Review of Strata Legislation in NSW. Submission by the. Owners Corporation Network of Australia Limited. Part 3. OCN Strata Renewal Model.

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1 Review of Strata Legislation in NSW Submission by the Owners Corporation Network of Australia Limited Part 3 OCN Strata Renewal Model May 2012 Prepared by Ted Rofe PO Box Q933, Queen Victoria Building, NSW 1230 ABN

2 STRATA RENEWAL 1. Introduction This submission, directed specifically to proposed changes to Part 3 of the Strata Schemes (Freehold Development) Act 1973 dealing with the termination of strata schemes, is Part 3 of three OCN submissions to the NSW Government regarding proposed changes to the Strata Schemes Management Act 1996 and related legislation. The Issue A number of major industry bodies, including PCA, UDIA and SCA (NSW) have issued policy statements or made submissions to the NSW Government to the effect that: There is a major housing shortage in NSW It is expensive to develop housing in greenfields sites where new infrastructure and services need to be provided, and thus more economical to redevelop existing residential areas There is a large number of existing strata developments which are old, dilapidated and unsafe and fail to meet current Building Code requirements The obvious solution is to demolish these buildings and replace them with new, high density developments The major impediment to this goal is the fact that under existing Strata Titles legislation, termination of a strata scheme requires the approval of 100% of the existing owners and other stakeholders The answer is for the government to amend the current Strata Titles legislation to provide that a strata scheme can be terminated by a resolution passed by less than 100% and perhaps 80%, or even 75%, of the lot owners. The Fundamental Flaws There are two flaws in this argument. Firstly, it confuses the difficulty of obtaining the agreement of 100% of lot owners to sell their lots to a third party (referred to in the Singapore Strata Titles legislation as a Collective Sale) with the requirement to obtain the agreement of 100% of persons having an interest in a scheme to terminate the scheme under Part 3 of the Strata Schemes (Freehold Development) Act Termination of a strata scheme is a distinct concept from the collective sale of all of the lots and common property in a strata scheme. This is illustrated by the fact that the provisions of the Singapore Land Titles (Strata) Act dealing with the Collective Sale of Property, are contained in a separate part of that Act, viz Part VA (ss 84A to 84G) and the First to Fourth Schedules to the Act, from those dealing with Variation or Termination of Strata Subdivision Schemes, which are contained in Part V (ss 77 to 84), which corresponds Part 3 of the NSW Strata Schemes (Freehold Development) Act Part 3 OCN Strata Renewal Model 2/11

3 The real problem for developers is the lack of any provisions in the NSW Strata Titles legislation facilitating the collective sale of all the lots and common property in a strata scheme to a third party. Once a single owner has obtained ownership of all the lots in a strata scheme, termination of the scheme will, in most cases, be a mere formality. Secondly, it assumes that once a building is old, dilapidated and unsafe or fails to meet current Building Code requirements, the only solution is to demolish the building and erect a new building in its place. A manual published by Randwick City Council in November 2005, Design Ideas for Rejuvenating Residential Flat Buildings, demonstrates that significant improvements to older buildings can be achieved in terms of aesthetics, amenity and environmental performance and provides examples of refurbishment that can be undertaken at a reasonable cost. OCN encourages the NSW Government and other relevant bodies to facilitate such redevelopment and refurbishment where possible. With these points in mind, OCN has developed the concept of the Strata Renewal Model. OCN Strata Renewal Model OCN s Strata Renewal model is based on the Singapore Collective Sale model but expanded to encompass both: (a) the Collective Sale of all of the lots and common property in a strata scheme to a third party for redevelopment; and (b) the redevelopment and refurbishment of an existing property by the current lot owners along the lines outlined in the Randwick City Council document referred to above. The first key concept in the OCN Strata Renewal model is the OCN Strata Renewal Plan, which is based on the Collective Sale Agreement referred to in the Singapore legislation. The Strata Renewal Plan is an agreement signed by a minimum specified proportion of lot owners, who have received independent legal advice, specifying the terms and conditions on which either all of the lots and common property in a scheme will be sold to a third party, or the property will be redeveloped and refurbished by the existing lot owners. This is a key distinction from the models proposed by other industry bodies which rely on a resolution passed by a specified proportion of lots owners, eg 75%, 80% or 90%, to effect the collective sale of all the lots and common property in a scheme or, as they refer to it, the termination of the scheme. The second key concept in the OCN Strata Renewal model is the Strata Renewal Tribunal, which is based on the Singapore Strata Titles Board. Before explaining the OCN Strata Renewal model in more detail it may be helpful to briefly outline the relevant provisions of the Singapore legislation. Singapore Strata Titles Legislation Part 3 OCN Strata Renewal Model 3/11

