Strata Titles

Strata titles involve the vertical subdivision of land and the building on the land into lots and common property. The lots comprise the units or apartments while the common property comprises the land above, below and around the building, as well as common facilities within the building (such as foyers, elevators, stairs, landings, carpark driveways and a range of equipment).

The lots are effectively parcels of “airspace” usually bounded by floors, walls and ceilings as defined on a plan drawn by a surveyor and registered in the local titles office;hence, the use of the term “strata”. The common property is everything that is left after the lots are taken out of the original land parcel. Because of this approach the plan does not actually define the common property. One has to identify the lots before being able to define the common property. Sometimes there are structural features and services located within a lot but which serve other lots. These are usually deemed to be common property even though they are situated within a lot.

Community Titles

Community titles involve the horizontal subdivision of land (often without any buildings) into lots and common property. The lots usually comprise building parcels, although it is common for the buildings to be constructed on the proposed lots before the plan is registered. In the case of community titles, the common property usually comprises access roads, open space and recreational facilities (such as swimming pool, tennis court, clubhouse, etc.).

The lots are defined in much the same way that conventional land lots are defined and it is common for services to be deemed to be common property. Again, the common property comprises everything not included in the lots, although, unlike strata titles, the subdivision plan usually defines the common property by survey means.

Subdivision

Strata title subdivisions cannot be undertaken until the building structures are in place. This is because the surveyor uses the physical structure (floors, walls and ceilings) to define the boundaries of the lots. In practice local government approvals cannot be obtained for strata subdivision plans until the building has been completed. When the building is ready for occupation the local government approves the plan, it is signed by the land owner and other relevant parties and then it is registered at the titles office.

Community title subdivisions are not dependent upon buildings. They involve normal survey techniques and can be completed and approved once access roads and services are in place. However, it is common for buildings to be completed on the various lots before the subdivision is undertaken.

After registration of a subdivision plan a separate title deed issues for each lot shown on the plan. The title issues in the name of the person who was the owner of the land parcel being subdivided, namely, the developer. The developer is then at liberty to transfer the lots to individual purchasers. In the true sense these are the first or initial unit or lot owners (i.e. the first one registered after the developer).

Boundaries

Every land parcel and/or building subdivided by a strata or community titles plan has both lots and common property. The boundary between the two depends upon:

• how the particular plan has been drawn; and

• the rules of the particular jurisdiction relating to boundaries.

The boundary is commonly the centre of the walls, floors and ceilings enclosing the lot, or the internal surface of the floors, walls and ceilings enclosing the lots. Where parts of a lot are not enclosed, the boundaries are usually defined with reference to the nearby walls, floors and ceilings, or other physical structure. It is often a highly technical exercise to determine the boundary between a lot and common property and a copy of the registered plan will usually be required for this purpose.

Original Owner

The lots are initially owned by the developer (sometimes called the “original owner”). The developer transfers the lots to the first purchasers while the common property becomes the responsibility of a body corporate.

In most jurisdictions the original owner must establish the body corporate records and effect the initial insurance covers. The original owner is usually required to hand over the body corporate and building records to lot owners at the first annual general meeting of the body corporate. Some jurisdictions also restrict the activities of original owners during the period when they own the majority of lots in the scheme.

Lot Entitlements

Each lot in a scheme has a lot (or unit) entitlement. When added together they comprise the aggregate lot (or unit) entitlement. In Queensland there are 2 types of entitlements, interest schedule lot entitlements and contribution schedule lot entitlements. The other Australian jurisdictions only have one type of lot entitlement. The lot entitlements determine:

• Share of ownership of the common property
• Voting entitlement on a poll
• Contributions (or levies) payable for the particular lot
• Entitlement to distribution of surplus assets (upon a distribution or winding up)
• Liability for rates and taxes

They are like the lot owners “shareholding” in the body corporate.

Body Corporate

When a strata or community titles plan is registered a “body corporate” is automatically constituted. Terminology varies from jurisdiction to jurisdiction. For example, body corporate is used in Queensland, both body corporate and owners corporation are used in New South Wales while owners corporation is used in Victoria and community corporation in South Australia. Depending upon the jurisdiction, the common property will either:

(a) vest in the body corporate; or
(b) vest in the lot owners for the time being, as tenants in common in shares proportional to their lot entitlements.

