NSW Strata Reform to pave the way for Sydney’s growth

NSW STRATA REFORMBy Lachlan Commins, Patterson Houen & Commins, Lawyers, Sydney.

Late in 2016 two pieces of legislation came into force in New South Wales: the Strata Schemes Development Act 2015 (the “Development Act”) and the Strata Schemes Management Act 2015 (the “Management Act”). Although they are separate Acts, they are considered together as part of the same ‘package’ of legislative reform.

Strata Schemes Development Act 2015

The Development Act replaces both the Strata Schemes (Freehold Development) Act 1973 and the Strata Schemes (Leasehold Development Act) 1986.  That is, the subdivision of land into freehold strata schemes and leasehold strata schemes are now both provided for by the Development Act.

The most significant change brought about by the Development Act is the introduction of the Strata renewal process for freehold strata schemes (see Part 10) to “facilitate the collective sale or redevelopment of freehold strata schemes”.

Previously any collective decision made by a strata scheme’s Owners corporation to terminate (read sell) or renew the scheme required unanimous support from the lot owners.  The process introduced by Part 10 reduces this threshold to the support of 75% of the lot owners.

Balanced against this reduced threshold are several ‘safeguards’ designed to “prevent intimidation, encourage collaboration and ensure that owners receive appropriate compensation”.[i]

Essentially, any proposal to sell or redevelop the strata scheme must undergo a series of review and approval checkpoints at the strata scheme level, which can be summarised as follows:

  1. a strata renewal proposal must be submitted and approved;
  2. a strata renewal committee must be established to investigate and further develop the proposal; and
  3. finally a strata renewal plan must be prepared and approved by at least 75% of the lot owners.

Once a renewal plan has received the required approval from the strata owners, it must then be approved and given effect to by order of the Land and Environment Court. As a further safeguard, before making such an order, the court must be satisfied regarding several matters, including:

  • That the renewal plan has been prepared and presented in good faith free from the undue influence of the proposed purchaser or a developer; and
  • That the steps taken in preparing and presenting the renewal plan were carried out in accordance with the Act; and
  • That proceeds pursuant to a collective sale of the scheme are distributed, or compensation to a dissenting owner pursuant to the redevelopment of the scheme is paid (as the case may be), in a manner that is just and equitable in all the circumstances.

Strata Schemes Management Act 2015

The changes introduced by the other half of the legislative ‘package’ “the Management Act” – are more numerous and undoubtedly will have a more immediate impact regarding how people deal with, and operate within, strata schemes. The Management Act replaces the Strata Schemes Management Act 1996 and, in general, provides for the management of strata schemes and for the resolution of disputes therein.

The suite of changes introduced by the Management Act could be thought of as a series of ‘updates’ required to keep the strata title system relevant and functioning in today’s rapidly changing society.

To illustrate this point, the repealed legislation (Strata Schemes Management Act 1996) mandated that quorum and voting (other than by proxy) at owners corporation or strata committee meetings could only be achieved on the basis of the owner or committee member being physically present at the meeting. The new legislation, on the other hand, deems a person to be a “present person” so long as that person is “able to vote at the meeting” using such means that have been approved by the owners corporation or strata committee. These means can include “teleconference, video-conferencing, email or other electronic means while participating in a meeting from a remote location”.

Rather than outlining a comprehensive list of all changes introduced by the Management Act (of which there are more than ninety), this article focuses on six of the more notable changes along with a brief explanation of each:

  1. Defect bond and inspection regime

  • The building defect and inspection regime introduced by Part 11 of the Act aims to address a regulatory gap in the Home Building Act Compensation Fund in that the new regime will largely be restricted in its application to the construction of new multi-storey residential and mixed-use residential buildings that have a rise of three or more storeys.
  • The new regime mandates that the developer is required – as a pre-condition to being issued with the building’s occupation certificate – to lodge with Fair Trading a building bond of 2% of the contract price for the building work. The purpose of the bond is to secure funding for the payment (up to the amount of the bond) of the costs of rectifying any building defects which have been identified in a special building inspection report to be completed after inspection of the building by an independent building inspector appointed in accordance with the Act.
  • The building inspector must not be connected with the developer and the appointment must either be with the express approval of the Owners corporation (if appointed by the developer) or be made by Fair Trading itself (in which case the Owners corporation’s approval is not required). The costs of appointing the building inspector and all subsequent investigations and reports undertaken are to be met by the developer and cannot be withdrawn from the amount of the building bond.
  • The building inspector’s role is to undertake an investigation of the building and to produce a report detailing any defective building works. The first report (the interim report) has to be completed and delivered to all parties concerned no earlier than 15 months and no later than 18 months after completion of the building work. If required, the second report (the final report) is to be completed and delivered no earlier than 21 months and no later than 2 years after completion of the building works.
  • Subsequently, any costs paid out by the Owners corporation in connection with the rectification of defective building works identified in the final report can be claimed from the amount of the building bond. Any amount of the building bond left that has not been claimed after 60 days from the provision of the final report can be returned to the developer.
  1. Transparency and accountability measures for strata managing agents

Part 4 of the Act outlines measures for the appointment, functions, and accountability of strata managing agents and building managers. Notably:

  • The developer, or a person connected with the developer, cannot be appointed as the strata managing agent within 10 years of the initial registration of the strata scheme;
  • The term of appointment for the strata managing agent appointed at the first AGM of the owners corporation is to be for a maximum period of 12 months, with all subsequent appointments and reappointments to be for a maximum period of three years;
  • A ban on strata managing agents requesting or accepting gifts or benefits – other than those with a nominal value and other than payments, commissions, and training services approved by the owners corporation – in the exercise of his or her functions; and
  • Increased stringency with regards to the disclosure and reporting requirements for the strata managing agent’s commissions and training services provided to or paid for the managing agent.
  1. Three-tiered approval process for renovation to common property

