and services located within a lot but which serve other lots. These are usually deemed to be common property even though they are situated within a lot.
The lots are defined in much the same way that conventional land lots are defined and it is common for services to be deemed to be common property. Again, the common property comprises everything not included in the lots, although, unlike strata titles, the subdivision plan usually defines the common property by survey means.
Community title subdivisions are not dependent upon buildings. They involve normal survey techniques and can be completed and approved once access roads and services are in place. However, it is common for buildings to be completed on the various lots before the subdivision is undertaken.
After registration of a subdivision plan a separate title deed issues for each lot shown on the plan. The title issues in the name of the person who was the owner of the land parcel being subdivided, namely, the developer. The developer is then at liberty to transfer the lots to individual purchasers. In the true sense these are the first or initial unit or lot owners (i.e. the first one registered after the developer).
- how the particular plan has been drawn; and
- the rules of the particular jurisdiction relating to boundaries.
The boundary is commonly the centre of the walls, floors and ceilings enclosing the lot, or the internal surface of the floors, walls and ceilings enclosing the lots. Where parts of a lot are not enclosed, the boundaries are usually defined with reference to the nearby walls, floors and ceilings, or other physical structure. It is often a highly technical exercise to determine the boundary between a lot and common property and a copy of the registered plan will usually be required for this purpose.
In most jurisdictions the original owner must establish the body corporate records and effect the initial insurance covers. The original owner is usually required to hand over the body corporate and building records to lot owners at the first annual general meeting of the body corporate. Some jurisdictions also restrict the activities of original owners during the period when they own the majority of lots in the scheme.
- Share of ownership of the common property
- Voting entitlement on a poll
- Contributions (or levies) payable for the particular lot
- Entitlement to distribution of surplus assets (upon a distribution or winding up)
- Liability for rates and taxes
They are like the lot owners “shareholding” in the body corporate.
(a) vest in the body corporate; or
(b) vest in the lot owners for the time being, as tenants in common in shares proportional to their lot entitlements.
Where the common property vests in the body corporate, it is effectively held by the body corporate as “trustee” for the lot owners, as tenants in common in shares proportional to their lot entitlements.
Either way, the body corporate is charged with administering the common property for the benefit of the lot owners. It obtains the funds it needs to discharge this function by imposing levies (or contributions) on the lot owners. It is effectively a “not for profit” entity and in some jurisdictions it cannot carry on a business unless the business activity has a relationship to its core functions.
Some jurisdictions allow for layered body corporate structures. These involve one body corporate being a member of another body corporate. Two and three layers (or tiers) are not uncommon. Typically, these occur where land and building subdivisions are mixed and are undertaken in stages, or where a particular development site has a number of different uses.
For example; a large parcel of land is subdivided into 6 lots (each intended for further subdivision) and common areas (comprising roads, open space and recreational facilities). A community plan is used for this subdivision. When the plan is registered a body corporate (“principal body corporate”) is constituted and it becomes responsible for the common areas. The developer, as the owner of the 6 development lots is the sole member of the body corporate. The development lots are progressively developed by constructing buildings on them. The 6 buildings comprise:
- shopping centre
- office building
- 2 story row-houses
- high rise apartment building
- midrise apartment building.
The office building and the 2 apartment buildings are then subdivided by separate strata plans. Bodies corporate (“subsidiary bodies corporate”) are constituted upon registration of those plans. The subsidiary bodies corporate become responsible for the common areas within their respective land parcels, but not the common area in the community plan. They are members of the principal body corporate. The row houses are then subdivided by another community plan and a further subsidiary body corporate is constituted. Again, that further subsidiary body corporate becomes a member of the principal body corporate. The management structure then looks like this –
Each body corporate is able to make decisions at general meetings of its members. The general meeting elects a committee each year.
Each office bearer has a range of duties. They are answerable to the committee. Because they are volunteers they are usually assisted by a professional administrative officer.
