Issues Arising in Mixed-Use Developments Simon Libbis Principal Subdivision Lawyers www.legalwiseseminars.com.au
1 ISSUES ARISING IN MIXED-USE DEVELOPMENTS By SIMON LIBBIS SUBDIVISION LAWYERS www.subdivisionlawyers.com The introduction of the Subdivision Act 1988 (the Act) in October 1989 provided property developers with unprecedented flexibility. They could now set out multiple uses on one plan without having to comply with the rigid regime of the Strata Titles Act 1967. This led to a plethora of so called mixed-use developments. There was no limit to the combination of uses. The most common is commercial and residential where there are shops and apartments in one building. There can also be commercial with industrial, rural with residential and so on. Whatever the mixture, a number of issues can arise when dealing with these sorts of developments. The purpose of this paper is to equip you with the basic tools necessary for deal with them. A more detailed analysis can be found in my book, Subdivisions with the Lot. For more information about my publications visit http://www.hybridpublishers.com.au/legal.html Understanding the Plan of Subdivision You need to know what the plan does. Following is an overview of some of the more important features. Stages Section 37 of the Act allows a subdivision to be done in a number of stages. Ascertaining whether or not a plan is staged can have significant consequences. Staged subdivisions have particular significance in relation to making changes to owners corporations. A plan for a second or subsequent stage on a staged subdivision can create an owners corporation, common property, lot liability and entitlement for that stage. It can also change the earlier stages by adding to the membership of an existing owners corporation, adding to existing common property and changing lot entitlements and liability for existing lots. No other change affecting the common property can be made. The unanimous resolution of the existing owners corporation to the making of these changes is not required. The developer is entitled to make the changes without any reference to the
2 owners corporation. The buyer of a lot in a staged subdivision needs to be aware of the changes that can be made without reference to the lot owner. Staged subdivisions impose additional disclosure obligations on vendors. They are set out in Section 32(3)(ba) of the Sale of Land Act 1962. If the land being sold is in a second or subsequent stage then a copy of the plan for the first stage must be given. Details of any unsatisfied requirements in a statement of compliance for the stage that includes the land being sold must be provided. Any information that the seller has about subsequent stages must be disclosed and the buyer must be informed of the contents of the planning permit that authorised the staged subdivision. This latter requirement would usually be satisfied by attaching a copy of the planning permit. The obligation to provide these details is not limited to the developer. A person who purchased a lot in a staged subdivision and subsequently sold that lot would also need to provide the necessary information. Easements Section 24(2)(d) of the Act provides that on registration of a plan of subdivision any easement is created, varied or removed as specified in the plan. Where land being subdivided is subject to an existing easement it will be shown on the plan even though it was created before the land was subdivided. Details of where the easement was created will be set out on the plan. This could be in a deed of creation of easement, a transfer of land or an earlier plan of subdivision. Providing these details on the plan enables a person dealing with the land to obtain the document that created the easement and ascertain details of it. Where the easement has been created by the plan of subdivision the origin of the easement is shown as being this plan. As well as express easements, a plan can also have implied easements under Section 12 of the Act. These easements will exist in all subdivisions that create an owners corporation or subdivide a building. They will also apply if the plan so specifies. A plan can provide that implied easements do not affect land on a plan in which an owners corporation is created. However, it is not possible to exclude Section 12 easements in the case of the subdivision of a building. Section 12(2) sets out that the easement will exist if it is necessary for the reasonable use and enjoyment of the lot or common property and is consistent with the reasonable use and
3 enjoyment of the other lots and the common property. This sounds straightforward enough but whether it will apply in a particular situation is not always that clear. Burford & Ors v. Wichlinski 1 dealt with an implied easement for drainage over an adjoining property. Even though the proposed location of the drain was the most convenient and cost effective way of providing the service it was not the only way. The court refused to recognise an implied easement. Compare this with Gordon & Anor v. Body Corporate Strata Plan 3023 & Anor 2. The easement claimed related to foundations for extensions to a building on the lot. Although an alternative method was available the cost of it was prohibitive. The court found that an implied easement did exist. Then there s Body Corporate No. 413424R v. Sheppard 3. The court had to decide whether there was an implied easement over a lot to access equipment on the 16 th floor. The only other way of reaching it was by climbing up the fire escape. But climb they must said the court as there was no implied easement for that purpose. So the message here is to never assume that an implied easement exists. If an easement is required then it is best to expressly create it on the plan. To avoid one being implied when you don t want it utilise the option in Section 12(3) to negate it. This will not be available for those parts of a plan that subdivide a building. 