Going, Going, Gone! Thoughts on Collective Strata Building Sales

A solution to a non-existent problem, or, is it just a few decades too soon …

Everyone thought that the new forced strata sales and redevelopment process would lead to many old and dated strata building sites being redeveloped. But, that hasn’t happened and it’s fair to say collective sales have had a [very] slow start. Why is that, and what’s likely in the future?

[13.0 minutes estimated reading time, 2631 words]

Introduction

In 2016 New South Wales introduced new strata laws that allowed a three-quarter majority of strata owners to sell their building despite the objection of a minority of other owners but only with Court approval.

It was heralded as a ground-breaking reform that would release many trapped strata building sites for redevelopment from being held to ransom by one or a few recalcitrant holdouts.

Despite the rhetoric, I wasn’t convinced then that the new laws would make much difference and what’s happened over the last 5 years hasn’t changed my mind. 

Plus, in my submissions about the current New South Wales strata law reforms I’ve said that ‘laws about strata renewal and collective sale are too new and should be left alone for people to use them more and for Courts to make more decisions about how they operate’ [see my article ‘Strata Reforms [NSW] Update 2: Lessons & Challenges from past reforms’].

After all, if there were so many strata buildings just waiting to be redeveloped to everyone’s advantage but there were minorities blocking them, why haven’t we seen many collective strata building redevelopment projects?

So, in this article I explore what’s been happening, the issues affecting strata building collective sales/redevelopments, and, my thoughts about issues and the future.

How collective strata building sales work in NSW

I won’t bore you with the intricate details of the New South Wales collective sale process here as you can find out more easily on the web and there’s a basic outline on the NSW Fair Trading’s website you can read here.

Plus, if you want to know more or help with a strata renewal, you can always contact me.

What’s actually been happening with strata redevelopments?

There have been very few collective sales in New South Wales occurring under the new strata laws with strata owner and Court approval.

However, there have been a number of strata building redevelopments where the building has been sold to a developer for redevelopment by complete replacement or by alterations and refurbishment.  In those cases, the developers have adopted the old-fashioned approach of buying all the lots by private arrangements [either outright or under call options] and then terminating and recreating the strata building corporation by exercising all the votes and using paper-based titling processes. 

That’s always been possible and has occurred when there have been motivated developers and strata apartment owners.  So, it’s not an indicator of the success or usefulness of the new strata laws. 

Some commentators [including NSW Fair Trading] believe that the possibility of forced strata building redevelopment under the 2016 laws may have motivated strata owners that would otherwise have said no.  That’s possible, but who can say for sure and it’s a very odd proposition to argue that a new law that doesn’t get used informally persuades people to do things that render the law unnecessary.

The few Court decisions

So far there’s only been one ‘contested’ case about a collective strata sale where the NSW Land & Environment Court approved of a strata renewal plan.  And, there’s been a few others in the NSW Land & Environment Court that considered some of the legal issues.

In August 2018, in Application by the Owners – Strata Plan No 61299 [2019] NSWLEC 111, the Court considered a collective sale plan for a 25 level, 159 lot strata building that included 119 serviced apartments, retails lot used as a cafe, hotel reception and lobby, office, gymnasium, and storage room, and, 34 basement car spaces.  

A few strata owners [mostly investors] did not agree with the collective sale but did not appear at the hearing to oppose it.

In approving the collective sale, the Court made the following relevant findings:

1.    The collective sale processes and procedures protect strata owners’ interests and are prescriptive and technical, so everyone needs to be extremely thorough in relation to document preparation, submission, and general governance, and, there is very little (if any) margin for error.

2.    Collective sales cannot be approved where some, but not all, of the strata lots are being acquired or where some of the lots are already owned by the proposed developer.

3.     The Court has discretion about permitting sales of leased strata lots with vacant possession so if that is required, it needs to be clearly stipulated in the renewal plan.

4.    Tenants must get written notice if the strata building decides to apply to the Court about a collective sale.

6.    The two valuations supporting the renewal plan must conform with the regulations, be prepared on a just equitable basis, and, be consistent.

7.    The Court has the discretion to make ‘any ancillary or consequential order that it considers appropriate or necessary to give effect to the strata renewal plan’ which in this case included changing some lot unit entitlements and thereby affecting the distribution of surplus strata assets.

