Changing Strata Unit Entitlements in NSW: A 2024 Update
or, how to tune up original entitlements …
A Quick Take
It’s very common for some strata owners to believe their unit or lot entitlements are incorrect and want them changed. Like a kind of strata tune up. But the processes can be complex, lengthy, expensive, and legally intricate as this overview of the NSW strata rules and cases demonstrates.
[a 12:50 minute read, with 2463 words]
The Full Article
INTRODUCTION
Unit or lot entitlements are important in strata buildings as they determine voting rights, strata owners’ share of strata expenses, their ownership share in the common property and the proportionate division of the net assets of the strata scheme if it is ever terminated.
The unit or lot entitlements are determined by the developer when it registers the strata plan and are noted in the schedule on the strata plan. Unit or lot entitlements can change if there are changes to the strata plan to create, eliminate or merge strata lots. If they ever change then the correct unit or lot entitlements will be shown on the certificate of title for the common property.
So, in practical terms the common property title is is the most reliable source of the information about the unit or lot entitlements rather than the strata plan or strata subdivision plans.
By a combination of the provisions of the strata laws and decided cases, it’s clear that unit or lot entitlements in NSW strata buildings should be allocated according to the relative market values of the lots at the time of strata plan or strata subdivision plan registration. In other words, more valuable lots have higher unit or lot entitlements.
Unit entitlements must be a whole number and the total of all lot unit entitlements is called the aggregate unit entitlement.
CONTROLS ON STRATA UNIT OR LOT ENTITLEMENT ALLOCATIONS
NSW unit or lot entitlements must be apportioned on a market value basis at the valuation day under schedule 2, clause 2(1)(b) of the Strata Schemes Development Act 2015.
That means the day the strata plan or strata subdivision plan was registered.
And, the basis for determining the value of a strata lot or development lot is to estimate the amount for which the lot or development lot would be sold by a willing but not anxious seller to a willing but not anxious buyer under see clause 7(3) of the Strata Schemes Development Regulation 2016.
For many years, there was no obligation for developers to have the unit or lot entitlement verified by a valuer or in any other ways when they first created a strata building subdivision. So, there was both a temptation and looseness that allowed developers to allocate them incorrectly.
But, since 2016 new strata plans and strata subdivision plans in NSW must have a valuers’ certificate that confirms the schedule of unit or lot entitlements complies with the market value requirements which has added a layer of independent review and accountability to the process which should reduce future inaccuracies under see sections 10(3)(e) and 13(6)(d) of the Strata Schemes Development Act 2015].
The latest December 2023 changes has modified that slightly for strata plans of subdivision so that a valuation is not required for lots in a strata plan of subdivision that only changes common property in minor ways and doesn’t change those lots. This reform fixed a complication that causes additional cost for simple strata re-subdivisions.
TYPICAL UNIT OF LOT ENTITLEMENT ISSUES
Despite the requirements of strata laws about unit or lot entitlement allocations there are many strata buildings where they are misallocated. But, they are not always obvious or identified by the stakeholders.
The main reasons why strata owners [and sometimes strata buildings] are unhappy with unit or lot entitlements fit into the following typical situations.
One or more strata lots have very low unit entitlements because they were intentionally or mistakenly kept low. Sometimes these are owned by the developer, associated entities or consent authorities like the local council.
Typically, these situations are easy to identify as the out of line strata lots area pretty easy to identify as they have very low unit or lot entitlement numbers and/or are very large in size. They are often the only or few commercial lots in the strata building.
There are obvious differences and anomalies in the size, location, value of the strata lots but the unit or lot entitlements are relatively similar.
Typically, these situations involve identical lots on different strata building levels having the same unit or lot entitlements despite obvious differences in values or, conversely, very different lots having the same unit or lot entitlements. So, that it’s quite obvious that they are not the same value.
When there’s a change to the strata plan to create, eliminate or merge lots and common property by a strata subdivision but no changes or incorrect changes have been made to the unit or lot entitlements to get approval.