4 Restrictions Covenants are called restrictions in the Act. A plan of subdivision can have the effect of creating, removing or varying a restriction. All lots are affected by the covenant as soon as the plan is registered. The fact that the restriction is created will be set out under the Notations panel on the plan and a separate sheet which contains the restriction forms part of the plan of subdivision. A plan of subdivision can also remove or vary a covenant provided that a planning permit is obtained for this purpose. If the plan has this effect then it will be accompanied by a statement. When the plan is registered the restriction will be removed or varied as specified in the statement. 1 Unreported, Supreme Court of Victoria, Beach J, 30 April 1996 2 (2004) 15 VR 557 3 [2008] VSCA 118 4 Section12 (3A) of the Act
4 Another form of restriction that will often affect lots on a plan are agreements under Section 173 of the Planning and Environment Act. These are not created by the plan but may be lodged with it. A planning authority will require one of these where there will not be compliance with all the conditions of a planning permit prior to the plan of subdivision being registered or where the authority wishes to impose some restriction on the use of the land. The agreement will bind not only the original subdivider but also anyone who subsequently purchases the land. To ensure that future owners of the land are aware of their obligations under the agreement it is a requirement that the agreement be noted on the title to the land. Boundaries Lots created on a plan can consist of land, air space, buildings or any combination of these. They are defined by their boundaries. Apart from strata titles, land does not usually have an upper limit. Accordingly the owner also owns the air space above it. This space can be subdivided in much the same way as land. Most subdivisions of air space are ancillary to the subdivision of a multi-storey development. Strictly speaking, however, this does not have to be so. A diagram showing these lots will form part of the plan of subdivision. Where the plan is a subdivision of a building some of the boundaries are structures like walls, floors or ceilings. A particular point in those structures must be located as the actual boundary. It is, therefore, necessary to specify whether the boundary is the interior face, the external wall or some other location in the structure. Some plans adopt the medium of a structure as the boundary. So if the boundary were a dividing wall it would be located at the middle of the wall Details of the location of the boundaries come under the heading of Notations on the plan If a lot on a plan has the letters PT before the number it will be part of the lot. This is used to tie a main unit to an ancillary area such as a car park. So part of the lot is the building or apartment and the other part is the car park space. This means that the car park cannot be dealt with separately from the living area. Common Property and Owners Corporations Most mixed-use developments will create at least one owners corporation. Information about it is contained in an additional sheet on the plan which is called the Owners Corporation Schedule. A number of consequences flow from the manner in which owners corporations are set up.
5 Identifying Common Property It is important to ensure that the boundaries of common property on the plan are clearly and correctly identified. Failure to do this could have unintended consequences. A plan will often define the common property as the area not included in the lots. What constitutes a lot then becomes of paramount importance. Where the boundary between lots and common property is a structure such as a wall it is necessary to identify what part of that structure is the boundary. A plan must indicate this. You can find on the same plan that some boundaries are the median of structures whereas others are the exterior or interior faces of those structures. When those structures require repairs or maintenance the cost will need to be borne by either the owners corporation or the lot owner depending on whether all or part of those structures are lots or common property. In order to ascertain this, the location of the boundary needs to be identified. Also watch out where the boundaries of lots have upper and lower limits. What is above and below the lot will be common property. Plans created under the Strata Titles Act are not always easy to read and it is often better to consult a surveyor when in doubt. Traditionally, a thick continuous line with no measurement represents a vertical or near vertical boundary along or inside a wall or fence. A thick broken line with measurements represents a vertical or near vertical boundary which does not lie along or inside a wall or fence. Where there is a common boundary (such as a wall, fence, ceiling or floor) between two lots or a lot and common property and the plan does not provide otherwise, the boundary between them is the middle of that wall, fence, ceiling or floor. Membership of an Owners Corporation An owners corporation can be created on any plan of subdivision but must be created where the plan creates common property. You don't need to have one in a building subdivision provided that no common property is created. There are, however, some subdivisions with no common property where an owners corporation is created. This is usually where there is a subdivision of a building that does not have separate services. The authority providing those services may only agree to the subdivision if an owners corporation is created. Section 27 of the Act provides that a plan may create one or more owners corporations. Any owners corporation created will be incorporated on registration of the plan of subdivision and any common property shown on the plan will be owned by the members of the owners
