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Unlocking The Sustainable Future

Wednesday, 29th August 2012

This article is an edited extract of a story produced by the Urban Development Institute of Australia NSW Seniors Living Committee earlier this year.

The current strata scheme legislation in NSW will be the most significant hurdle to increased urban consolidation of our major population centres if reform is not delivered. The current framework requires that all strata owners must consent to the termination of a scheme.

Earlier this year, the Urban Development Institute of Australia NSW (UDIA NSW) prepared a legislative reform paper that advocates that when the consent of 75% 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 risk and financial costs

The first strata scheme in NSW 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 a significantly more economic cost than redeveloping, ageing strata buildings burden the community with significant social, economic and environmental cost.

The financial cost to the community for the ongoing maintenance of common property in strata buildings, or maintenance necessary to meet existing building standards and other regulations, in many cases outweighs the cost 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 provided by the UDIA NSW 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 Incentives

The NSW Government's Metropolitan Strategy requires that between 60 - 70% of all new housing developed to 2031 will 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.

UDIA NSW says 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% of the overall infill housing production, there is only roughly 10 years of supply left from these sites. Sydney will therefore be increasingly reliant on fragmented holdings and the renewal of strata schemes to provides its housing needs and to satisfy the Government's strategy policy objectives.

The Strata Schemes Management Act 1996 (SSM Act) requires a 100% 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 the unanimity to terminate strata schemes is fundamental to the NSW Government's strategic objectives and renewal of the the urban fabric.

The Metro Strategy itself identifies that,
"Existing blocks of flats are likely to be redeveloped because of the... 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 UDIA NSW believes there will be limited capacity to meet the housing requirements within the existing urban footprint as defined by the Metro Strategy.

Environmental, Economic, and Community Expectations
The UDIA NSW also argues that  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. It says the inability to terminate existing strata schemes consistent with the will of a 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% unanimity to terminate schemes is a key limiting factor to redevelopment.

The way forward

A Reduced Threshold for Strata Scheme Termination
Currently a 100% threshold vote is required by the owners corporation within a strata scheme to terminate that scheme. It is the UDIA NSW's view that 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.

It says that a 75% threshold to ensure that termination of of a substantial proportion of strata schemes for the purpose of redevelopment is realistically viable. A 75% threshold is also consistent with the existing framework for a special resolution and the threshold required to terminate a company.

UDIA NSW recommends that the threshold vote for scheme owners be based on unit entitlements in an existing scheme. An important consideration in the approval process is how an approval mechanism deals with the right of additional stakeholders, in particular the rights of mortgages, tenants and developers.

The onus is on the proponent to assess the risk of existing contractual arrangements between stakeholders prior to triggering scheme termination. Following the approval of scheme termination by the 75% 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 on the co-workers.

An Independent Review Process for Dissenting Voters
Following a resolution to terminate an existing scheme by 75% 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.

UDIA NSW proposes 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 Ombudsmen 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 if remaining stakeholders in a redevelopment.

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