An Introduction to NSW Part Strata Complexes: 2023 Update
or, an interesting strata title hybrid, that’s largely misunderstood …
Part strata schemes [or BMCs] are increasingly common place in NSW. Yet, whilst they look like strata title corporations, they are completely different; being instead a strange kind of property partnership between the owners of different parts of a building. So, BMCs are challenging but will be an increasingly important part of our high-density future.
[13:50 mins & 2678 words]
Introduction
If you’re familiar with Sydney’s King Street Wharf, Quay West or Barangaroo, then you’re looking at a part strata scheme. Each of these well-known property developments is a stratum or part-strata scheme [sometimes also called BMCs] … and there are many all over NSW and even more on the way.
The re-development of the inner city and inner urban mixed-use sites is increasingly done under stratum and part-strata subdivision structures, unlocking many new opportunities for developers, local councils, investors, managers and strata owners and offering extremely flexible structuring options.
However this form of development and management is not well understood by many people. It can also involve far greater complexities than torrens, strata or community title real estate ... so they need to be properly structured, implemented and managed.
I’ve written about part strata and BMC issues for the current NSW strata law reforms in Strata Reforms NSW Update 3: Part Strata Schemes which covers more esoteric matters.
But, here’s a useful overview of part strata and BMC buildings to help get newcomers and more experienced stakeholders familiar or re-acquainted with some basics.
General matters
Part strata complexes and buildings are yet another form of hybrid real property title, but they’re not like strata or community titles.
They involve a spatial subdivision of land and buildings by survey and measurements of torrens title land to create cubic space lots that are a lot like strata title.
Unlike strata title, part strata complexes don’t rely on the building structures for boundary definition, and there’s no common property. Everything is either in one lot or another.
Plus, like community title schemes, each part strata complex is unique because the subdivision structure and the governing documents are designed solely for that particular site and are not like any other part strata complex.
And, like community title schemes, there can be layered multi-property entities within a part strata scheme; like privately owned freehold lots and subsidiary strata corporations.
But, part strata complexes are very different to both strata title and community title schemes in that there’s no separate legal entity [like a strata corporation or community association] and there’s no common or community association property.
Part strata or stratum building subdivision
For some time, it has been possible to subdivide a single building and the land it sits on by stratum subdivision [air space or vertical subdivision] into 2 or more stratum lots: that is lots partly or completely limited in height or depth or both by dimensions and measurement of a registered plan. This form of subdivision accommodates the separate ownership of different parts of the building, those parts usually corresponding to components designed for different uses [e.g. residential parts of the building, offices, retail areas and car parking]. But, how the parts were integrated was problematic.
Since the 1992 updates of the Strata Schemes (Freehold Development) Act 1973 it became possible to also strata subdivide a part of a building only [leaving the rest of the building on a separate title]. Those provisions are now found in Part 6 of the Strata Schemes Development Act 2015.
So, a building can now be subdivided so as to contain 1 or more stratum lots [including a strata scheme (for example a residential scheme)], and one or more other stratum lots not forming part of that strata scheme (for example a lot comprising offices and/or a lot comprising retail areas).
As a result, those parts of a building that are suitable for subdivision under the strata titles legislation can be isolated from other parts of the building that are considered unsuitable for strata subdivision and/or those parts where the developer and ultimate owners don’t want to participate in the strata corporation.
However, the subdivision of the ownership of a single building in this way can result in management, title and operational complexity.
Partly that’s covered by deeming basic property rights between the stratum owners such as rights for mutual building support, for access rights, for the passage of utilities and services as automatically implied easements and specifying some basic default operating rules.
But, mostly the details for part strata schemes and their operational rules come from a management plan that must be registered with the subdivision plan under section 99 of the strata development laws. This management plan is in the form of a Strata Management Statement.
Strata management statement
When a stratum lot is subdivided by a strata plan it creates a stratum parcel.
On creation of a stratum parcel it is necessary to register a Strata Management Statement to regulate the management and operation of the building and the responsibilities and obligations of each part of the building [the strata scheme and the remaining stratum lots].
Section 105 of the part strata development laws describes the effect of a Strata Management Statement as being like a signed agreement between each person or entity that is a strata scheme owner, a private owner, or a mortgagee in possession of any stratum lot which binds them to comply with its terms. Plus, the Strata Management Statement automatically applies to new owners and mortgagees in possession. So, it’s like a perpetual partnership or shareholders agreement between them.
