UDIA NSW has prepared a legislative reform paper that advocates that when the consent of 75 per cent of owners is received to terminate a scheme, then dissenting voters be afforded the opportunity to be heard in by an independent ombudsman. Below is a summary of the proposal and the rationale for reform.
The rationale for reform Ageing buildings, their risks and financial costs The first strata scheme in New South Wales was registered in 1961 with many existing schemes in buildings older than that. The lifecycle of most buildings is approximately fifty years. Unless maintained, often at significantly more economic cost than redeveloping, ageing strata buildings burden the community with significant social, economic and environmental cost.
Ageing strata buildings, unless well maintained, are generally run down, decaying and of poor visual amenity for the surrounding community. Older buildings often pose an Occupational Health and Safety (OH&S) risk to residents, employees in commercial buildings and the broader public. The financial cost to the community for the ongoing maintenance of common property in strata buildings, or maintenance necessary to meet existing BCA standards and other regulations, in many cases outweighs the of renewal and redevelopment. As a result it is financially irrational for an owners corporation to invest in required maintenance and strata buildings fall into disrepair.
The financial burden for the maintenance of older buildings is also in many cases outside the capacity of individual owners or the means of the owners corporation to finance.
As a result, owners are forced into a cycle of depreciating wealth as the building value deteriorates and are forced to reside or work in an inadequate built environment.
The case study below provides an example of a strata building in a state of disrepair and deemed uninhabitable.
The strata scheme for this particular building cannot be terminated, and therefore redeveloped, because of one dissenting owner. The case study also demonstrates that there are compassionate grounds that must be accounted for in any termination proposal.
Compromised Major Policy Initiatives
The NSW Government’s Metropolitan Strategy requires that between 60 and 70 per cent of all new housing developed to 2031 be provided within Sydney’s existing urban footprint. This equates to roughly 450,000 new dwellings based on the forecasts provided in the Metro Strategy in 2006, which will likely be revised upward to account for increased population growth. In terms of current housing production, over the last two years nearly 90 per cent of all new stock has been from existing areas. These figures account for record low production on the urban fringe, but also the utilisation of large scale renewal sites such as Victoria Park and in Alexandria.
The challenge for the future is that Sydney does not have an endless supply of what the Government calls, ‘major sites’, which are suitable for urban renewal. In fact, estimates from the Government indicate that while these major sites are currently contributing around 50 per cent of the overall infill housing production, there is only around ten years of supply left from these sites. Sydney will therefore be increasingly reliant on fragmented holdings and the renewal of strata schemes to provide its housing needs and to satisfy the Government’s strategy policy objectives. The Strata Schemes Management Act 1996 (SSM Act) requires a 100 per cent voting threshold of the owners corporation to terminate existing schemes. This threshold, for a variety of reasons, is one of the most significant obstacles to the renewal of strata buildings. Fundamental reform of the current requirement for unanimity to terminate strata schemes is fundamental to the NSW Government’s strategic objectives and renewal of the urban fabric.
The Metro Strategy itself identifies that, “Existing blocks of flats are unlikely to be redeveloped because of…the provisions of the Strata Scheme Management Act 1996 which make them difficult to secure as a whole block to redevelop.’ The Metro Strategy continues, ‘Strata Title reform will be investigated to determine whether it can create opportunities for housing redevelopment that will add to the mix of housing.”
Without strata reform there will be limited capacity to meet the housing requirements within existing urban footprint as defined by the Metro Strategy.
The UDIA NSW Strata and Community Development Committee has undertaken some desktop analysis of existing strata schemes in strategic locations to identify their potential dwelling yield if redeveloped.
This analysis is provided in the below case study. Further analysis of this nature will be undertaken by UDIA NSW in 2010 to highlight the potential dwelling yield potential that is effectively being quarantined by existing strata schemes. Environmental, Economic, and Community Expectations.
The environmental impacts and ecological footprint of older strata buildings are, in a majority of cases, outside acceptable community standards and do not correspond with the concept of what would be considered as sustainable development. The inability to terminate existing strata schemes consistent with the will of a significant majority of owners, and therefore redevelop a site, is one of the principle constraints on new development which would otherwise meet community expectations for good environmental practice.
The degraded nature of ageing strata buildings, both individually and combined, reduces the amenity of particular areas. As a result, these buildings reduce the livability of the surrounding community. There is a clear policy nexus between strata reform and enhancing the social and urban fabric. Economic growth and employment generating development projects correspond with strata reform. Without the capacity and legislative framework to realise the increased lot yield and investment potential, of sites with existing schemes, the economic potential of the State is limited. The existing framework requiring 100 per cent unanimity to terminate schemes is a key limiting factor to redevelopment in the Case Study.
The way forward A Reduced Threshold for Strata Scheme Termination
Currently a 100 per cent threshold vote is required by the owners corporation within a strata scheme to terminate that scheme.
This is an unrealistic threshold to obtain in larger schemes in instances where a minority of owners or a single dissenter can prevent necessary redevelopment.
A 75 per cent threshold is required to ensure that termination of a substantial proportion of strata schemes for the purpose ofredevelopment is realistically viable. A 75 per cent threshold is also consistent with the existing framework for a special resolution and the threshold required to terminate a company. It is recommended that the threshold vote for scheme owners be based on unit entitlements in an existing scheme. As discussed above, a 75 per cent threshold (of total unit entitlements) would be the preferred threshold for scheme termination.
An important consideration in the approval process is how an approval mechanism deals with the rights of additional stakeholders, in particular the rights of mortgagees, tenants and developers.
The onus is on the proponent to assess the risks of existing contractual arrangements between stakeholders prior to triggering scheme termination. Following the approval of scheme termination by the 75 per cent threshold of unit entitlements and the correct facilitation process with scheme owners, it is proposed that an administrator such as a licensed strata manager carry out any statutory obligations on behalf of the coowners.
An Independent Review Process for Dissenting Voters
Following a resolution to terminate an existing scheme by 75 per cent of owners, a review process must be afforded to dissenting scheme owners. The appeal process would be integrated with just compensation and compulsorily acquisition mechanisms in instances where an appeal is held in the proponents favour.
It is proposed that an independent Ombudsman with the authority to engage in mediation and decision making processes would provide the preferred mechanism to determine any appeals. The compulsorily acquisition process would be supported by and correlate with the provision of just compensation for the dissenting voter.
The Ombudsman does not have the power to reverse the decision of an owners corporation unless he is of the view that just compensation cannot be provided to dissenting voters. The Ombudsman maintains the power to determine appropriate compensation for dissenting voters. The definition of just compensation must be clearly outlined to provide certainty to a proponent early in the process whether to proceed with a proposal.
Implementation of Scheme Termination
Stakeholders or scheme owners who wish to remain part of the new scheme in a redevelopment, as may have been agreed with a proponent or determined by the Ombudsman, require guaranteed rights to realise agreed participation in redevelopment. This could include a registered development contract with tradable rights to part title of the land. To provide certainty to stakeholders who wish to remain in a new scheme, the proponent must demonstrate to the Ombudsman a financial capacity and commitment to redevelop a site. It is recommended that this commitment be guaranteed and implemented within a prescribed and reasonable timeframe for the benefit of remaining stakeholders in a redevelopment. – See more at: http://www.stratavoice.com.au/blog/maintenance/23-strata-reform-unlocking-the-su/#sthash.S4OGNWHN.dpuf