Key Features of the New Unit Titles Legislation

Introduction

The Unit Titles Act 2010 (the “Act”) comes into force on 20 June 2011. The Act is accompanied by the Unit Titles Regulations 2011 (the “Regulations. Except for certain provisions which will continue to apply for a transitional period, the Unit Titles Act 1972 (“1972 Act”) is repealed from 20 June 2011.

The new Act seeks to update and improve the regime under the 1972 Act and, as a result, is much longer and more comprehensive. In summary the Act:

Offers greater flexibility for the structure and management on unit title schemes, particularly large, staged or complex developments with:
- The introduction of layered developments;
- Redefinition of the “unit entitlement” concept into the new concepts of “ownership interest” and “utility interest”;
- Introduction of optional financial funds and a sinking fund concept;
- Relaxation of the “unanimous consent” provisions of the 1972 Act.
Places additional disclosure and reporting responsibilities and duties when entering service contracts while in control of a body corporate.
Introduces new body corporate rules and sets out the powers and duties of a body corporate.
Vests ownership of common property in the body corporate.

Both new unit title developments and existing unit title developments will be affected by the Act and Regulations.

Key Features of the Act and Regulations

The Act will provide greater flexibility for developers in relation to the structure and management of unit title schemes, particularly large, staged or complex developments with the introduction of the concept of layered developments, redefinition of the “unit entitlement” concept and relaxation of the “unanimous consent” provisions of the 1972 Act. However, with this new flexibility comes additional responsibility in the form of the “consumer protection” provisions of the Act including a new disclosure and reporting regime. Taken as a whole the new regime is also likely to require greater co-ordination among all relevant parties – developers, lawyers, surveyors, valuers, quantity surveyors and body corporate managers – than was previously the case.

The main features to be aware of are:

Principal Units

The new definition makes it clear that a principal unit must contain a building or be contained in a building, or be a car park.

Unit Entitlements

One of the most common criticisms of the 1972 Act is the inflexibility surrounding unit entitlements. The Act separates unit entitlements in two:

Ownership interest - determined by reference to relative value of the unit in relation to each other unit. The ownership interest is used to determine matters such as the beneficial interest in the common property, voting rights, capital improvement fund levies and surpluses, and ground rental liability (for leasehold estates).
Utility interest - the utility interest is the same as the ownership interest unless it is reviewed. The utility interest is used to determine matters such as unit contributions to the long-term maintenance fund, optional contingency fund, and the operating account (together with refund of any surpluses arising out of them).

Ownership and utility interests may be reviewed provided a special resolution is passed at the general meeting of a body corporate; however, they must not be reviewed more than once every 36 months.

Future development units (“FDUs”)

The Act takes a new approach to FDUs by making FDU owners members of the body corporate for certain purposes, including payment of levies where a FDU is being used as a place of residence, business or otherwise.

Layered developments

A completely new concept of layered developments has been introduced. This allows for grouping of a number of individual unit title developments, which all subscribe to a parent unit title development (which may also contain other principal units) with each subsidiary development forming a subsidiary body corporate to manage the affairs of their units and any associated common property.

The layered scheme approach is most likely to be used in mixed use developments or sister developments, adding an extra level of flexibility in structuring developments of this nature. It may also be looked at by current developments, which operate a pseudo layered style developments by use of incorporated societies or management agreements.

Common property

Under the Act common property will be owned by the body corporate. Each unit owner will still have a beneficial interest in the common property. This should make dealings with common property (leases, licences and easements etc) easier to deal with.

Unanimity relaxed

The previous requirement for key body corporate decisions to be made unanimously has been replaced with a 75% voting threshold (special resolution). This will prevent voting on a multitude of key areas including redevelopments, amendments to staged unit plans, grant of easement/ covenants and cancellation from being blocked by one or two owners. However, note that the Act contains a process for dissenting minority unit holders to apply to the Tribunal or Courts (depending on jurisdiction) for relief against a decision, where the effect of the resolution would be unjust or inequitable on the minority.

Long Term Maintenance and Financial management

The Act allows four new funds to be established by a body corporate – mandatory funds for operating expenses and long-term maintenance (except that the body corporate can decide by special resolution not to establish a long term maintenance fund); along with optional contingency and capital improvement funds.

A “long term maintenance plan” is now required, covering the next 10 years, an estimate of the costs involved for those works and a basis for levying owners to cover them. The body corporate must then establish and maintain a fund based on that plan unless it is determined not to establish such a fund by special resolution.

