Sale of Strata Buildings for Redevelopment (QLD)

Since our successful completion of the sale of an entire Strata Scheme in Sydney, and the subsequent changes to the New South Wales Strata Legislation, we have received increased interest from Bodies Corporate in the concept of taking a pro-active approach to the sale of their Community Title Scheme. While the Queensland Legislation still requires the Body Corporate to resolve, by way of resolution without dissent, to terminate the Scheme, we are finding that more and more complexes in Queensland are prepared to seriously consider the collective sale of the entire scheme.

BUILDING MAINTENANCE AND PREPARING FOR THE END OF A BUILDING’S USEFUL LIFE

As buildings get older and become more difficult and costly to maintain, Bodies Corporate must consider the economic feasibility of repairing and refurbishing the building as opposed to selling the Scheme. With changes in planning laws and building design over time, it is often the case that a building design and constructed 30 years ago will have a different footprint and capacity to the type of building which may be approved for the site today. Accordingly, there can be circumstances where an aging complex would be of a significant interest to a property developer who may be able to get an approval for a building on that site with significantly more lots than has currently been constructed.

The perils of building defect and maintenance issues have been written about extensively. Often, Bodies Corporate are left in a situation where they have a strict duty to maintain the common property with little or no recourse to the building and developer of the scheme. A prominently reported case of severe building defects is that of Locrosse Apartments in Docklands in Melbourne in which reports of up to $15 million in rectification costs for the removal and replacement of exterior cladding to the building. This poses a significant problem for the 470 owners of the 21 storey building who are likely be required to incur the $15 million expenses in rectifying the building and then pursue the builder for recovery of such costs in the hope that some or all of those costs may be recovered.

SALE OF ENTIRE STRATA SCHEME IN SYDNEY

We were involved in a matter which completed last year in which all 18 lot owners in a Sydney scheme entered into a collective sale arrangement of the entire scheme. By selling the entire scheme as one redevelopment site, each of the owners of the units in the complex were able to generate a significant uplift in value by way of the achieved purchase price compared to the then market value of their individual units. Essentially, each unit owner was able to achieve a purchase price which exceeded the market value of their unit by around $1 million.

Obviously, each scheme is different and there are many variables which could affect possible attractiveness and overall sale price of a scheme. However, there are various things which a Body Corporate can do to maximise the potential of a scheme to achieve an overall purchase price that is greater than the sum of market values of each of the lots within the scheme.

The above sale was made possible by the agreement of all lot owners. This sale took place prior to the legislative changes in New South Wales, which now allow for a scheme to be redeveloped with only 75% of lot owners’ support.

CURRENT REGIME IN QUEENSLAND

Under Queensland legislation, a scheme may be terminated (and redeveloped) if:

• If the Body Corporate resolves to terminate the scheme by way of a resolution without dissent; and
• An agreement about “termination issues” is entered into between all registered lot owners and lessees under registrable or short leases over scheme land.

Alternatively, the scheme may be terminated by an order of the District Court, if the Court is convinced that it would be just and equitable in the circumstances to terminate the scheme.

It is well known that resolutions without dissent are notoriously difficult to achieve in any circumstances. However, particularly where the potential emotional, social and financial implications are as serious as the sale of an entire scheme, it is often problematic to have all lot owners unanimously agree on terminating the scheme and the “termination issues”, which include the sale and distribution of proceeds from the transfer of the scheme land and body corporate assets as well as the apportionment of liabilities of the body corporate.

In the case of Body Corporate for Nobbys Outlook CTS 14822 v Scott Lawes, Justice Kingham discussed some of the necessary considerations in order for the District Court to be comfortable to make an order for termination of the scheme. Some of the issues raised include:

• There being provision for the termination order to be subject to certain conditions;
• That provision be made for the order to be set aside upon the successful application to the court by a lot owner;
• A provision be made for the manner in which the assets and liabilities of the body corporate would be dealt with upon termination; and
• A mechanism exists for the sale of the land and assets as well as the distribution of the proceeds after the satisfaction of all liabilities in the event that a binding redevelopment agreement is unable to be reached.

The above case highlights the many issues which still require considerable negotiation and agreement even after the concept of redeveloping the scheme may have been agreed upon by all lot owners.

There are certain processes which Body’s Corporate must go through in order to satisfy the legislation and regulations and there are other processes which we would consider to be “best practice” in order for the process to be as affective and orderly as possible.

In conclusion, Body’s Corporate appear to be more open to the idea of scheme redevelopment, however, we note that even in the face of extreme building maintenance and defect issues, the sale of the entire strata scheme is not to panacea all of the Body Corporate’s woes. Positive results can be achieved through this process, however we note that it is both legally and socially complex and must be handled with care.

This article was contributed by James Nickless. James is a Partner in ClarkeKann’s Litigation and Insolvency team and has specialised in Body Corporate, building and construction, property, commercial litigation, international commercial arbitration, debt recovery and insolvency matters since his admission in 2007.