4 In Singapore, prior to 1956, under the general law and the Singapore Conveyancing and Law of Property Act, legal interests in land had to be conveyed by deed in the English language, which could be registered under the Registration of Deeds Act. 1 In other words, the system of land title was similar to Australian old system title. In 1956, the Land Titles Ordinance was enacted which introduced into Singapore the Australian Torrens system of title. Under this legislation (now the Land Titles Act, Chapter 157), interests in land which has been brought under the Act can be transferred only by registration. Since 1960 the two systems, the common law deed system and that under the Land Titles Act, have been operating side by side. However, with the enactment of the Land Titles (Amendment) Act 2001, virtually all land in Singapore has been brought under the Land Titles Act. 2 Strata Titles legislation was introduced in Singapore in 1967 by the Land Titles (Strata) Act 3, which was based on the NSW Conveyancing (Strata Titles) Act In 1999, faced with similar problems to NSW of a housing shortage and a stock of residential and commercial property in need of redevelopment, the Singapore legislature amended the Singapore Land Titles (Strata) Act to facilitate what have become known as collective or en bloc sales of property for redevelopment. In subsequent years, in the light of experience which has been gained in the operation of the legislation and of court challenges to particular transactions, the legislation has been amended on a number of occasions, including, in particular, in 2004, 2007 and 2010 and now provides a useful model for amendments which might be made to Australian Strata Titles legislation. A collective or en bloc sale in Singapore typically involves the following steps: 1. Initiation and evaluation 2. An Extraordinary General Meeting of the lot owners to appoint a Collective Sales Committee 3. A second EGM to approve the appointment of lawyers and other consultants 4. A third EGM to approve the Collective Sale Agreement and the apportionment of the proceeds of sale 5. Signing the Collective Sale Agreement 6. One or more meetings to update lot owners on the signing of the Collective Sale Agreement and the proposed terms of sale 7. Marketing the property 8. One or more meetings to update lot owners on offers received and consider the terms of sale of the property 1 National University of Singapore, Faculty of Law, Part A Bar Course 2011, Land Law, p 9 2 Ibid. 3 Act 41 of As in NSW, strata schemes are regulated in Singapore by two principal Acts, the Land Titles (Strata) Act (Cap 158) and the Building Maintenance and Strata Management Act (Cap 30C), originally enacted as the Buildings and Common Property (Maintenance and Management) Act (Act 23 of 1973) Part 3 OCN Strata Renewal Model 4/11

5 9. Application to the Singapore Strata Titles Board to approve the sale 10. Completion of the sale. Some of the key features of the Singapore model are as follows: Initiation of the collective sale process The collective sale process may be initiated by lot owners, the Owners Corporation or external parties such as property consultants, developers, etc. The initial evaluation of the proposal will involve an assessment of the planning parameters of the site, an estimate of the current value of each unit and the potential value of the land on a collective sale, the views of lot owners and, in particular, any hardship which may be caused to individual lot owners by a collective sale of the property. Appointment of Collective Sale Committee If the owners wish to proceed, a collective sale committee will then be appointed to represent the lot owners and evaluate the proposed collective sale in more detail. It will recommend the appointment of lawyers and other consultants and negotiate the terms of the proposed collective sale agreement. Collective Sale Agreement A collective sale agreement is an agreement between the lot owners to collectively sell all the lots and common property in a strata plan, as distinct from the contract of sale entered into with the purchaser of the property. It is a document signed by lot owners and witnessed by solicitors, who will explain the document to the lot owners and ensure that they understand the terms of the collective sale agreement and its consequences, as distinct from a resolution passed at a meeting of lot owners who may not fully understand the implications of a resolution to terminate a strata scheme. The collective sale agreement must be signed by the requisite number of lot owners within 12 months from the date of the first signature, otherwise it lapses. Marketing The Singapore legislation provides that a property to be sold pursuant to a collective sale agreement must first be offered for sale by public tender or auction. If it is to be sold by private treaty, the sale must take place within ten weeks of the close of the public tender or auction. Strata Titles Board The Singapore Strata Titles Board operates in a manner similar to the Australian Takeovers Panel. It currently consists of a President, four Deputy Presidents and 37 Members. The President and the Deputy Presidents are lawyers, including two District Court Judges. The Members include Architects, Surveyors, Engineers, Property Consultants, Quantity Surveyors and Accountants. Part 3 OCN Strata Renewal Model 5/11

