Like everything in life, buildings are not built to live forever. With constant maintenance, upkeep, major renovations and eventually some structural improvements, we extend the life of those buildings to beyond their life expectancy.
Of course the life expectancy of each building is subjective, depending upon the quality of construction and the type of materials used. Some buildings are built to last 50 years, while other may have only been forecast to stand for 30 years.
There comes in a time in every buildings life when people will question whether this money spent on “improving” the structural integrity and aesthetic qualities of a building would be better served by a total redevelopment.
As property investors, we need to be aware of this issue and the major decisions we face to either “renovate or detonate”. As a unit owner you not only own the unit in which you live, but also you share ownership with all the other owners in the common property and assets of your Owners Corporation or Body Corporate. To keep propping up these diminishing assets can be a very expensive exercise.
Recently I have seen these costs escalate, with investors struggling to meet the rising tide of costs that are required to keep the building looking “fresh” but more importantly structurally sound. In one instance owners have been required to contribute $60,000 each towards these improvements. That is a massive dent in anyone’s cashflow and as a result the unfortunate property investor could cause serious financial difficulties. This begs the question as to whether the strata scheme is worth the upkeep.
However the alternative as it currently sits is limited and very difficult to achieve. That alternative is either voluntary or compulsory acquisition. Voluntary acquisition consists of a developer approaching all the owners and everyone agreeing to meet the market in terms of selling their unit to the developer at an agreed price. As you can appreciate for any number of factors this rarely occurs. Unwillingness to move home, unrealistic sale prices, bargain hunting developers, and a desire to be the “last man standing” so that the developer will pay over and above the odds are but a few of the difficulties any strata scheme faces when considering redevelopment.
Compulsory acquisition is when all or some of the owners within a building are forced to sell their property. As it currently stands there is not one state in Australia which has any meaningful legislative framework to support compulsory acquisition. Why? Politicians have two conflicting images. One is a 75 year old lady, a touch of blue rinse in her perm, conservative long dress, tweety in birdcage firmly in hand, being unceremoniously evicted by a rapacious developer, from her home unit of 30 years.
The alternate image is that of the same lady, birdcage in hand, sitting on her balcony, when finally the building succumbs to being riddled with concrete cancer, sending the lady, tweety and a tonne of rubble to the ground. The force of each of these images keeps our politicians in a state of constant inertia.
Whilst it is often argued that common sense in these situations prevails and voluntary redevelopment occurs before the building enters a complete and utter state of disrepair, history shows this is very rarely achieved.
Voluntary acquisition requires ALL owners within that building to agree to sell at a price that is fair to them. The frustration of redevelopment being rejected by one or two owners results in maintenance budgets becoming meaningless. The complex degenerates into a “ghetto” thus affecting the sales of units, the building fails to attract good tenants and unless there is a speculator who is consolidating units within the building, values of the units become affected.
A few years ago I had a client who owned Management Rights in an older, somewhat tired building. Developers managed to secure adjoining sites, leaving only this one building in their sights to be able to control the entire block in order to construct what would become the world’s tallest residential building of its time, Q1 on the Gold Coast. Unfortunately for our client and the other 27 odd owners within the building, one little old lady refused to be bought out, no matter the price, as it had been her home for 30 years. No one could argue her right to her “castle”. However the remaining 27 owners were forced to endure 3 years of living in a construction site, dust, drilling, jack hammering and large cranes, just some of their daily nightmare. Those same owners continue to live in a virtual shadow, dwarfed by a massive, first class and iconic building next door.
Those poor investors have endured 3 years of virtually no income on their investments and a vastly reduced value of their units forever. So while the lady retained her “castle” the remaining owners suffered financial ruin, all because one owner was never going to budge to the demands of the developer and the overwhelming interests of her fellow owners to redevelop.
The ability of one owner to hold out on redevelopment is at times an intended strategy. The refusing owner might want to extract the ultimate sale price by being the last person the developer needs to buy out and therefore they receive a premium for their unit. Often this competition to be the last agreeable owner is hard fought, meaning that there remain multiple owners trying to employ this strategy. Almost certainly this will end in the developer’s frustration, as the each owner’s contracts are subject to each and every other owner agreeing to sell. This means that the deal falls over and the dilapidated building remains. Those other owners have thrown away their legal costs all for nothing.
Knowing that the current laws require unanimous consent to re-develop, street smart property investors have taken advantage of this loophole. A property developer will often purchase a unit in a building many years before they are ready to consolidate their purchases. That purchase ahead of time acts as a “blocker” on other developers wanting to acquire those units to commence construction. This often leads to a situation where two developers are at loggerheads, resulting in neither being able to acquire all units and no redevelopment occurs.