Typically, these situations occur because of:
the politics of getting the strata subdivision plan approved between the lot owner and the strata building which create incentives and disincentives to make changes that impact on other strata lot owners and/or for the strata building to extract agreements for higher unit or lot entitlements [and therefore more strata levies] from the applicant lot owner,
the cost of properly investigating the market values of the strata lots with valuers, and/or
because the applicant strata lot owner doesn’t want to reveal the true market value of the newly created strata lots to avoid refusal, requests for compensation and/or paying higher stamp duty.
When the use of a lot has changed and affected its value or the impact it has on common property activities.
This happens in 2 main ways.
Firstly, an owner simply starts using their strata lot for higher value activities which increase its value but that is not detected when a strata subdivision plan is approved and/or in other situations. Think about residential strata lots becoming used for commercial purposes or vice versa in some situations where old commercial space is converted to high end residential. Or, the use of strata lots for serviced apartment or Air BNB activities.
Secondly, when the zoning or other planning controls change to permit higher intensity or value activities in a strata lot and therefore increase its value [whether or not the use of the strata has changed].
In my experience, this situation is almost never detected or considered by strata stakeholders even though it’s clearly identified in section 236(1)(c) of the Strata Schemes Management Act 2015.
CHANGING UNIT OR LOT ENTITLEMENTS
However, unit or lot entitlements can be changed at anytime in NSW by a strata building or by a strata owner in one of 2 ways.
Strata subdivision plans
By a strata plan of subdivision of common property (whether including lots or not) since that plan must include strata building approval of a revised schedule of unit or lot entitlements supported by a valuer’s certificate and based on the market values of the strata lots at that date.
In that way a strata building can change the unit entitlement for one or more lots.
But, that requires a three quarter majority vote of the strata owners.
So, that may be difficult since it’s likely that any strata owners with lots that have their unit or lot entitlements increased [proportionately to others] will oppose that decision.
NCAT orders
The NSW Civil and Administrative Tribunal can make an order changing unit or lot entitlement under section 236 of the Strata Schemes Management Act 1996. But, these kinds of applications have become increasingly difficult in NSW as I explain below.
1. The strata building, a strata owner, and the local council or a government body can make an NCAT application to change the unit or lot entitlements [see section 236(3)].
So, most strata stakeholders can make these applications.
2. NCAT needs to be satisfied of one or more of the following things about the unit or lot entitlements to change them as follows [see section 236(1)]:
they were unreasonable when the strata plan was registered or when a strata plan of subdivision was registered, or
they were unreasonable when a revised schedule of unit entitlements was lodged at the conclusion of a development scheme, or
they became unreasonable because of a change in the permitted land use, being a change (for example, because of a rezoning) in the ways in which the whole or any part of the parcel could lawfully be used, whether with or without development consent.
This allows a fair bit of scope to applicants but also means that the latest date is relevant to the application. In other words, the latest of those events is the date that must be considered by NCAT when determining these applications and market values.
3. NCAT must take into account the respective values of the lots and other matters that may be relevant and the application must be supported by a valuation [see sections 236(4) and (5)].
This typically presents the biggest impediment to most NCAT applications about unit or lot entitlements because the valuation needs to cover all the strata lots in the building and according to some NCAT decisions, may require the valuer to have inspected the strata lots to make that determination. Let’s break that down a bit further.
Since unit or lot entitlements work in conjunction with the total unit or lot entitlements for the strata building to proportionately allocate strata owner obligations and rights, any change to a strata lot’s unit or lot entitlements will impact the total unit or lot entitlements and therefore proportionately affect every other strata lot. If the total goes up, every strata lot has a lower proportion if the total does down, every strata lot has a higher proportion. So, changes impact everyone and that needs to be considered by NCAT.
If the market value of one or a few strata lots was not properly reflected in their unit or lot entitlements then it’s possible that others were also not properly reflected. So, NCAT since needs to be satisfied about all the unit or lot entitlements before changing them, they all need to re-assessed.