Developers will need to weigh up if any of the optional funds are relevant or useful for a particular unit title development. For example, the optional capital improvement fund might be useful for lower grade commercial buildings who over time want to pool funds to lift the building grade of a building with its services such as air conditioning. In addition, leases of units will need to cover who is responsible for what levies.

The body corporate must keep proper financial records and, unless resolved otherwise, these must be audited.

Easements, covenants and access lots

Flexibility has been introduced allowing:

· Dealings with easements or covenants relating to the underlying fee simple title;

· A body corporate the ability to grant or acquire easements and covenants over or for the benefit of the common property;

· Principal unit owners to grant or acquire easements and covenants over or for the benefit of their unit to greater degree than permitted under the current Act; and

· A body corporate to own a share in an access lot with such share to be treated as common property.

Redevelopments

Redevelopments have been separated into two categories, namely:

· Adjustments between units that do not materially affect the common property or other units. In such a case an amendment to the unit title plan can be lodged as opposed to a completely new redevelopment plan; and

· All other redevelopments in which case a redevelopment plan is required together with the support of a special resolution.

New Disclosure Regime

The Act introduces a mandatory disclosure regime for unit title developments as follows:

· upfront pre-contractual disclosure by the seller of a unit before a buyer enters into an agreement;

· pre-settlement disclosure by the seller to the buyer; and

· additional disclosure (where requested by the buyer within the specific time frames).

The original owner or developer must also make a “turnover disclosure” to the body corporate once that original owner (or its associates) ceases to be in “control” of the body corporate (by exercising 75% or more of the votes at a body corporate meeting).

The following are the key aspects of the disclosure regime:

The disclosure provisions of the Act apply irrespective of when the sale agreement was entered into – so both existing and future sale agreements are affected. However, sales of units that settle on or before 27 June 2011 do not have to comply with the disclosure requirements - but all others do.
The regime is mandatory and any attempt to exclude or limit a seller’s obligation to disclose has no effect.
Disclosure statements must be dated and signed by the seller or an authorised agent of the seller.
If, before settlement, the seller becomes aware of any inaccuracies in any of the disclosure statements provided to a buyer, the seller must provide another disclosure statement correcting those inaccuracies.
Differing remedies apply according to the disclosure obligations with deferring of settlement or termination allowed where post-contractual disclosure is not made on time.
Developers and sellers will be responsible for ensuring that the disclosure statements provided are accurate as the new Act provides that buyer’s are entitled to rely on the information included.

Body Corporate Powers and Duties

The Act prescribes the powers and duties of the body corporate to operate and manage a unit title development. Many of these are mandatory and can not be varied or excluded. It is no longer necessary to provide for these powers and duties in a body corporate’s rules.

From 20 June 2011 these mandatory duties and powers will override any corresponding provisions of the existing body corporate rules.

The duties and powers set out in the Act and Regulations include:

Insuring the property;
Repair and maintenance of the common property;
Establishment of funds and accounts (as noted above, some funds are optional);
Levying contributions from owners;
Record keeping and financial statements;
Calling meetings;
Keeping a register of members;
Fixing ownership and utility interest; compliance with body corporate operating rules; and
Spending, borrowing and investing of money.

Body Corporate Operational Rules

Standard (but short) body corporate operational rules are set out in the Regulations and these apply to every body corporate. They cover matters including restrictions on parking, noise, recycling and rubbish. However, a body corporate can amend, revoke or make additions to the body corporate operational rules at any time after the unit plan is deposited.

It is important to note that a body corporate’s operational rules must be consistent with the provisions of the Act and Regulations and no powers or duties may be conferred or imposed on the body corporate that are not incidental to the powers and duties conferred or imposed on the body corporate by the Act (see above).

Existing body corporate rules can continue to apply until 1 October 2012. Existing body corporate’s have that time to review their rules against the new requirements and have appropriate resolutions passed, for example, to make any necessary amendments to reflect the new rules. If this is not done the new rules will apply as from 1 October 2012.

Body corporate’s should consider whether there are benefits from being an early adopter of revised rules.

Service Agreements - Developers’ duties to the body corporate

The new Act imposes obligations on developers relating to agreements between the body corporate and third parties while the developer still controls the body corporate. Specifically, developers must exercise reasonable skill, care and diligence and act in the best interests of the body corporate in ensuring that any service contracts entered into are fair and reasonable and appropriate in all the circumstances. A developer may be liable for damages if it fails to meet these obligations. A court may also terminate such service contacts if it is considered they are harsh or unconscionable.

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