Where the common property vests in the body corporate, it is effectively held by the body corporate as “trustee” for the lot owners, as tenants in common in shares proportional to their lot entitlements.

Either way, the body corporate is charged with administering the common property for the benefit of the lot owners. It obtains the funds it needs to discharge this function by imposing levies (or contributions) on the lot owners. It is effectively a “not for profit” entity and in some jurisdictions it cannot carry on a business unless the business activity has a relationship to its core functions.

Some jurisdictions allow for layered body corporate structures. These involve one body corporate being a member of another body corporate. Two and three layers (or tiers) are not uncommon. Typically, these occur where land and building subdivisions are mixed and are undertaken in stages, or where a particular development site has a number of different uses.

For example; a large parcel of land is subdivided into 6 lots (each intended for further subdivision) and common areas (comprising roads, open space and recreational facilities). A community plan is used for this subdivision. When the plan is registered a body corporate (“principal body corporate”) is constituted and it becomes responsible for the common areas. The developer, as the owner of the 6 development lots is the sole member of the body corporate. The development lots are progressively developed by constructing buildings on them. The 6 buildings comprise:

• hotel

• shopping centre

• office building

• 2 story row-houses

• high rise apartment building

• midrise apartment building.

The office building and the 2 apartment buildings are then subdivided by separate strata plans. Bodies corporate (“subsidiary bodies corporate”) are constituted upon registration of those plans. The subsidiary bodies corporate become responsible for the common areas within their respective land parcels, but not the common area in the community plan. They are members of the principal body corporate. The row houses are then subdivided by another community plan and a further subsidiary body corporate is constituted. Again, that further subsidiary body corporate becomes a member of the principal body corporate. The management structure then looks like this –

Each body corporate is able to make decisions at general meetings of its members. The general meeting elects a committee each year.

Committee

A body corporate should have a committee. The committee is like the board of directors of a company. It has specified powers, although generally speaking it shares power with the general meeting of the body corporate. The committee’s powers are not as extensive as the powers of the average company board of directors. The committee is responsible for formulating policy for consideration by the body corporate in general meeting. Once the policy is set the committee is responsible for ensuring that its office bearers implement that policy. The office bearers of the committee comprise:

• Chairperson
• Secretary
• Treasurer

Each office bearer has a range of duties. They are answerable to the committee. Because they are volunteers they are usually assisted by a professional administrative officer.

Managing Agents

The professional administrative officer that assists the committee and its office bearers is called a strata managing agent or body corporate manager in most jurisdictions. They are engaged as the “agent” of the body corporate and in most jurisdictions they are delegated certain powers, authorities, duties and functions by the general meeting of the body corporate. These functions are usually of a clerical or “record keeping” and organizational nature. As an agent, they are “fiduciaries” of the body corporate. This means that, apart from their agreed fees and remuneration, they cannot profit from any dealing in which the body corporate is involved. For example; a managing agent cannot receive a commission from a tradesperson for introducing the tradesperson to body corporate work, unless the commission is properly disclosed to and approved by the body corporate.

In New South Wales and the Australian Capital Territory strata managing agents must be licensed and their conduct is subject to scrutiny by a Government department and independent tribunal. Other states are considering whether to licence their body corporate managers and if this occurs it is likely to be part of the national competency standards process that is underway in Australia. In the meantime, Queensland has imposed a Code of Conduct under which body corporate managers must operate.

Managing agents can also be appointed by dispute tribunals when the affairs of a strata or community scheme are so bad that a court imposed compulsory management is considered necessary. Where this occurs, the managing agent is given very wide powers, usually to the exclusion of the owners themselves.

Building Managers

Managing agents usually have a limited role in relation to building maintenance. In smaller schemes owners tend to monitor maintenance requirements and then rely upon the managing agent to arrange for and pay tradespersons. However, the building management in larger schemes is much more complex and a full time building manager is often engaged to look after the building. The powers of building managers are much more restricted than the powers of managing agents. These building managers are paid a fee and are usually engaged on long term contracts. In most cases they are also permitted to conduct a letting business in conjunction with their building management role.