In New South Wales and the Australian Capital Territory strata managing agents must be licensed and their conduct is subject to scrutiny by a Government department and independent tribunal. Other states are considering whether to licence their body corporate managers and if this occurs it is likely to be part of the national competency standards process that is underway in Australia. In the meantime, Queensland has imposed a Code of Conduct under which body corporate managers must operate.
Managing agents can also be appointed by dispute tribunals when the affairs of a strata or community scheme are so bad that a court imposed compulsory management is considered necessary. Where this occurs, the managing agent is given very wide powers, usually to the exclusion of the owners themselves.
Management rights are effectively a “package” of rights and assets. The package commonly comprises:
- A caretakers unit in the building
- A Building Management Agreement between the manager and the body corporate under which the manager agrees to care-take the building in exchange for an annual fee
- A Letting Authority under which the body corporate agrees to the manager conducting a letting business in conjunction with the caretaking functions
- A reception desk, office and various storage facilities (which can be part of the unit lot, a separate lot or the subject of a licence or “right to use” in favour of the owner of the caretakers unit)
- An exclusivity arrangement that is often evidenced in the letting authority or a by-law.
With this package the manager is able to operate a letting pool (known in some overseas jurisdictions as a “rental program”) within the building. The letting pool usually caters for holiday lettings, but pools or programs for permanent lettings are not unheard of. Owners wishing to place their units in the pool do so by entering into an agency agreement with the building manager. This is similar to the normal agency agreement between a landowner and a real estate agent. These agency agreements are the final component of the management rights package.
Building managers who operate a letting pool must be licenced under the relevant jurisdiction’s real estate agency laws. In some jurisdictions special “restricted licenses” are available. The agency activities of the manager are thereby restricted to the particular building to which the licence relates. The benefit to the manager is the ease with which a restricted licence can be obtained compared with a full real estate agent’s licence. This restricted licence also facilitates the development of a secondary market for these management rights.
Management rights can be very controversial within a body corporate, particularly where the manager is not performing adequately or if the annual fee is too generous for the work the manager is required to undertake. Management rights disputes have been very common and this has led to Governments tightening up the law relating to these arrangements. Despite these efforts management rights still form the basis of a relatively high proportion of disputes within bodies corporate.
Most Australian jurisdictions have introduced requirements for long term sinking fund budgeting. This has had the effect of substantially increasing the sinking fund levies but it also has the advantage of ensuring that a body corporate builds up sufficient funds to ensure that major items of renewal and replacement can occur without the need to impose a special levy to cover the cost.
If an adjudicator’s order is not obeyed, then the person against whom the order was made commits an offence and is liable to prosecution and a fine.
In very limited circumstances disputes can be taken directly to the Supreme Court. In those jurisdictions where there is no specialist dispute resolution regimes, resort to the Supreme Court is often the only avenue available. Supreme Court proceedings for these types of disputes are expensive and can take a long time to resolve.
SALES AND PURCHASES
Because lot owners must contribute funds to a body corporate in sufficient amounts to enable the body corporate to discharge its liabilities, the legal position of the body corporate is akin to that of an unlimited liability company. That is to say, the lot owners are liable to discharge the body corporate’s debts and successive levies can be imposed until sufficient funds are available, even if this means that one or more of the lot owners are forced into bankruptcy. Add to this the fact that a purchaser automatically becomes a member of the body corporate when their purchase transfer is registered and it will be appreciated that lot purchasers should be very concerned to ensure that there are sufficient funds in the body corporate’s bank account to discharge its liabilities. If this is not the case, then the purchaser will have to make up their share of the deficiency once they are registered as the owner of the lot they are purchasing.
Clearly, this is also a matter of concern for a financier because:
- A purchaser forced to assume a significant liability to the body corporate may be forced into default under their mortgage to the financier.
- In the event of such a default the financier may need to enter into possession of the lot and exercise their power of sale. In this event they are potentially liable for any unpaid levies.
