An update on strata renewal

One of the substantial changes to the New South Wales strata development legislation (which became law on 30 November 2016) relating to strata renewal has now been considered by the NSW Land and Environment Court. In the recent case of Application by the Owners – Strata Plan No 61299 [2019] NSWLEC 111, the Court made its first order giving effect to a strata renewal plan (in this instance, for the collective sale of lots and common property in a strata scheme, as opposed to a redevelopment).

Part 10 of the Strata Schemes Development Act 2015 (NSW) contains the process by which strata schemes may terminate with the support of the owner or owners of at least 75% of the lots (other than utility lots) in the scheme.  A substantial amount of Pain J’s judgment is devoted to listing the relevant legislation (both in the Development Act and its regulation) in relation to the process and the manner in which it was followed by the owners corporation.  There are a few interesting facts and issues in this case which are worth commenting on:

  1. There was no other party to the proceedings.

While the Court held it could not be said there was unanimous support in the scheme for the proposed collective sale, it noted that none of the non-consenting owners had sought to appear in the proceedings as objectors to the sale (in the form of dissenting owners).

  1. The copious evidence submitted by the applicant owners corporation.

The evidence supported the Court’s findings that the original four-round expression of interest campaign put together by the selling agent was “arm’s length” and “competitive” and did not affect the strata renewal plan being prepared in good faith.  Further, it proved that the procedural requirements of Part 10 of the Development Act had (mostly) been followed.

  1. The returning officer.

Regulation 29 of the Strata Schemes Development Regulation 2016 (NSW) requires the returning officer for a strata renewal plan (being the person to whom the owners in the scheme return their support notices for the plan) to have significant personal and pecuniary independence from the outcome of the renewal process.  The owner corporation appointed as its returning officer a solicitor from a firm different to the one representing the owners corporation.

  1. Compliance with section 170 of the Development Act.

Section 178(3) of the Development Act provides that an owners corporation must be satisfied that the strata renewal plan complies with the requirements of section 170 of the Development Act before making the application to the Court.  Although the owners corporation in general meeting had resolved to apply to the Court for the order, the minutes of the meeting were silent as to whether the owners corporation was satisfied the plan complied with the requirements of section 170.  Applying administrative law principles, the Court agreed with the owners corporation’s submission that, given the terms of the strata renewal plan, the general level of support for the plan, and the steps taken in respect of the plan and the application to the Court, such satisfaction was inferred.

  1. Distribution of proceeds of sale.

The Court identified a potential conflict between sections 171(1) and 182(1)(d) of the Development Act.  Section 171(1) requires the amount paid for the sale of the lots and common property to be apportioned among lot owners on a unit entitlement basis: section 182(1)(d) requires that the proposed distribution of the proceeds of sale apportioned to each lot is not less than the compensation value of the lot.

The scheme in question was a mixed use scheme, where a distribution of the proceeds of sale based on unit entitlement would result in the five retail lots being paid less than their compensation value.

The Court resolved the issue by making an ancillary order under sections 186(1) and 186(2)(e) of the Development Act by re-allocating the unit entitlements for the scheme.  The Court noted that the re-allocation was “modest and [did] not disadvantage any lot owner in any real way”, and that it was “largely…notional given that the consequence of an order giving effect to the strata renewal plan is the termination of the strata scheme in the short term”.

  1. Effect of the renewal plan on leases

The Court observed that section 184(6) of the Development Act contains a mechanism to terminate leases of lots on the day stated in the strata renewal plan for giving vacant possession.  As vacant possession was not required under the strata renewal plan, the Court’s order giving effect to the strata renewal plan did not impact the existing leases, which would otherwise be terminated in accordance with the relevant terms of those leases.

An observation

There were no dissenting owners, as there were in the earlier Land and Environment Court decisions of The Owners – Strata Plan No. 6666 v Kahu Holdings Pty Ltd [2018] NSWLEC 15 and The Owners – Strata Plan No. 6877 v 2-4 Lachlan Avenue Pty Ltd [2018] NSWLEC 13 – possibly, the deficiencies in the process and the use of ancillary orders to amend the unit entitlements may have come under greater scrutiny if there had been.