NSW parliament passes new laws on developing and building in strata

In brief - Strata reforms to impact lot owners, managing agents, committees and tenants

On the 28 October 2015, the NSW parliament approved major reforms to the state's strata title laws. Both the Strata Schemes Management Bill and Strata Schemes Development Bill, which now have passed through both the Legislative Assembly and the Legislative Council, contain around 90 changes to the current laws. The new laws are expected to come into effect in July 2016.

Strata development, building maintenance and defect inspections impacted by reforms

This is the first of three articles addressing the amendments that have been made and the potential impact of those changes. This article addresses how the reforms will impact development issues, including collective sale and renewal, building maintenance and defect inspections.
 
The main objects of the Strata Schemes Development Bill 2015 include providing for:

• the subdivision of land, including buildings, into cubic spaces to create freehold strata schemes and leasehold strata schemes
• the way in which lots and common property in strata schemes may be dealt with
• the variation, termination and renewal of strata schemes

Collective sale and renewal of ageing strata schemes

This reform plans to deal with ageing strata schemes. It enables strata owners to make collaborative decisions about their strata building. The reform creates a new process that recognises the rights of owners to jointly end or wind up a strata scheme so that the site can be sold or developed. The new renewal process will only require 75% of support from lot owners. Therefore, smaller schemes of two or three lots (comprising 37% of strata schemes in NSW) will continue to require unanimous agreement before they can be terminated.
 
The renewal process does not apply automatically to existing schemes. Part 10 of the amending Act will only apply if the owners' corporation opts in to the process by passing an ordinary resolution of 50%. A renewal proposal can then be made by any person. For example, it could be proposed by a potential purchaser of the entire building by owners wishing to renew the building or by developers.
 
In order to maintain balance within this process, lot owners will be compensated with at least the market value of their lot, as well as moving costs. Lot owners will have access to a free NSW government advice service and vulnerable owners will have access to a free advocacy program.
 
Read more about the significant changes to the collective sale and renewal process in our second article, NSW strata reforms: collective sale and renewal process timeline.

Owners can access Fair Trading's Strata Renewal Advice and Advocacy Program

Fair Trading will establish a Strata Renewal Advice and Advocacy Program which will involve a dedicated hotline that all owners can ring for further information and referrals. Additional protections will be in place for elderly and vulnerable owner-occupiers, for example, owners who are on an aged or disability pension. Funded agencies will provide additional advice and free advocacy on the sale and renewal plan, as well as housing choices to vulnerable parties.

Defects bond and inspection regime aims to reduce costs, time delays and incidence of legal action

Part 11 of the Act contains a reform related to a defects bond and an inspection regime which will be required to be carried out in the first two years. It is designed to maintain developer and builder accountability, to incentivise them to do a good job and to fix any problems that arise early in the building's life. The reasoning behind this new process is to reduce costs for all parties, reduce any time delays and reduce the incidence of lengthy, strenuous and expensive legal action.

Defects bond to be paid by developers to cover unresolved building defects

This new defects model will apply to new residential and mixed-use strata buildings and renovations that are not covered by the Home Building Compensation Fund and where there has been a registration of a new strata plan. It is not intended to incorporate minor upgrades to existing strata schemes or cosmetic renovations.
 
Developers will be required to lodge a 2% bond (for the contracted price of the building) or financial security with Fair Trading to cover any unresolved defects that have been identified by a qualified independent inspector.

Developer will bear costs of independent inspector's defects report

Having a single process for independent defects reports will help each party in the dispute to avoid spending money commissioning competing reports. A qualified independent inspector will be required to inspect the work and provide a defects report between 15 and 18 months after completion of the building.

There are strict conflict of interest provisions in place to exclude anyone with personal or fiscal interests in the building work from being selected as the qualified building inspector for that building. These measures are in place in order to guarantee the credibility of the qualified building inspector. However, if the owners' corporation and the original owner cannot agree on an appointment, the original owner will need to notify the Commissioner for Fair Trading, who will arrange for the appointment of an inspector. The interim report must be provided to the original owner, the builder, the owners' corporation and the Commissioner for Fair Trading.
 
The costs of obtaining a building inspector, the inspection and the production of the report are to be borne by the developer, regardless of whether or not the building inspector was appointed by the developer.

Final building report can only assess previously identified defects

The builder will be granted a right of entry to rectify any defects outlined in the interim report. The builder must give at least 14 days' notice of an intention to enter individuals' lots to rectify the identified defects. Access to lots cannot be unreasonably refused by an owner and is supported by financial penalties for a breach. The builder will be given at least three months to carry out the rectification work before a final inspection can be undertaken. Furthermore, the final report cannot identify new defects, rather it must only assess the defects previously identified in the interim report, and any work undertaken to rectify those defects.
 
If no defects are identified in the final report, then the bond is returned in full to the developer. However, if there are defects identified, the portion of the bond necessary to cover the estimated cost of any defects (identified in the final report) will be released to the owners' corporation.

Strata levies and capital works funds reforms benefit owners' corporations

Developers will no longer be able to control the future operation of the scheme or be involved in decisions about defects. They will also have to set realistic levies and the owners' corporation can apply to the tribunal for an order that the original owner compensate the scheme if the original levies were inadequate.
 
In relation to governance and administration, a building maintenance manual and all necessary information for the running of the scheme must be provided to the owners' corporation at the first annual general meeting. Owners' corporations will be able to more easily pursue outstanding levies through an application to the tribunal for recovery of a debt and the use of garnishees on real estate agents' trust accounts.
 
The new strata laws will require developers to set realistic levies during the initial period, between when the strata plan is registered and the developer has sold at least one third of the unit entitlements in the scheme and for the subsequent year after. It will be easier for owners' corporations to recover outstanding levies that are mainly used to pay for the scheme's day-to-day expenses.

Strata schemes development and termination process significantly impacted by reforms

The changes made by the Strata Law Reform are significant. Lot owners, strata managing agents, strata committees and tenants need to be aware of these changes and the potential impact that they might have on them. These reforms are likely to improve the environment for the process of development of strata schemes and completely change the process of termination of schemes.
 
Read the second article in this series: NSW strata reforms: collective sale and renewal process timeline.
Read the third article in this series: New laws on managing and living in strata.