6 When an application to approve a collective sale is made to the Board, a panel is appointed to hear the matter, consisting of a President or Deputy President and either two or four Members. Any lot owner who has not signed the collective sale agreement and any mortgagee or other person (other than a lessee) with an estate or interest in the land whose interest is noted on the land register may lodge an objection within 21 days after notice has been given of the application. The Board has power: (a) to mediate in any matter arising from an application; (b) to summon any person to attend before the Board; (c) to call for a valuation report; and (d) to impose such conditions as it may think fair and reasonable in approving the application. Where an application has been made to a Board, and one or more objections have been filed, the Board must mediate the matters that are in dispute between the objectors and the applicants to achieve a resolution of the dispute. If mediation has proceeded as far as it reasonably can in an attempt to achieve a resolution of the dispute but has failed to resolve the dispute within 60 days, and one or more objections have not been withdrawn then, after having given seven days notice to the objectors and the applicants, the Board must order a discontinuance of all proceedings before it in connection with the application. If the Board makes such an order, the applicants may, within 14 days, apply to the Singapore High Court (the equivalent of the NSW Supreme Court) for an order approving the sale. If the Collective Sale Committee consents, an order made by the High Court approving a collective sale may include an order that the proceeds of sale of any lot to be received by a lot owner who has lodged an objection be increased if the Court is satisfied that it would be just and equitable to do so. The total sum ordered by the High Court to be paid under this provision for all lot owners who have lodged objections is paid from the proceeds of sale of all the lots and must not exceed the aggregate sum of 0.25% of the proceeds of sale of each lot or SGD 2,000 for each lot, whichever is the higher. Neither the High Court nor a Board can approve an application for collective sale if it is satisfied that: (a) the transaction is not in good faith after taking into account the sale price of the lots and the common property, the method of distributing the proceeds of sale and the relationship of the purchaser to any of the lot owners; or (b) the sale and purchase agreement would require any lot owner who has not agreed in writing to the sale to be a party to any arrangement for the development of the lots and the common property in the strata plan; or Part 3 OCN Strata Renewal Model 6/11

7 (c) if the Collective Sale Committee does not consent to an order being made by the High Court that the proceeds of sale of any lot to be received by a lot owner who has lodged an objection be increased as referred to above. Publicity, Transparency and Consultation Perhaps the key feature of the Singapore model is the extent to which it provides for publicity, transparency and consultation. The legislation contains detailed provisions requiring notice and details to be given to lot owners and other interested parties of the nature of the proposed transaction, the terms of the proposed collective sale agreement and the progress of the transaction. A series of meetings is required to be held dealing with the appointment of the Collective Sale Committee to represent lot owners and to approve the appointment of consultants and the terms of the collective sale agreement. There are provisions dealing with potential conflicts of interest and the requirement that the property must initially be offered for sale by public tender or auction is designed to promote transparency in the sale process. There is the potential for existing lot owners to be offered the opportunity to acquire a lot in the proposed new development, but they cannot be compelled to do so. Collective Sale Statistics In Singapore, since 1994, a total of 485 developments have been sold by collective sale, with a value of SGD billion, creating an estimated 43,000 new dwelling units. Although there have been fluctuations in the number of collective sales from year to year, this does suggest that, on the whole, the Singapore model has proved effective in facilitating strata renewal. Conclusion Although the Singapore model would require some modification to be applicable in Australia, it does provide a useful example of a process which could be adopted in Australia to facilitate strata renewal. Part 3 OCN Strata Renewal Model 7/11