6 corporation in the shares shown as lot entitlement on the plan. Not all lot owners have to be members of the owners corporation. The owners corporation has a separate legal identity and owns the common property as nominee for the lot owners. The number which is allocated to the owners corporation is the registration number of the plan of subdivision. As a separate legal entity, the owners corporation can sue and be sued. Although the owners corporation resembles a company, it is not covered by the legislation that regulates corporations. Limited Owners Corporations It is possible to create an owners corporation with a limited function. There is a panel in the owners corporation schedule headed limitations on owners corporation. If the words limited to common property appear in this panel then the owners corporation is a limited owners corporation. Otherwise it will be unlimited. Strangely enough, there can be a limited owners corporation in a plan with no common property, but the same statement must appear to create it. A limited owners corporation will normally serve some purpose which is ancillary to a main owners corporation. It is, however, possible to have a limited owners corporation without there being an unlimited owners corporation. As a limited owners corporation is intended to be an ancillary owners corporation, it does not have the same powers and responsibilities in respect of lots on the subdivision. The significance of limited owners corporation in relation to multiple owners corporation is dealt with below. An example of an owners corporation with a limited function could be where there is a large subdivision with a number of facilities, such as swimming pools and tennis courts. Different lots are entitled to use different facilities. There could be one main owners corporation which has responsibility for the whole of the subdivision. There could then be a number of limited owners corporations in respect of each facility. The only function of those limited owners corporations would be to look after their particular common property and those lot owners entitled to use it. Multiple Owners Corporations A plan of subdivision can create more than one owners corporation. Often in mixed-use developments there are different lots that use separate parts of common property. This could be because they are located on different levels of the building or in certain parts of a
7 land subdivision. In these circumstances, it is appropriate to create a number of owners corporations, each having its own members, common property and responsibilities. Section 27(1) of the Act provides that a plan can create one or more owners corporation. A lot cannot be affected by two unlimited owners corporations. Nor can it be affected by more than one limited owners corporation unless there is also an unlimited owners corporation affecting it. This does not mean that there cannot be more than two unlimited owners corporations on a plan of subdivision. Not all lots on a plan need be affected by a particular owners corporation created on that plan. When lots are affected by more than one owners corporation, special provisions apply in relation to the distribution of owners corporation assets on the winding up of the owners corporation. It is another significant aspect of limited owners corporations as, clearly, it is not possible for common property to be owned by two owners corporations at the same time. Lot Entitlement and Liability A plan of subdivision creating an owners corporation will set out the lot liability and entitlement of each lot. It will also show the total lot liability and entitlement for all lots on the plan. Lot liability is the proportion of the owners corporation expenses that are to be borne by a particular lot. It is effectively the limit of a lot owner s liability for the liabilities of the owners corporation. Lot entitlement reflects the lot owner s share of ownership in the owners corporation assets which primarily comprises the common property. It will dictate entitlement on a winding up of the owners corporation and also voting rights at meetings of the owners corporation. Normally, lot entitlement and liability for a particular lot will be the same. This does not, however, need to be the case. Lot entitlement should reflect the value of the lot as a proportion of the total value of all lots affected by the owners corporation, whereas lot liability should be based on an equitable sharing of expenses of the owners corporation. Rules The Owners Corporations Act 2006 provides that an owners corporation: may make rules with respect to the matters listed in Schedule 1 of that Act be subject to prescribed model rules if no rules are made by an owners corporation be subject to a model rule if the owners corporation has not made a rule relating to a matter.