Schedule 4 of the part strata development laws describes the key and optional requirements for Strata Management Statements, including:
establishing the governing body [the Building Management Committee] and its functions,
the allocation of shared expenses [including the methodology for allocation and a review process],
defining shared areas for access, garbage, etc,
an architectural code,
other administrative matters,
how to resolve disputes, and
how to change the Strata Management Statement.
Shared facilities
Probably the most interesting feature of part strata schemes is the concept of shared facilities.
Simply described they are parts of the building [and sometimes associated equipment and/or services] that are shared by the stratum owners in pursuit of their occupation and use of the building and identified as such in the Strata Management Statement. Since there is no common property in part strata schemes, these shared facility areas are actually part of one or more stratum lots.
For example, lifts are typically shared facilities in part strata complexes and are located throughout the building [from the basement to the roof] and pass through differently owned stratum lots. So, the lift shafts and equipment are owned by multiple part strata owner members but need to be used and operated collectively; so, they’ll typically be designated as shared facilities and managed by the stratum owners collectively.
Shared facilities can also be identified by drawings, words, or both. But typically they are only described by words in a schedule. This can sometimes lead to uncertainty about the location/s and/or extent of the shared facilities if the descriptions are pithy or poorly worded.
The rights to use and limits on the use of shared facilities are also specified in the Strata Management Statement. That’s especially important if they are not used by all stratum owners or limitations on their use are required.
What’s most interesting about these Strata Management Statement provisions about shared facilities is that they effectively make parts of a part strata owner’s private property available and accessible to other part strata owners [and in the case of strata corporation stratum owners, their member owners and residents] without an easement or other agreement. Plus, the effective control of those shared parts of the part strata owner’s property passes from the owner alone to the group of partnered stratum owners.
These shared or mutual rights over shared facilities in other stratum owners’ property are further hybrid kind of property right [fitting somewhere between a licence and an easement].
Shared expenses
Accompanying the shared facilities are shared facility expenses for the costs of operating, maintaining and repairing them which must be shared between the part strata owners.
These are also specified in the Strata Management Statement and there are usually multiple expense categories; typically, as many as there are shared facilities or more.
Expense allocation/apportionment is usually a percentage per part strata owner per shared facility and they are not necessarily grouped or correlated. Therefore, the expense allocation between part strata owners can be infinitely variable from shared facility to shared facility.
The Strata Management Statement must specify how the expense allocation is calculated or what it is based on and some typical examples are:
gross floor area of each stratum lot,
a shared facility count split [how many sprinkler heads, car spaces, etc],
meter readings [for electricity, water, etc], or
an estimated usage or benefit proportion [based on a range of objective and subjective factors].
As you can imagine shared facilities [and therefore expense allocations] are often ill defined and not comprehensive since they are based on design criteria and expectations rather than well thought out and/or practically achievable managerial concepts and actual in-building experience. And, the allocation methods can be arbitrary and/or wrong.
These days, there’s a requirements for new part strata schemes to review the expense allocations but the process for doing so is not clearly defined and, in my view, likely to prove a challenge for stratum owners who believe they’re paying too much.
Insurance
Part strata schemes that include a strata corporation must insure the whole of the building for damage [meaning the full replacement cost of the building] under s 160 of the part strata management laws.
That obligation is also typically covered in a Strata Management Statement, included as a shared facility and the expenses shared between part strata owners. But, unlike other shared facilities the costs must be allocated between the stratum owners in the same ratio as the replacement value of each stratum lot to the whole. So, valuations for insurance purposes in part strata schemes are a bit more complicated.
Financial matters
Because there’s no separate legal entity, the financials in a part strata scheme are actually a pooling of each part strata owner’s shared expenses that must be managed, spent and accounted for collectively and separately.
Typically, Strata Management Statements provide for distinct accounting periods [usually annual] that require record keeping within the period and zeroing or reconciling balances for the next period. This adds a timing dimension to part strata complex accounting and financial management.
Plus, decisions about setting part strata owners’ contribution are not typically by majority vote and usually have higher thresholds. Some Strata Management Statements require unanimous approval for part strat owners’ contributions on the theory that each part strata owner needs to agree to what they should pay.