8 OCN Strata Renewal Model This section of the OCN submission outlines the principal features of the OCN Strata Renewal Model. OCN would welcome the opportunity to explain these features and their underlying rationale in more detail. Initiation of Strata Renewal Process The strata renewal process may be initiated by one or more lot owners of the relevant strata scheme, the executive committee, the strata or building manager, or a third party such as a real estate consultant, architect or developer. What is important is that, once initiated, the process is transparent and under the control of the Owners Corporation of the scheme. The proposal will initially be considered by the Executive Committee of the scheme which, if it sees merit in the scheme, will call an Extraordinary General Meeting to appoint a Strata Renewal Committee to further consider and develop the strata renewal plan. If the Executive Committee fails to do so then one or more lot owners may place the proposal on the agenda for the next Annual General Meeting of the Owners Corporation or, if there is a sufficient number of lot owners who support the scheme, convene an Extraordinary General Meeting (EGM) for that purpose. Strata Renewal Committee The function of the Strata Renewal Committee is to develop a Strata Renewal Plan for consideration by lot owners. The members of the Strata Renewal Committee will be elected at an Extraordinary General Meeting of the Owners Corporation. They may comprise some or all of the members of the Executive Committee, other lot owners, representatives of the Strata or Building Manager or other persons with particular expertise able to contribute to the development of the plan. A further EGM may be held to approve the appointment of lawyers, engineers, architects and other professional advisers to assist the Strata Renewal Committee in the development of the Strata Renewal Plan. Strata Renewal Plan As mentioned earlier, the Strata Renewal Plan is one of the two key elements of the OCN Strata Renewal Model, the other being the Strata Renewal Panel, to be discussed below. The Strata Renewal Plan sets out all of the relevant terms on which the strata scheme will be renewed, irrespective of whether (a) the existing property is to be rejuvenated in the manner described in the Randwick City Council study referred to earlier or (b) all the lots and common property are to be sold to a third party for redevelopment. If, for example, it is proposed that some of the lots in the new development will be made available to lot owners in the existing scheme, then the Strata Renewal Plan will set out the basis on which they will be transferred to those persons. If it is proposed that all the lots and Part 3 OCN Strata Renewal Model 8/11

9 common property will be sold to a third party for redevelopment, then the Strata Renewal Plan will set out the principal terms of the proposed contract for sale including, for example, the anticipated date of completion of the sale and the basis of the division of the proceeds of sale among the lot owners. Once the terms of the proposed Strata Renewal Plan have been settled by the Strata Renewal Committee, the plan will be submitted to an EGM of the Owners Corporation for approval by special resolution. The purpose of requiring the plan to be approved by a special resolution at an EGM of the Owners Corporation is not to give the plan legal effect but rather (a) to provide a forum for the terms of the plan to be discussed by lot owners and (b) to provide an indication that there is a reasonable prospect that the plan will be signed by a significant proportion of lot owners. Signature of Strata Renewal Plan by Lot Owners The requirement that the Strata Renewal Plan be signed by a specified proportion of lot owners who have received independent legal advice, rather than merely being approved by a special or even a unanimous resolution of lot owners, is an essential element of the OCN Strata Renewal Model. Persons familiar with the administration of strata schemes will appreciate that it is often difficult to obtain a quorum of lot owners at a general meeting, let alone 75% or 100% attendance. Thus under the existing definitions in the Strata Schemes Management Act 1996, a special resolution may be a resolution passed by only 20% of lot owners who attend the meeting (in person or by proxy) and a unanimous resolution may be passed by only 25% of lot owners (a quorum for a general meeting). OCN also draws attention to the practice of proxy farming which has been referred to in a number of submissions to the GAP Online Forum, and in OCN s submission, whereby one or a small number of lot owners, often the Secretary or Chairman of the Owners Corporation or other members of the Executive Committee, solicit proxies from lot owners including, in particular, non-resident owners, as a result of which they are able to dominate proceedings at general meetings. A lot owner selling his or her lot will normally sign a contract for sale which has been prepared by a solicitor and will have received advice from the solicitor before doing so. OCN believes that a Strata Renewal Plan, which may result in the sale of all of the lots and common property in a strata scheme, should be signed by at least a specified proportion of lot owners, who have had the benefit of independent legal advice, rather than merely being approved by a resolution of lot owners. Required Number of Signatories This is likely to be the most controversial issue in formulating legislation to provide for the collective sale of all of the lots and common property in a strata scheme. Some industry bodies have cited data from other jurisdictions where the required criterion is 80% owner agreement. The Singapore legislation requires 80% owner agreement to a Part 3 OCN Strata Renewal Model 9/11