If the NCAT application is based on a later strata subdivision plan or change in permitted uses, then it’s possible that strata lots that are not directly affected by the subdivision or who have not changed use may have changed in value relative to other lots. Not all strata lots go up and down in value in the same ratios. So, NCAT since needs to be satisfied about all the unit or lot entitlements before changing them, they all need to re-assessed.
And, as a contentious issue, since the test NCAT must apply is market value the condition of a strata lot may impact that value due to deterioration, renovations, styling, and changes to views. So, even the if the unit or lot entitlements did properly reflect the relative values of the strata lots originally, they may not do so in the future.
As a result, valuers need to undertake building wide analyses of strata lots, their values, use, condition, etc to determine the market values which I time consuming, may involve multiple inspections, requires historical data on sales and real estate market conditions, and more.
4. NCAT also needs to be satisfied about what the new unit or lot entitlements should be so it can re-allocate them.
This means that there’s a 2 step process at NCAT: Step 1 – to establish the existing unit or lot entitlements are incorrect; and; Step 2 – to satisfy NCAT about what the correct unit or lot entitlements should be.
So, NCAT needs a clear and compliant schedule of new unit or lot entitlements that is supported by valuation evidence independently of the valuation evidence about the existing unit or lot entitlements.
5. NCAT can make extra orders if the applicant can establish that the developer made the orginal allocation of unit or lot entitlements without a valuation and that they were unreasonable for the developer to pay [see section 236(6)]:
the applicant’s costs including for the valuer, and
any overpayments by strata owners [where their unit or lot entitlements were reduced] for up to 6 years before the NCAT order
This requires the developer [and any claimant strata owners] to be included as parties to the NCAT proceedings.
6. NCAT Applications to change unit or lot entitlements are tricky when they are defended or involve extra orders or complications. Generally, you need to be aware of the following key issues.
You can only apply once to change unit entitlements since an order that they should change based on values at a particular date can only be made once and cannot be reviewed.
Applications must include a proper valuation. That is an historical valuation of all the lots. Ideally the valuer inspects the lots and obtains original sales information. If there is a dispute if will generally be about valuation issues.
If you want orders against the original owner for the costs of the application or levy compensation, make sure you name them in the application so they can appear.
Expect the lot owners whose unit entitlements go up to contest the applications in direct proportion to the size of the increase: if their unit entitlement is increased by 50% they are likely to want to object.
Watch out for strata plans of subdivision in the strata scheme as these change the effective date for the unit entitlements, the valuation and the application.
Make sure the valuer attends the hearing as there may be questions from the Tribunal member.
Register any order promptly so that the changes take effect,
THE STRATA CASES
There are 3 important cases about unit or lot entitlements in New South Wales as follows which you can also find in Strata Case Watch.
Anderson Stuart & Ors v Treleaven & 1 Ors [2000] NSWSC 536, an appeal to the NSW Supreme Court from a Tribunal decision in a 3 lot strata building that comprehensively covered most issues that arise in strata unit entitlement disputes.
North East Developments Pty Limited v The Owners - Strata Plan No. 53374 [2007] NSWSC 1063, another appeal to the NSW Supreme Court about when Tribunal orders to change strata unit entitlements take effect: the date of the order or when it is registered.
Sahade v The Owners - Strata Plan 62022 [2014] NSWCA 208, a NSW Court of Appeal decision about whether other issues, like good strata governance, could be considered in strata unit entitlement cases.
CONCLUSIONS
Although many strata owners think their unit entitlements aren’t correctly allocated, what’s right and wrong is not intuitive and depends on comparative historical market valuations of strata lots.
But, changing strata unit entitlements in NSW to tune up your strata building is possible.
It’s just a bit tricky, expensive and time consuming. Plus, there’s some traps along the way and after they’ve changed to watch out for.
March 26, 2024
Francesco ...