I have also seen situations where all of the owners in building A contribute funds to a company. That company then purchases a unit in building B which has a particular strategic position, maybe directly in front of Building A. This means that it is impossible for Building B to be redeveloped, thereby protecting the views or amenity of Building A and its owners.
Surely this wasn’t the intention of governments in protecting the rights of land holders from greedy developers overtaking and bullying their way into forcing the little old lady from her home? With a necessity on higher density living and the real risk of dilapidated buildings becoming a hazard for the owners and the community, we need to be able to balance the interests of owners from being unfairly bullied by developers, with the sensible need to redevelop and rejuvenate suburbs.
The Current Laws
In New South Wales a vote of over 75% of owners to sell can force the remaining owners to sell their lots. This law has been in place since November 2016 and in those 12 months, some strata schemes have forced the minority owners to sell. The legislation appears to be working with some success.
In Queensland the decision to terminate must be unanimous, meaning all owners within a building must agree on this course. Whilst this may be a desirable outcome, what about the rights of the remaining owners who do not wish to face financial ruin because of the stubbornness of the absolute minority?
A QUT discussion paper issued some years ago has sought the views of industry on this hot issue. It is widely expected that at some point in the not too distant future, government will adopt the recommendations from QUT to lower the required vote from 100% to a lower amount. Our information is that Queensland will very likely follow NSW and apply the 75% vote to force the minority owners into a sale.
Proposals for Reform
Countries such as the United Kingdom and Singapore provide guidance and models of ways we can counter this issue. The Property Council of Australia has also provided a framework for resolution; however they are largely looking to follow the NSW example, which may not be perfect.
An alternative looked at is that the Scheme would be required to put together a proposal to redevelop. A majority of owners who have decided that redevelopment needs to be explored could trigger the Owners Corporation or Body Corporate to action.
This should also be coupled with the original developer allocating a life expectancy of the building so that people buying into the building originally are aware that the life span of that building is not endless. This would be disclosed to buyers whenever purchasing within the building.
When the life expectancy of the building is approaching, a majority vote of owners can determine the avenues to be explored for that building.
Once that proposal has been explored and owners have had an opportunity to consider, then the next step would be for owners to vote on a redevelopment. Most discussions focus on what level of support from owners would be required for redevelopment to occur.
Some say that 90% is the level we should be looking at, while others say 75% is more realistic. The answer appears to be a combination of those levels.
Once the disclosed life expectancy of the building has been reached, a vote of 75% seems fair. Prior to that only the support of 90% can trigger redevelopment.
If it were to be 90% regardless, then this would effectively mean that the current difficulties continue. In a small scheme of say 10 owners, the 90% level would effectively mean that one owner could block the redevelopment. At 75% this would mean that too few can decide a major issue for all owners without their consent, particularly where a power bloc of owners who hold multiple units exist.
If the threshold is reduced from the current 100% levels, there will be of course occasions where a minority is dissatisfied with the approval to redevelop. In these instances a form of review is inevitable and warranted.
What we need to avoid is a lengthy and costly “appeal” process, where Courts are given powers to decide if the minorities’ interests should prevail. A review process should look at a certain criteria that can determine if the redevelopment is in the interests of the collective owners.
The policy and law makers should consider setting a framework of criteria which considers the following for any review:-
- Adequacy of compensation, not only for owners but for mortgagees, lessees and other interested parties
- Financial benefits and disadvantages
- Financial capacity of owners to maintain the building
- Lifestyle issues
- Loss of amenities
- Planning policies
- Safety issues
- Social benefit
- Social dislocation
- Structural adequacy of buildings
Ultimately consumer protection will need to prevail and therefore any compensation paid to non-consenting owners must be fair market value. The difficulty with this is what a registered valuer will determine what the unit is worth. Is it taken to be valued at pre-redevelopment vales or at some other point in time? Is it to be construed as a forced sale valuation? Can the owner expect to receive a premium like other owners who sold out to the developer?
These are issues that need to be considered carefully but are certainly not insurmountable. Currently a similar process exists for resumption of land for government use such as the construction of freeways. Therefore it is within the realm of possibility but needs to be carefully and properly explored.
Simply applying the “me too” theory and following NSW might ultimately not balance the competing interests that are in play in this sensitive and quite emotive issue.
Progress on this issue has been largely stifled over the last few years, but with our state election less than a week away, we will likely see a renewed vigor for this legislative change whoever wins at the polling booth.
Watch this space, as 2018 is likely to be the year that strata termination reform finally arrives for home owners and property investors in Queensland.
Authored by Clayton Glenister, Managing Partner MBA Lawyers.