10 collective sale where the building is ten or more years old and 90% owner agreement where the building is less than ten years old. OCN does not believe that the chronological age of a building should be a factor in determining the required number of signatories to a Strata Renewal Plan, although, of course, it may be a factor to be taken into account by lot owners and by the Strata Renewal Panel in determining whether it is in the interests of lot owners to enter into such a plan. Based on data provided to OCN by NSW Land & Property Information and City Futures, OCN anticipates that in the immediate future most collective sales will be of schemes with 20 or fewer lots. Due to the different dynamics applying to smaller and larger schemes, it may be appropriate to specify different percentages for schemes of different sizes. The New South Wales Division of the Planning Institute of Australia, for example, in its submission to the Open Forum dated 29 February 2012 has suggested that the appropriate threshold should be 100% in the case of dual occupancies, 80% in the case of schemes with 12 to 50 units and 75% in the case of schemes with more than 50 units. OCN suggests that the threshold should be 100% for schemes with four or less lots; and 80% for schemes with more than four lots. As indicated earlier, in Singapore, if the collective sale agreement has not been signed by the requisite number of lot owners within 12 months from the date of the first signature, then it lapses. OCN suggests that the same time limit should apply to the signature of the Strata Renewal Plan. Strata Renewal Panel The second key element in the OCN Strata Renewal Model is a tribunal or panel to review the Strata Renewal Plan, particularly where it has been signed by less than 100% of lot owners. OCN considered a number of alternatives including the Supreme Court of New South Wales, the Land and Valuation Court and the Consumer, Trader and Tenancy Tribunal. OCN recommends the establishment of a Strata Renewal Panel, based on the Singapore Strata Titles Board. Like the Singapore Board, its members would consist of Architects, Surveyors, Engineers, Property Consultants, Quantity Surveyors, Lawyers and Accountants. And, like the Singapore Board, and the Australian Takeovers Panel, when a matter is referred to the Strata Renewal Panel a sitting Panel would be appointed of, say, three members to deal with the matter. The members of the Panel would serve on a part time basis and would be sufficient in number to ensure that when a sitting Panel was appointed three members could be appointed who were not subject to any possible conflicts of interest. OCN is aware of the NSW Government s current review of the tribunal system in New South Wales and envisages that the Panel would operate as an independent division of the Consumer, Trader and Tenancy Tribunal or possibly of a new consolidated tribunal system based on the model of the Victorian Civil and Administrative Tribunal. Part 3 OCN Strata Renewal Model 10/11

11 Like the Singapore Strata Titles Board, following the 2010 amendments to the Singapore legislation, the primary function of the Strata Renewal Panel would be to mediate between minority and majority lot owners to ensure an outcome that was fair and acceptable to all parties. If agreement was reached, the Panel would make an order formally approving the Strata Renewal Plan. If mediation had proceeded as far as possible, but agreement could not be reached within 60 days, the Panel would make an order discontinuing the proceedings. It would then be open to the Strata Renewal Committee on behalf of the majority lot owners to apply to the Supreme Court of New South Wales to approve the Strata Renewal Plan. The application would then be determined by the Supreme Court in accordance with normal judicial principles. Summary The key features of the OCN Strata Renewal Model are: 1. It avoids the confusion which has arisen in past submissions and debate between the problem of obtaining approval of lot owners to the collective sale or redevelopment of a strata property and the issue of strata termination which is essentially an administrative process analogous to the winding up of a company. 2. It establishes the concept of a Strata Renewal Plan, which is an agreement signed by a significant majority of lot owners for the collective sale or redevelopment of a strata property, with the benefit of legal advice, as distinct from the possibility of lot owners being deprived of their properties by means of a resolution passed at a meeting in which they may not have fully participated or understood. 3. It establishes a transparent process for the development of the Strata Renewal Plan which is under the control of lot owners and in which they can actively participate. 4. It provides for the establishment of a Strata Renewal Panel for the resolution of disputes between minority and majority lot owners, which is under the judicial supervision of the Supreme Court of New South Wales. Conclusion In this submission OCN has sought to summarise and explain what it believes to be the key features of its proposed Strata Renewal Model. As indicated earlier, OCN would welcome the opportunity to discuss the proposed model with the Minister and the Minister s advisers and to provide further supporting data. RECOMMENDATION Protection of the rights of strata owners is paramount within the Strata Renewal Process; and far more important than the percentage required for approval. The Strata Renewal Model proposed by OCN would achieve this whilst ensuring a streamlined and cost-effective method of redeveloping old or dilapidated buildings. Government should initiate a workshop including the available strata related bodies to flesh out and test the implementation details. There will be value in drawing on the considerable practical experience of these bodies who currently work amongst owners and residents. Part 3 OCN Strata Renewal Model 11/11