  • Under the repealed legislation, the owner of a lot would need to apply for and receive the written approval of the owners corporation given by special resolution 14 days prior to being able to carry out any alterations or changes to the lot which affected common property. Consequently, even minor cosmetic changes to common property inside an owner’s lot (such as painting the interior surface of a common wall) would need to be approved by special resolution of the Owners corporation, resulting in practice in broad non-compliance with the process.
  • The new legislation introduces a three-tiered approach to the renovation approvals process as follows:

Firstly, at the least level of invasiveness, the owner of a lot who wants to carry out cosmetic work (as defined in the Act) to the lot affecting common property can do so without the prior approval of the owners corporation.

Secondly, at the next level of invasiveness, the owner of a lot who wants to carry out minor renovations (as defined in the Act) to the lot affecting common property can do so with the approval of the owners corporation given by general resolution (i.e. 50% + 1) (as opposed to special resolution (i.e. at least 75%) required under the repealed legislation). Further, such approval cannot be unreasonably withheld.

Thirdly, and at the highest level of invasiveness, the owner of a lot wishing to carry out work on the lot affecting common property being work of a nature that is outside the scope of both cosmetic work and minor renovations can only do so after approval from the Owners corporation given by special resolution (at least 75% in favour).

  • The Act clearly delineates the level and types of work which are captured by, and which fall beyond, the scope of cosmetic work and minor renovations. However, power is given to the owners corporation to expand (within limits set by the Act) the scope of what can constitute cosmetic work or minor renovations by making by-laws to that effect.
  1. Streamlined and enhanced by-law enforcement process

  • Under the previous legislation, in order to enforce a by-law, the Owners corporation had to serve a notice of compliance on the owner or occupier of a lot alleged to have acted in contravention of the by-law. If the owner or occupier, having been served with the notice of compliance, continued to act, or acted again, in contravention of the by-law, the owners corporation would have 12 months (from the service of the notice) to apply to the Tribunal for a civil penalty order.
  • The new legislation keeps this process in place with the difference being that if the Tribunal (NCAT) makes a civil penalty order (in accordance with the process above) and, after the making of such an order, the contravening party continues to acts, or acts again, in contravention of the same by-law within 12 months, the owners corporation may apply to the Tribunal for a further civil penalty order without first having served the contriving party with a notice of compliance.
  • The level of monetary penalties available to the Tribunal for contravention of a by-law has also been increased: up to 10 penalty units are available for the first finding of a contravention within a 12 month period (an increase from 5 penalty units), and up to 20 penalty units are available for all subsequent findings (of the same contravention) within the same 12 month period (an increase from 5 penalty units). The limit has been increased to 50 penalty units and 100 penalty units respectively for contraventions relating to overcrowding of units. Currently, a penalty point is equivalent to $110.00.
  1. Voting reform

As stated, the new legislation aims to provide certain flexibility in administration and rights flowing from strata schemes and to “future proof” those provisions.  To this end, changes have been made regarding voting and meeting attendance.  Those changes include the following:

  • A limit on the number of proxies that can be held by a single person who is voting on a resolution:
    • if the strata scheme has 20 lots or less – to 1 (one); or
    • if the strata scheme has more than 20 lots – to a number equal to not more than 5% of the total number of lots.
  • Invalidating proxy votes cast by the developer of a strata scheme (or a person connected with the developer) which have been procured from an owner pursuant to the terms of that owner’s purchase contract.
  • Invalidating proxy votes cast by a strata scheme’s building manager, property manager, or strata manager if the vote so cast would result in pecuniary gain or material benefit to the proxy.
  • Making void and unenforceable terms of a sale contract which purport to require the purchaser of a lot to vote or otherwise grant a proxy at the direction of another person.
  • Secret ballot voting on a motion or election if at least one quarter of the persons entitled to vote on the matter so agree.
  1. Tenant participation in owners corporation and strata committee meetings

Tenants are now entitled to attend meetings of the owners corporation, albeit in a limited capacity; that is, they are not entitled to vote, address the meeting, and may be required, by general resolution of the meeting, to be absent during the discussion of certain matters.

In addition, where at least half the lots in a strata scheme are tenanted, a tenant representative may be voted on by the tenants to sit on the strata committee. Again, the powers of the position are limited and to this extent the representative cannot: vote, put forward motions, or nominate in a meeting; act as an officer of the Owners corporation; or be counted in determining a quorum.

The upshot and where to find out more…

As Sydney’s population continues to grow and expand with no apparent end in sight, the NSW Government plans to house more and more of the population in medium density residential strata developments; a solution the former Minister for Planning, Rob Stokes, described as creating “the missing middle”.[ii]

Accordingly, these strata reforms can be seen as facilitating and anticipating the increasing relevance and importance that the operation and management of strata schemes will have in the day-to-day lives of Sydneysiders. The regulation of the influence of developers and increased scope for the involvement of tenants in strata schemes are but two examples of the way in which these laws aim to facilitate and anticipate Sydneysiders’ increased interaction with their strata scheme.

More information can be found regarding the detail and application of the new legislation from Fair Trading’s website and the Real Estate Institute of NSW.

Contact the author directly by email or by telephone

[i] Second Reading Speech (New South Wales, Parliamentary Debates, Legislative Assembly, 14 October 2015, Victor Dominello).

[ii] Jacob Saulwick, ‘Terracotta Warriors: Reshaping the Great Australian Dream’, The Sydney Morning Herald, 22 November 2016.

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