In practice, many purchasers and financiers arrange for a “due diligence” exercise to be carried out in respect of the body corporate. This is usually arranged by the purchaser’s solicitor, although some purchasers undertake the process themselves. This process should only be undertaken by purchasers who are confident that they know exactly what to look for and the records that need to be examined. Most due diligence exercises are undertaken by specialist records inspection agencies. Purchasers Strata Inspections Pty Ltd is a company that specialises in these due diligence exercises. It is the longest established agency of its type and operates along much of the east coast of Australia. It distinguishes itself from other inspection agencies by its huge data base on strata and community title bodies corporate. Every time an inspection is undertaken the results are compared to any existing data. This often detects attempts by bodies corporate to withhold or “hide” unfavourable information. More information about inspections is available on the web site of Purchasers Strata Inspections Pty Ltd at www.strata.com.au
- The building and outbuildings
- Common area contents (e.g. carpet, furniture, paintings, etc.)
- Common property public liability
- Workers compensation
- Voluntary workers
Lot owners are, in turn, responsible to insure the contents of their lots, as well as covering themselves against personal liability. Even the question of contents is not without its problems. Issues arise as to whether carpets or wall coverings are part of the building or its contents. What about the kitchen cupboards and hot water system? These are the issues a lot owner needs to address when considering the type and extent of insurance cover they require for their unit. Some insurers offer unit content policies that “dovetail” with the body corporate’s policy. In other words, the items not covered under the body corporate policy are clearly covered under the unit’s contents policy. Where different companies issue the policies this “dovetailing” effect is sometimes not achieved.
In Queensland, a community titles scheme comprising buildings which are not connected with common walls (e.g. free standing houses or villas) may put in place an “insurance scheme” under which the body corporate assumes responsibility for insuring all the buildings on the lots. In the absence of such a scheme the individual lot owners must insure their own buildings. The insurance scheme usually delivers much cheaper premiums for the individual owners.
Sometimes car parking and storage spaces are owned by the body corporate and are allocated for use by lot owners by means of a by-law. In those cases the validity of the by-law may need to be investigated and the actual areas allocated to the lot being purchased needs to be checked. Special care is needed where by-laws are used for this purpose. As a general rule, it is preferable for these areas to be included on the title to the lot rather than allocated in a by-law.
By laws are usually enforced as part of the dispute resolution process (i.e. a dispute regarding a by-laws is arbitrated and an order is made for compliance). However, in some jurisdictions a body corporate is able to issue what is effectively an “infringement notice”. Failure to comply with the notice may then attract a monetary penalty.
RATES AND TAXES
Sometimes “services”, such as water and garbage removal, are charged as extras against the individual lot owners. Of course, the body corporate levies are in addition to these rates and taxes. Purchasers of lots therefore need to enquire about the overall level of rates, taxes and levies to ensure that they are not over committing themselves on the purchase.
Until about the year 2000 strata and community title properties were built with a single water meter and excess water charges imposed by local government were payable by the body corporate. As water became a scarce commodity building regulations were changed to require separate water meters to be installed for individual units. Many older schemes have voluntarily installed separate water meters to encourage more economical use of water and to more fairly distribute the costs.
ELECTRICITY AND OTHER SERVICES
CONTROLLING OWNERS AND TENANTS
The mixing of resident owners and permanent renters can lead to problems, although these are less likely (and less serious) than problems arising from the mixing of resident owners and short term occupants, such as holiday makers. When purchasing a unit the buyer should be aware of the type of occupant that is likely to be within the building or community and test this against their own plans for the unit.
SELF-MANAGEMENT vs PROFESSIONAL MANAGEMENT
- Are there sufficient owners with the time and interest to undertake the tasks?
- Are these people sufficiently skilled?
- Are these people likely to lose interest in a year or two?
- Is the state of harmony within the scheme such that self-management will be supported?
- Is the complexity of strata and community management fully appreciated?
If the decision is to self-manage, then the right “equipment” needs to be assembled. This includes publications, copies of legislation, computer facilities and suitable programs.
The existence of legal proceedings can also be a deterrent to prospective purchasers.
GET IN TOUCH
If you would like to speak to one of our team members, please call us or fill in the form below.