Is the Imperial Towers purchaser & defects deal a good or bad outcome?
In late 2023, strata buyers of the defective Imperial Towers building in Sydney were allowed to break contracts and recoup deposits in a 'radical first’ deal brokered by NSW Building Commissioner, David Chandler AOM.
In summary, after 7 years of development dramas involving delays whilst off the plan buyers were stuck waiting for completion and hoping it all worked out, the builder and developer [Merhis Group ] went into liquidation, the development financier [Wingate ] took over, more and more defects appeared in the building, and a Prohibition Order was issued by NSW Building Commissioner preventing compliance certification.
Eventually, a deal was done via David Chandler OAM with the financier and receiver with an Enforceable Undertaking as follows.
Strata buyers don’t need to purchase under contracts.
Strata buyers will receive some [but not all] of their deposits back.
The building cannot be registered as a strata plan for 10 years.
The building can be occupied as apartments in the meantime [effectively as a build-to-rent property development].
Identified defects will be fixed by the financier and receiver.
Subject to compliance with the Enforceable Undertaking, the building can be strata titled and apartments sold off in 10 years’ time.
It’s been heralded as a great outcome and, in some respects, it is.
But let’s consider the different stakeholders’ positions to understand the benefits and drawbacks of the deal.
Firstly, future strata owners are protected from having to deal with an uninsured defective building without a solvent builder or developer since there won’t be any for at least 10 years, if ever. That’s good.
Secondly, the government successfully flexed their regulatory muscles, saved some strata citizens from an intractable purchase and defect crisis, and look like heroes [if they hold the line – given they haven’t always]. That’s mostly good.
Thirdly, the developer [actually the financier now] gets to keep a building at their loan funding cost [let’s say 70% of the land value and the construction cost which is less than its market value] without fixing defects until no one can sue, earn [high] Sydney rents for 10 years, and, then get to sell a whitewashed and risk-free strata building. It sounds like a massive medium to long term financial benefit. That’s great for the financier.
Fourthly, it’s good [maybe] for ‘off the plan’ strata buyers who don’t have to settle and buy into a known defective strata building in crisis, plus they recover their deposits. But those strata buyers also missed out on 5 to 7 years of Sydney property value increases which were on average up from $715K to $817K in Sydney over that time [or 14.25%]. That’s a lot of capital gain they’ve lost [and, probably Capital Gains Tax free]. That’s not so good [or fair].
So, on reflection, the Imperial Towers defects deal isn’t necessarily a great deal for the strata consumers who’ve had to wait so long and lost real capital gains. But, it’s a very good deal for the development financier who’s ended up with a cheap highrise strata building earning high rents until they can sell.
Maybe those strata buyers could sue for those lost capital gains that are going to someone else?
Just strata sayin …..
January 15, 2024
Francesco …