Sometimes, more formal and technical levy notice requirements are included in Strata Management Statements as a protection for part strata owners. They can be a trap creating potentially invalid levies that are not recoverable because of procedural mistakes.
Usually, there is no sinking or reserve fund on a part strata complex since that concept sits awkwardly with the principle that part strata owners only pay their allocated proportion of expenses depending on the shared facility category it relates to and when it’s paid. That puts pressure on part strata owners if unexpected, urgent, or major works are required and when a part strata owner may have financial difficulties.
Strata Management Statements also typically contain intricate arrears recovery procedures that involve payment of arrears by other part strata owner members before and so that they acquire recovery rights against the non-paying part strata owner.
Interest is not always recoverable in part strata complexes and, when it is, it is usually based on a major bank commercial rate.
And, annualised financial cycles with reconciliations for each stratum owner of actual liabilities against projected [budget] estimates, make levy notices to part strata owners a lot more complicated … and sometimes require accompanying reconciliations.
Decisions & Voting
Strata Management Statements will specify the things that part strata schemes can and cannot make decisions about.
Strata Management Statements will also specify the procedures around decision making including:
when and how meetings are to be held,
how different decision thresholds work and apply, and
the voting rights of part strata owners.
These voting provisions can be completely different in each part strata complex and they often are. Except that there are some default meeting provisions that apply if the Strata Management Statement doesn’t cover them.
Typically part strata schemes will incorporate the following meeting and decision rules.
An annual meeting to consider repeating issues like insurance, budgeting and management.
Extra meetings when needed including for emergencies on short notice.
Fixed voting rights for each part strata owner [although there’s a new trend to proportionally vary voting rights on shared facility decisions to match the part strata owner’s contribution proportion for that shared facility].
Needing unanimous approval for many decisions.
Mechanisms to appoint and change voting representatives for strata corporation members of the part strata complex.
Denial of voting rights when contributions are not paid.
Unfortunately, because of the way many part strata complexes are created [and because of the relative size and value of non-strata parts of the buildings] strata corporation members often have a permanent minority vote which means they have little [or no] influence on decision making.
Changes in ownership can also cause problems with notices, contribution adjustment, and ongoing contractual arrangements. and attitudes to important management issues.
Conflict resolution
Part strata complexes will usually have bigger, more complex, and more contentious disputes by reason of the size and nature of those buildings, the more complex operational rules, the value of the stratum lots, and the size of the part strata owner members.
Disputes in part strata complexes typically involve building maintenance works, appearance issues, shared facility identification or use, and alterations or additions.
But, because there’s no separate legal entity for a part strata complex, the disputes occur between part strata owners by them enforcing the Strata Management Statement against each other. Plus, the part strata owners often have wider commercial motivations unrelated to part strata complex management issues.
Part strata complex disputes often follow different pathways.
Chapter 6 of the Strata Schemes Management Act 1996 [the dispute regime] is not useful at all, since it does not apply to part strata complexes unless the dispute is between adjoining strata schemes that both consent to participate in it [which has never happened in my experience].
Additionally, Strata Management Statements often specify that disputes must be privately mediated first and, if not resolved, get determined by private arbitration or expert determination.
And, where that doesn’t work or the parties want to escalate things, then the dispute needs to be determined in Supreme Court proceedings.
Manager appointment
Part strata complexes’ ability to appoint and delegate functions to a strata manager is also more complicated since the ability to do so relies on the Strata Management Statement [rather than any strata laws] and the provisions about that are not standardised.
Real estate agent or strata manager licences are also not required for a person to manage part strata complexes, although the Strata Management Statement may impose an extra obligation for the manager to hold a licence [which probably isn’t binding].
And, agency agreements between part strata complexes and managers need to be multi-party [approved and signed by each part strata owner] and customised to fit the Strata Management Statement, cover the unique and non-standard work usually required, and deal with any part stratum ownership changes.
Conclusions
Part strata complexes are one of the more interesting parts of strata title.
But, they are very different to strata title buildings [and each other] so require much more care and attention by all stakeholders involved in their ownership and management. Plus since the stakes [values, expenditures and commercial interests] are usually higher, there’s a lot more exposure.
In my opinion, if you want to be at the pointy end of the strata title sector, I’d recommend mastering part strata complexes.
They are challenging and will be an increasingly important part of our high-density future.
Francesco ...
November 09, 2023