8.    After termination of the strata scheme, the strata assets must be distributed to each strata owner in shares proportional to their unit entitlements.

So, whilst this Court decision is an approval of a collective strata sale and sets out some principles since it was not actively contested it doesn’t really tell us how a Court will balance the competing desires and views of strata lot owners.

The other two decisions of the NSW Land & Environment Court [also made in 2018] in The Owners – Strata Plan 6877 -v- 2-4 Lachlan Avenue Pty. Ltd. [2018] NSWLEC 18, and The Owners – Strata Plan 6666 -v- Kahu Holdings Pty. Ltd. [2018] NSWLEC 15 were preliminary or interim decisions, so are also not very helpful in determining how to balance competing strata interests. 

In those cases, the Court made the following relevant findings about processes and procedures:

1.     The strata owners opposing the collective sale had a sufficient interest to be joined as parties to the proceedings.

2.     The developer proposing the renewal plan could not be joined as an applicant [as only the strata building could apply] but had a sufficient interest to participate as a respondent.

3.     The strata building should pay the strata owners’ costs of seeking to be joined to the proceedings and opposing them, even if their opposition failed.

4.     That even if the parties later agreed about the collective strata sale and Court orders, it was still necessary for the Court to hear the application and be satisfied on the merits that the proposal was appropriate.

So, there hasn’t been much useful guidance from Court decisions about when and how a strata building collective sale can occur in contested and difficult situations.

The practical challenges for collective strata sales

What about non legal/judicial issues that practically affect whether or not there will be successful strata building collective sales?

Here are my thoughts about those things.

1.   Density matters

For any property development to be viable it has to cover the following component costs:

• The cost of acquiring the apartments on site.

• The cost of constructing or altering the building.

• Acquisition, approval, sale and other costs [including duties, fees, etc].

• Interest on the cost of capital funds.

• A margin for delays and other risks.

• A profit margin [let’s conservatively say that 20%].

This can be hard enough to achieve when buying vacant land for strata building development. 

But it’s virtually impossible when paying market value for existing strata apartments unless there’s an opportunity to significantly increase the density on the strata building site by creating bigger and better apartments or more apartments.

Assuming that on top of the cost of acquiring the strata apartments all the other development costs and profit margin are another 40% [which I’m told is conservative], then the developer will need a 40%-50% increase in density to make the project viable.

That’s like putting at least 4 or 5 more apartments onto a 10 lot strata building or at least 40 or 50 more apartments onto a 100 lot strata building.

I’m pretty sure that there aren’t too many strata buildings with enough land to permit that unless there’s a rezoning.  And, if the strata site, is rezoned then I suspect the strata owners would want to add that factor into increased values of their apartments.

So, it will be hard to find profitable strata building redevelopment sites.

2.   Money isn’t always enough

Even if a strata owner is offered the market value of their apartment to sell, that may not be enough for them to agree or better their position.

After all, they will need to relocate and buy another property [with the usual acquisition costs and stamp duty liabilities]. 

And, if the payment for their strata apartment is delayed until the developer is ready to start demolition and construction [which is usual as they need all planning and construction approvals, and probably a number of pre-sales to get construction funding] the market value could be worthless after 6 or 12 months  That’s especially so in a rising property market when it’s more likely developers will be interested in strata building redevelopments.

So, strata owners may not be able to upgrade or even replace their apartments when it’s time to move and get their money in a strata building collective sale.

3.   Owner greed

You can’t underestimate strata owner greed which creates two main issues for strata building collective sales as follows:

• all owners begin to want more [and more] for their apartments than they are worth because they feel special as a result of the developer’s courting of the building and owners, and

• because some strata owners try to get higher values by being the last to agree and/or oppose collective sales.

Both of these effects are strictly useless since a Court approved collective sale must be at just equitable market values for all strata lots supported by valuations and strata owners will only get their approved payment and unit entitlement share of strata assets.

But they will operate to stymie many strata building collective sale proposals so they never get to the three-quarter approval stage.

4.   Free legal advice for opponents & strata buildings pay costs

An additional feature that impacts the cost of a strata building collective sale is the availability of free legal advice to strata owners who may want to oppose the collective sale.

