Property 101: Highest and best usage compensation under new NSW strata laws will be problematic

GUEST OBSERVER

Although the Strata Schemes Development Act 2015 does not yet have a commencement date, Part 10 of the Act, the part dealing with strata renewal is the topic of much discussion. Specifically, lot owners and owners corporations have been asking what is the process for strata renewal?

Note: we use the term strata renewal for both a collective sale (lot owners agreeing to sell to a developer) and a collective redevelopment (lot owners agreeing to refurbish the building and potentially build additions).

Once Part 10 of the Act comes into effect the process is as follows:

Anyone (it does not have to be a lot owner) can give a written proposal to the owners corporation (OC) for a collective sale or redevelopment of the strata scheme. The proposal cannot be the same as, or substantially similar to, a proposal that lapsed within the previous twelve months.

The executive committee (soon to be the strata committee (SC)) must consider the proposal at a meeting no later than 30 days after it is received. There are two options at this meeting:

If the SC decides the proposal warrants further consideration it must no later than 30 days after the meeting convene a general meeting to consider the proposal.

If the SC decides the proposal is not worthy of consideration the proposal will lapse unless lot owners with at least 25% of the unit entitlements of the scheme request the proposal be considered at general meeting.

Assuming the proposal has been deemed worthy of consideration or there has been a qualified request, the OC at general meeting must decide whether the proposal warrants further consideration. This is an ordinary resolution meaning a simple majority is required to pass it.

If the OC decides the proposal is worthy of consideration it:

• Must establish a strata renewal committee to prepare a strata renewal plan (ordinary resolution required);
• Must elect members of the strata renewal committee (ordinary resolution required & note there are eligibility requirements);
• May provide the strata renewal committee with a budget to develop the proposal; and / or
• May authorise the strata renewal committee to engage professional advisers to assist it in developing the proposal;
• If the OC decides the proposal is not worthy of consideration it lapses.

Assuming the OC decided the proposal was worthy and elected a strata renewal committee, that committee is to prepare a strata renewal plan. The committee will operate for one year unless it is either dissolved by the OC or the OC by special resolution, votes to extend its time frame. The contents of a strata renewal plan are prescribed and include provision for compensating dissenting lot owners.

Once the committee has a strata renewal plan to its satisfaction it must put it to the OC at general meeting for approval. The OC must, by special resolution, decide whether or not to give the plan to lot owners for their consideration.

If the OC specially resolves to put the plan (or an amended plan) to lot owners for their approval:

• A copy of the strata renewal plan must be provided to all lot owners within 14 days plus any information prescribed by the regulations, then
• A minimum of 60 days after receipt of the strata renewal plan, lot owners may provide a support notice stating they support the plan. It must be signed by each owner and registered mortgagee or covenant chargee of the lot.
• A minimum of 75% of lot owners must return a support notice (and not withdraw it) for the strata renewal plan to proceed. If the required support is not received within three months the plan lapses.

If the OC decides not to put the strata renewal plan to the lot owners then it may either:

• resolve (ordinary resolution) to amend the strata renewal plan and put that plan to the lot owners instead: or
• resolve (ordinary resolution) to return the strata renewal plan to the strata renewal committee for amendment; or
• if it does neither and does not pass the special resolution to put the strata renewal plan to the lot owners, the plan lapses.

Assuming 75 percent of lot owners return (and do not withdraw) a valid support notice within the three month period the OC must:

• provide notification to the Registrar General and each lot owner within 14 days of being advised the required support has been obtained.
• meet and resolve to apply to the Land and Environment Court for orders to give effect to the strata renewal plan.

If the OC decides (by ordinary resolution) to apply to the Land and Environment Court the OC must provide notice of the decision to do so to all tenants within 14 days.

The Land and Environment Court must review the strata renewal plan and go through a hearing process to consider whether to make orders to give effect to it. The Act prescribes factors that the Court must consider including the relationship between the owners of lots and the purchaser or developer, steps taken in preparing the plan including whether the required notices were served, the compensation value to be paid to dissenting lot owners and the proposed distribution to supporting lot owners. Lot owners (and specified others) may file objections to the application to the Land & Environment Court and be joined to the proceedings.

As you can see, even a summary shows that this is a complicated process. We recommend seeking legal advice before embarking along this path.

Also please note that compensation is problematic. If the plan is for a collective sale it must provide for each dissenting lot owner’s lot to be purchased at not less than the compensation value for the lot. If the plan is for a redevelopment it must provide for each dissenting lot owner’s lot to be purchased at not less than the compensation value of the lot.

The compensation value for a lot is based on section 55 of the Land Acquisition (Just Terms Compensation) Act 1991. This Act however primarily relates to compensating land owners for compulsory acquisition by statutory authorities which arguably has a different effect when used in valuing the lot of a dissenting owner.

The “highest and best use” which is used to determine market value of the dissenting lot owners lot would likely not be the same as the highest and best use that a developer could put that lot to. Section 55 does however allow a component for disturbance in calculating the compensation value. This is likely to include stamp duty, legal costs and relocation fees but may not include costs such as the liability from terminated leases.  We believe this will be an area that is much disputed.

If you or your scheme are potentially looking at a strata renewal program you may find the report “Renewing the Compact City” by UNSW’s City Futures Research Centre of interest. The link to the report is here.