8 The model rules set out in Schedule 2 of the Owners Corporations Regulations 2007 apply to an owners corporation unless it makes and registers additional rules. Section 27E of the Act allows the rules to be lodged with the plan of subdivision. The model rules will be inadequate for most mixed-use developments and reaching agreement on rules after the lots have been sold is usually problematic to say the least. Accordingly, it is a good idea to work out some appropriate rules and lodge them with the plan. Lodging a rule with a plan will not of itself make that rule valid. Care needs to be taken when drafting rules that they meet legislative requirements. Insurance An owners corporation must have public liability insurance for the common property and reinstatement and replacement insurance for all buildings on it. In the case of a multi-level building it must have these insurances for all lots and the common property. It can, however, by unanimous resolution leave it to the lot owners to arrange their own insurance if there is no common property on the plan. There are insurance exemptions for two lot subdivisions. The impact of these insurance requirements is significant in conveyancing transactions. Section 11 of the Sale of Land Act provides that where land that does not have the requisite owners corporation insurance is sold, the buyer may withdraw from the contract at any time up to the settlement date. It is, therefore, important to ascertain whether owners corporation insurance is or will be compulsory. If it is compulsory then the seller must make sure that the appropriate insurance is in place, failing which the contract may not be enforceable against the buyer. In the case of an unregistered plan, the seller must take out the insurance that will be required to be taken out by the owners corporation when the plan is registered. Section 9AAA provides that the vendor must take out the insurance as if the vendor were the owners corporation and maintain that insurance for six months after the plan is registered or until the owners corporation holds its first meeting, whichever is the earlier. There is no penalty for a vendor who fails to comply with this requirement and it is unlikely that Section 11 would enable a purchaser to avoid the contract. Section 11 refers to the sale of a lot affected by an owners corporation. A lot on an unregistered plan of subdivision is not yet affected by the owners corporation as the owners corporation does not come into existence until the plan of subdivision is registered. It is for this reason that many vendors do not comply with Section 9AAA.
9 The requirement of Section 11(1) of the Sale of Land Act must be read in conjunction with section 9AAA. A problem can easily arise long after Section 9AAA has ceased to apply. There could be no public liability cover or the individual lot owner may have arranged his or her own cover. This latter insurance cover does not accord with the cover required by the Owners Corporation Act. Generally the owner-vendor in such a case would be only insured in respect of his or her own liability in relation to the common property and such cover would not extend to the liability of the owners corporation. To comply with the Sale of Land Act and the Owners Corporation Act, the statutory public liability cover must be taken out in the name of the owners corporation as the insured. To comply with section 11 the statutory cover must be in effect on the day of sale. Taking the cover out after the day of sale still leaves the seller exposed to the transaction being avoided at any time before settlement. A Final Word We are not likely to see a slowdown in the growth of mixed-use developments in the foreseeable future. This means that more issues will arise resulting in litigation and legislation. If you practise in this area it is vital to keep up to date. Failure to do this is not only detrimental to your clients interests but could also result in significant claims being made against you. Copyright These materials are subject to copyright which is retained by the author. No part may be reproduced, adapted or communicated without consent except as permitted under applicable copyright law. Disclaimer This seminar paper is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. Readers should not act on the basis of any matter contained in this seminar paper without first obtaining their own professional advice.
ISSUES ARISING IN MIXED USE DEVELOPMENTS A presentation for Legalwise on 18 August 2011 BY SIMON LIBBIS SUBDIVISION LAWYERS slibbis@gmail.com 0488 LIBBIS www.subdivisionlawyers.com MIXED USE DEVELOPMENTS Simon Libbis The Subdivision Act 1988 The interpretation of key provisions of that legislation is a particularly difficult task as it is one of the most poorly drafted Acts it has been my misfortune to confront. It must be said that the interpretation of this important legislation is made exceptionally difficult by virtue of the confusion and lack of clarity of the terms in which it has been drafted. This legislation sets a very low benchmark for the art of the parliamentary draftsperson. Walker & Sopov v Registrar of Titles [2001] VSC 354 (8 October 2001)
MIXED USE DEVELOPMENTS Simon Libbis Understanding The Plan of Subdivision Stages Easements Restrictions Boundaries
MIXED USE DEVELOPMENTS Simon Libbis Common Property & Owners Corporations Identifying Common Property Membership of OC Multiple OC s Limited OC s Lot Entitlement/Liability OC Rules Insurance