Management Rights

The building managers usually pay for the right to manage a strata building or community scheme. They do this by purchasing the “management rights”. They are usually purchased from the developer in the first instance, but they are then re-sold in the secondary market. This secondary market is particularly strong in Queensland where management rights can sell for millions of dollars.

Management rights are effectively a “package” of rights and assets. The package commonly comprises:

• A caretakers unit in the building
• A Building Management Agreement between the manager and the body corporate under which the manager agrees to care-take the building in exchange for an annual fee
• A Letting Authority under which the body corporate agrees to the manager conducting a letting business in conjunction with the caretaking functions
• A reception desk, office and various storage facilities (which can be part of the unit lot, a separate lot or the subject of a licence or “right to use” in favour of the owner of the caretakers unit)
• An exclusivity arrangement that is often evidenced in the letting authority or a by-law.

With this package the manager is able to operate a letting pool (known in some overseas jurisdictions as a “rental program”) within the building. The letting pool usually caters for holiday lettings, but pools or programs for permanent lettings are not unheard of. Owners wishing to place their units in the pool do so by entering into an agency agreement with the building manager. This is similar to the normal agency agreement between a landowner and a real estate agent. These agency agreements are the final component of the management rights package.

Building managers who operate a letting pool must be licenced under the relevant jurisdiction’s real estate agency laws. In some jurisdictions special “restricted licenses” are available. The agency activities of the manager are thereby restricted to the particular building to which the licence relates. The benefit to the manager is the ease with which a restricted licence can be obtained compared with a full real estate agent’s licence. This restricted licence also facilitates the development of a secondary market for these management rights.

Management rights can be very controversial within a body corporate, particularly where the manager is not performing adequately or if the annual fee is too generous for the work the manager is required to undertake. Management rights disputes have been very common and this has led to Governments tightening up the law relating to these arrangements. Despite these efforts management rights still form the basis of a relatively high proportion of disputes within bodies corporate.

Levies

The level of funds required to run the body corporate is determined each year in a budget. In most jurisdictions a sinking fund is also required to accumulate funds to undertake future renewals and replacements involving substantial capital expenditure. This budget is then used to determine the level of levies that should be imposed on lot owners. These levies are imposed by service of a levy notice. They are payable before a specified date and sometimes there is a discount of up to 20% if they are paid on time. If they are not paid on time penalty interest is imposed and the body corporate can sue to recover the amount owing.

Most Australian jurisdictions have introduced requirements for long term sinking fund budgeting. This has had the effect of substantially increasing the sinking fund levies but it also has the advantage of ensuring that a body corporate builds up sufficient funds to ensure that major items of renewal and replacement can occur without the need to impose a special levy to cover the cost.

Disputes

Communal living, whether in an apartment building or a master planned community, involves higher density living than conventional land subdivisions. It also involves the sharing of services and facilities and participation in a common governance structure. This results in an environment conducive to disputes and disagreements. It is therefore not surprising that most Australian jurisdictions have established specialist dispute resolution regimes. They each involve a quasi-judicial “paper based” adjudication process (often following a formal mediation process) from which an appeal lies to a special tribunal or to the mainstream court system. For example, in Queensland a Commissioner overseas a dispute resolution process under which adjudicators determine disputes by making orders. An appeal lies against the decision of an adjudicator to the Queensland Civil and Administrative Tribunal (QCAT) and a further appeal lies to the Courts, but only on questions of law. The position is much the same in New South Wales and all the major jurisdictions require some attempt to be made to mediate the dispute before the adjudication process is available.

If an adjudicator’s order is not obeyed, then the person against whom the order was made commits an offence and is liable to prosecution and a fine.

In very limited circumstances disputes can be taken directly to the Supreme Court. In those jurisdictions where there is no specialist dispute resolution regimes, resort to the Supreme Court is often the only avenue available. Supreme Court proceedings for these types of disputes are expensive and can take a long time to resolve.

Sales And Purchases

Strata and community title lots are bought and sold in much the same way as other parcels of land are bought and sold. Because of the body corporate and its levy process, these transactions usually involve a special sale contract or special conditions in the normal sale contract. However, the existence of the body corporate presents other difficulties for a purchaser and their financier.