In New South Wales, NSW Fair Trading has appointed the Marrickville Legal Centre as the designated source of free legal advice to strata owners who are involved in collective sales and is funding that advice at no cost to those strata owners.  See the Marrickville Legal Centre webpage about this service.

Additionally, the few Court decisions that have occurred suggest that a strata owner that opposes a collective sale application will get their legal costs paid by the strata corporation even if they do not succeed and the collective sale proceeds.

This makes opposing collective sales a no-cost and no-risk proposition for strata owners.

So, why not oppose a collective sale if you’re a strata owner and it doesn’t suit you or if you’re just difficult?

Plus opposing owners’ legal costs will get added to the total net cost of the strata building collective sale, either increasing the cost to the developer or reducing the strata owners’ net returns.

5.   A strong property market

A strong property market [like the one we’re having now] means that the escalating cost of real estate [including strata apartments] creates two main issues for strata building collective sales as follows:

• it makes acquiring the strata apartments too expensive for developers as strata owners can get higher prices from other one-off buyers, and

• it forces strata owners to lock into a sale price that might look low only after a few months from agreeing and before the strata building collective sale process is completed.

So, I believe we’re far more likely to see strata building collective sales during flat or falling real estate market conditions.

6.   Slow process doesn’t suit the development cycle

The series of steps that are involved in a strata building collective sale and the need to get Court approval means that the process is slow and can take a long time.

Six to eight months for a collective sale would be very fast and from my experience, they typically take much longer.  At the same time, a strata renewal plan lapses 12 months after it’s submitted for consideration.

So, timing issues are a significant impediment and dilemma as they are simultaneously too short and too long and because:

• most developers don’t want to wait 12 plus months to know if development is proceeding, and

• most strata buildings will take more than 12 months to work through the legal processes.

So, it’s only the most persistent parties that will see the redevelopment process through.

Is Mascot Towers an example of the real use of collective sales

So, I believe we will not see many strata building collective sales using the new strata laws for some time and/or until the property market softens.  And, even then they will be rare if they are based on or rely on everyone [strata owners and developers] making profits.

But, perhaps the real usefulness of forced collective strata redevelopment and sales mechanisms isn’t to help strata owners make windfall profits, but rather to get strata owners out of ‘sinking’ [I know that’s a bad pun] strata buildings to limit their losses.

In other words, where a building needs significant repairs that are uneconomical to undertake, just very expensive, very disruptive, or simply not what a majority of strata owners want to do but the strata laws compel them to do that work, a collective sale may be the release valve to pull the strata pin and avoid that work and expenditure.

That scenario is one of the options that’s playing out at Mascot Towers.

You’ll recall Mascot Towers as the building that was built over the Mascot railway station 10 years ago, developed serious cracking due to building subsidence, and the strata owners and residents were forced to vacate the building on a Friday night in 2019 and have never returned back to their apartments.  The sad story is reported in this ABC News article ‘What we know about the Mascot Towers cracks’.

Now it seems that despite suing the adjoining building developer, after some help with engineering advice and alternate accommodation costs by the NSW Government, and with a strata loan to cover costs, the strata owners are now considering a strata building collective sale to a developer a significant discount on their property values. 

According to this April 2021 ABC News article ‘Mascot Towers owners urged to sell as developers express interest in demolishing beleaguered block’ the strata owners in Mascot Towers are facing a choice between spending up to $64 million to fix their strata building or approve a strata collective sale where would receive as little as 30% of what they paid for their apartments.

I can see a lot of anguish here and legal actions on these matters whichever way owners vote at Mascot Towers.

Conclusions

Based on what has and hasn’t happened, it seems to me that there will be very few strata building collective sales using the new strata laws for while yet, unless there are planning law changes that allow much higher densities on existing strata building sites or a falling property market.

But, it is possible that we’ll see some use of the collective sale laws in the dispute over the future of Mascot Towers or other older and run down strata buildings where the cost of appropriate maintenance, repair, or replacement works is uneconomical as a circuit breaker between strata owners who want to take a loss and move and others who insist on fixing and staying.

That would be a surprise twist in the strata renewal laws that were heralded as helping unlock old, underdeveloped, and locked up strata building sites.

June 16, 2021

Francesco ...