Strata Reform: New rules for determining unit entitlements in strata developments

The NSW Government has recently released draft Regulations to support strata reform passed in by NSW Parliament in October 2015. The new Regulations will support the new Strata Schemes Management Act 2015 and the new Strata Schemes Development Act 2015 which are expected to commence in late 2016.

In this alert we highlight the proposed changes to the way the initial allocation of unit entitlements in a strata scheme is to be determined by developers.

What are unit entitlements?

Unit entitlements are a lot owner’s ‘share’ of the strata scheme and are used to establish levy contributions and voting power of each lot owner.

How are unit entitlements currently allocated?

Usually, the initial allocation of unit entitlements is determined by the developer and/or the surveyor at the time the draft strata plan is prepared.

There is currently no requirement for the allocation to be based on a valuation of the lots in the strata scheme. However, a developer could possibly defend a claim for an unreasonable allocation of unit entitlements if the initial allocation was made in accordance with a valuation from a qualified valuer.

An unreasonable allocation?

A developer could face a claim from a lot owner for payment of any adjustments or overpayments due to an unreasonable allocation of unit entitlements.

Examples of cases where it has been found that the allocation of unit entitlements was unreasonable include:

  • unit entitlements were allocated in proportion to the respective floor areas of the lots;
  • a surveyor accidentally overstated the size of some of the lots which in turn affected the likely sale prices which meant the unit entitlements allocated were too high; and
  • a developer set artificially low unit entitlements for commercial lots in a mixed use development to entice purchasers.

What are the proposed changes?

In short, under the new legislation it is proposed:

  • a qualified valuer must determine the unit entitlements when the strata scheme is established;
  • the valuer must certify that the unit entitlements have been apportioned in the way the legislation requires;
  • the legislation requires unit entitlements to be apportioned on a ‘market value basis’ as at the ‘valuation day’;
  • market value basis means estimating the amount for which the lot would be sold in an arms length transaction between a buyer and seller who both act knowledgeably, prudently and without compulsion; and
  • valuation day means a date that is no more than 2 months before the day on which the strata plan is lodged for registration.

Further information

The draft Regulations have been released for public consultation with submissions accepted until 27 May 2016. Once the new Regulations are finalised, the new legislation will commence (expected end of 2016).

For further information and advice regarding the proposed changes to the strata legislation, the potential impact on developer’s obligations, and necessary updates to off-the-plan contracts, please contact Andrew Ferguson on 4926 7253 or one of McDonald Johnson’s Projects & Developments Lawyers on 4926 1944.

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