Because lot owners must contribute funds to a body corporate in sufficient amounts to enable the body corporate to discharge its liabilities, the legal position of the body corporate is akin to that of an unlimited liability company. That is to say, the lot owners are liable to discharge the body corporate’s debts and successive levies can be imposed until sufficient funds are available, even if this means that one or more of the lot owners are forced into bankruptcy. Add to this the fact that a purchaser automatically becomes a member of the body corporate when their purchase transfer is registered and it will be appreciated that lot purchasers should be very concerned to ensure that there are sufficient funds in the body corporate’s bank account to discharge its liabilities. If this is not the case, then the purchaser will have to make up their share of the deficiency once they are registered as the owner of the lot they are purchasing.

Clearly, this is also a matter of concern for a financier because:

• A purchaser forced to assume a significant liability to the body corporate may be forced into default under their mortgage to the financier.
• In the vent of such a default the financier may need to enter into possession of the lot and exercise their power of sale. In this event they are potentially liable for any unpaid levies.

In practice, many purchasers and financiers arrange for a “due diligence” exercise to be carried out in respect of the body corporate. This is usually arranged by the purchaser’s solicitor, although some purchasers undertake the process themselves. This process should only be undertaken by purchasers who are confident that they know exactly what to look for and the records that need to be examined. Most due diligence exercises are undertaken by specialist records inspection agencies. Purchasers Strata Inspections Pty Ltd is a company that specialises in these due diligence exercises. It is the longest established agency of its type and operates along much of the east coast of Australia. It distinguishes itself from other inspection agencies by its huge data base on strata and community title bodies corporate. Every time an inspection is undertaken the results are compared to any existing data. This often detects attempts by bodies corporate to withhold or “hide” unfavourable information. More information about inspections is available on the web site of Purchasers Strata Inspections Pty Ltd at www.strata.com.au

Insurances

Lot owners need to understand how insurance arrangements work in strata and community title schemes. These arrangements vary from jurisdiction to jurisdiction and often from building to building. The managing agent or secretary should be able to assist in this regard. In a strata title situation, in very general terms, the body corporate is responsible for the following insurances:

• The building and outbuildings
• Common area contents (e.g. carpet, furniture, paintings, etc.)
• Common property public liability
• Workers compensation
• Voluntary workers

Lot owners are, in turn, responsible to insure the contents of their lots, as well as covering themselves against personal liability. Even the question of contents is not without its problems. Issues arise as to whether carpets or wall coverings are part of the building or its contents. And what about the kitchen cupboards and hot water system? These are the issues a lot owner needs to address when considering the type and extent of insurance cover they require for their unit. Some insurers offer unit content policies that “dovetail” with the body corporate’s policy. In other words, the items not covered under the body corporate policy are clearly covered under the unit’s contents policy. Where different companies issue the policies this “dovetailing” effect is sometimes not achieved.

In Queensland, a community titles scheme comprising buildings which are not connected with common walls (e.g. free standing houses or villas) may put in place an “insurance scheme” under which the body corporate assumes responsibility for insuring all the buildings on the lots. In the absence of such a scheme the individual lot owners must insure their own buildings. The insurance scheme usually delivers much cheaper premiums for the individual owners.

By-Laws

All strata and community schemes have by-laws. Potentially, every scheme may have different by-laws. These by-laws are rules by which lot owners must live in their community. They are therefore important and should be investigated as part of the purchase process. For example; if a purchaser has a cat, they need to ensure that the scheme by-laws do not prohibit the keeping of animals on their lot. Alternatively, body corporate consent may be required to keep the cat. In this event the purchase contract could be made conditional upon the consent being granted.

Sometimes car parking and storage spaces are owned by the body corporate and are allocated for use by lot owners by means of a by-law. In those cases the validity of the by-law may need to be investigated and the actual areas allocated to the lot being purchased needs to be checked. Special care is needed where by-laws are used for this purpose. As a general rule, it is preferable for these areas to be included on the title to the lot rather than allocated in a by-law.

By laws are usually enforced as part of the dispute resolution process (i.e. a dispute regarding a by-laws is arbitrated and an order is made for compliance). However, in some jurisdictions a body corporate is able to issue what is effectively an “infringement notice”. Failure to comply with the notice may then attract a monetary penalty.

Rates And Taxes

Local government rates are levied on strata and community title lots. They are usually based on the apportionment of the underlying land value among the lots in proportion to the lot owners’ lot entitlements. State government land taxes are usually applied in a similar manner. Because of the number of lots in a particular scheme the incidence of rates and land tax is often low when compared with standard houses. This may lead to local government imposing a “minimum rate” for strata or community title lots.

Sometimes “services”, such as water and garbage removal, are charged as extras against the individual lot owners. Of course, the body corporate levies are in addition to these rates and taxes. Purchasers of lots therefore need to enquire about the overall level of rates, taxes and levies to ensure that they are not over committing themselves on the purchase.

Until about the year 2000 strata and community title properties were built with a single water meter and excess water charges imposed by local government were payable by the body corporate. As water became a scarce commodity building regulations were changed to require separate water meters to be installed for individual units. Many older schemes have voluntarily installed separate water meters to encourage more economical use of water and to more fairly distribute the costs.

Electricity And Other Services

In most cases electricity, telephone, internet and cable television are the responsibility of individual unit owners with free to air television being reticulated via a body corporate (common property) distribution network. However, in some schemes the bodies corporate have entered into “bulk buy” arrangements with suppliers under which connections are made through the body corporate at considerable savings. Purchasers need to enquire as part of their purchase process as to whether such arrangements exist and whether the arrangements are exclusive to the particular supplier.

Controlling Owners And Tenants

Existing owners in strata and community title schemes have no control over who buys into the scheme or who is permitted to lease or occupy a lot. This is because there is a total prohibition in all Australian jurisdictions against interfering with the transfer, lease or other dealing with a lot. Therefore, the only mechanism available to a body corporate to regulate conduct within the scheme is the by-laws. And the content of the by-laws is restricted to matters involving the control, management and administration of the common property, and in some cases, the lots. The level and scope of control through the by-laws is therefore limited.

The mixing of resident owners and permanent renters can lead to problems, although these are less likely (and less serious) than problems arising from the mixing of resident owners and short term occupants, such as holiday makers. When purchasing a unit the buyer should be aware of the type of occupant that is likely to be within the building or community and test this against their own plans for the unit.

Owner Participation

Schemes depend heavily upon owner participation to function correctly. An active managing agent is very important, but there is a limit to the ability of a managing agent to create a good living environment and to effectively protect and enhance the assets of the body corporate, particularly the building. The best situation is an active committee supported by interested owners working with a competent and dedicated managing agent.

Self-Management –V- Professional Management

The question of self-management –v- professional management often arises. The choice is very much an individual one. Some schemes are very successful in managing themselves. Others fail miserably – usually because of the self-interest of those owners responsible for management, lack of skills or general lack of support from the community. The decision to self-manage should not be taken lightly. The issues to be considered include:

• Are there sufficient owners with the time and interest to undertake the tasks?
• Are these people sufficiently skilled?
• Are these people likely to lose interest in a year or two?
• Is the state of harmony within the scheme such that self-management will be supported?
• Is the complexity of strata and community management fully appreciated?

If the decision is to self-manage, then the right “equipment” needs to be assembled. This includes publications, copies of legislation, computer facilities and suitable programs. In some jurisdictions this is available in the form of a web based “package”. The product is called Strataware which is marketed by Mystrata.com (refer to www.mystrata.com).Strataware can be purchased through participating managing agents. It cannot be purchased direct from Mystrata.com, but full details of how it can be purchased can be obtained direct from Mystrata.com.

Litigation

Bodies corporate can generally sue and be sued, both in relation to civil and criminal matters. In some jurisdictions there are restrictions on the commencement of proceedings without a vote of a general meeting. Care needs to be taken when commencing serious legal proceedings. Bodies corporate do not have a good track record in weathering the substantial costs involved in serious proceedings. Legal proceedings can be a cause of disharmony within a scheme and should only be undertaken where there are no alternatives and there is a clear resolve on the part of the body corporate to see the proceedings through.

The existence of legal proceedings can also be a deterrent to prospective purchasers.

Building Defects

Strata title buildings frequently suffer from building defects. The builder licensing authorities in the various jurisdictions often assist in dealing with these types of problems and sometimes owners can access the home builder insurance schemes administered by state governments. Sometimes bodies corporate need to have recourse to legal proceedings to resolve these problems. In all jurisdictions some level of recourse by Court based proceedings is available against the builder and the project consultants.