Did you know, for example, that in buying a strata title property, you will become a member of a corporate body called an owners' corporation and that membership of this corporation will involve you in assuming certain obligations, duties, restrictions and liabilities, as well as conferring on you various rights, entitlements and privileges (apart from the ownership of your unit)?

Once you become a member of this organisation (after you have purchased the unit) you must comply with the requirements of the Strata Titles legislation, the regulations made under that legislation, and the by-laws (or house rules) of the particular strata scheme. If you don't, you could face very substantial fines and penalties.

For this compelling reason, if for no other, you should acquaint yourself with those requirements. You need to know:

• What those requirements are.
• What they mean.
• What you need to do in relation to them.
• What you cannot do, by reason of their existence.
• Where you can find out more information concerning them.
• What you can do if you cannot understand or interpret them yourself and who can help you in that case.

HOW IS THE OWNERS’ CORPORATION CONSTITUTED AND TERMINATED?

CONSTITUTION

When a strata plan is lodged for registration with the Registrar-General at the Land and Property Information NSW (LPI), a newly created legal entity comes into existence. This corporate body is now known as the owners' corporation. Previously it was called the body corporate. The owners' corporation comprises all the lot owners from time to time in a strata scheme.

On registration, the LPI allots a registered strata plan number which relates to the strata scheme. The owners' corporation is then known as “The Owners-Strata Plan No.X” (“X” being the registered strata plan number allocated by the LPI, which relates to the strata scheme).

When the strata plan is registered the by-laws for the strata scheme are brought into existence and apply from the time of registration. Each lot within the strata scheme is allocated a lot number in the strata plan with a corresponding unit entitlement.

The owners' corporation is constituted or created under Section 11 of the Strata Schemes Management Act 1996 (the Act).

The following example will help you understand the process:

Developer Pty Limited constructs a residential flat building consisting of 7 apartments. Once the building is complete, a surveyor draws up a draft strata plan showing the location of the land and the blue print of the building, draws the boundaries of each apartment and numbers them 1-7.

The plan also sets out each apartment’s share of the common parts of the building or unit entitlement. If the local council approves the building as constructed in accordance with the Building Code of Australia and the Development Approval and Construction Certificate, the Council will endorse the plan which is then lodged at the LPI. If the title and the draft strata plan are in order, then the plan is approved, registered and allocated a strata plan number.

It is this act of registration at the LPI which brings the owners' corporation and by-laws into existence. At this point in time, each of the 7 apartments are allocated a separate legal title corresponding to their lot number in the strata plan. Their corresponding unit entitlements may be set out as follows:

LOT     ENTITLEMENTS     OWNER

1                 3                     Developer Pty Ltd

2                 3                     Developer Pty Ltd

3                 4                     Developer Pty Ltd

4                 5                     Developer Pty Ltd

5                 5                     Developer Pty Ltd

6                 5                     Developer Pty Ltd

7                 8                     Developer Pty Ltd

Total = 33

The difference in unit entitlements is due to the fact that the units are not all valued the same. In the above example, Lot 7 is a penthouse apartment having twice the floor area of other units and a double garage. Lots 1 & 2 are ground level one bedroom apartments with a single car garage.

As the apartments are sold, each new owner takes title to the particular apartment and becomes a member of the owners' corporation with the corresponding unit entitlement, for example, for apartment 7 this would be 8/33rd.

TERMINATION

Once created, an owners' corporation continues to exist until such time it is wound up either:

• following a termination order made by the Supreme Court of New South Wales; or
• recording in the register at the LPI a termination order by the Registrar-General.

In the latter case, the owners' corporation will be terminated once the Registrar-General receives:

• a Request Form executed by all owners and parties who have genuine interest in the title (such as caveators, registered lessees, mortgagees, chargees, and the local council); and
• the Request Form must state that the owners' corporation has no outstanding debts, such as land tax or water rates.

You can buy copies of the Strata Schemes Management Act 1996, the Regulations and any amendments from the Government Information Service. 

WHO IS THE ORIGINAL OWNER AND WHAT IS THE INITIAL PERIOD?

ORIGINAL OWNER

The original owner is considered to be the owner of the strata scheme at the time the strata plan is registered, and is usually the builder or developer.

From the time the strata plan is registered, initially the original owner will control the owners' corporation, as it initially holds all of the owners’ voting power in the strata scheme. This is shown in the above table setting out the respective unit entitlements in the example.

However, the Act imposes on the original owner restrictions and duties during the initial period. This is to ensure a viable management structure is in place for the benefit of initial purchasers or incoming owners of lots in the strata scheme who might otherwise possibly be prejudiced by decisions made by the original owner in the self-interested exercise of its majority voting rights.

Some of the more significant restrictions imposed on the original owner during the initial period include the following:

• it must not change or cancel the by-laws or make additional by-laws that do not give a right or obligation to all owners or all lots
• it must not alter the common property (except under a development contract)
• it must not incur a debt for more than what is set aside in its funds to repay
• it must not borrow money or give securities
• it must not appoint a strata managing agent to continue after the first Annual General Meeting (AGM)
• it must not sell any common property

The principal duties imposed on the original owner during the initial period include the following:

• it must fullfill the duties of the owners' corporation contained in the Act, regulations and by-laws, but subject to the restrictions
• it must exercise and perform the powers, authorities, duties and functions of the chairperson, secretary and treasurer of the owners' corporation, until such positions are filled or the expiry of the first annual general meeting, which ever happens first.
• it must convene and hold the first annual general meeting of the owners' corporation in the prescribed manner within 2 months of the expiry of the initial period
• it must deliver to the owners' corporation at the first annual general meeting certain plans (ie building, engineering & drainage), specifications (ie building contract & land survey), diagrams (ie location of pipes, wires, cables or ducts) and other documents.

The above restrictions and duties assist to allow for a smooth transition in the control, management and administration of the strata scheme from the original owner to the incoming purchasers.

However, due to the complicated and rigid nature of the restrictions and duties imposed on the original owner, the Act allows the original owner to appoint a strata managing agent to undertake such duties and advise on the restrictions. In practice, most original owners do exercise this privilege, particularly in medium to larger developments.

INITIAL PERIOD

The initial period is the period commencing on the day the strata plan is registered (when the owners' corporation is created) and expiring on the day when there are owners of lots (other than the original owner) in the strata scheme, whose total unit entitlements are equal to or exceed one-third of the aggregate unit entitlement.

Therefore, when there are owners (other than Developer Pty Limited) of lots 5, 6 & 7 in our example the initial period would expire as the combined unit entitlements exceeds 11, (which is one-third of the aggregate unit entitlement of 33). Any other combination where the unit entitlements together total 11 or more is sufficient for the initial period to expire. After that time, the original owner is no longer bound by the restrictions and duties applying to it during the initial period.

Conversely, if there are owners (other than Developer Pty Limited) of lots 1, 2 & 3 only, the initial period would not have yet expired as their combined unit entitlements amount to 10, which is less than one-third of the aggregate unit entitlement of 33. In this case, the original owner is still bound by its initial period restrictions and duties.

In practice, the expiration of the initial period will vary depending on how quickly or slowly the original owner sells the lots within the strata scheme. Therefore the initial period could expire within a couple of weeks after registration, or within a year or more, or may never expire if the original owner has not sold any lots, or lots whose combined unit entitlements amount to less that one-third of the total aggregate unit entitlements.

For example, a family company which is the original owner may have no intention of selling all the units, but simply to keep all or most of the units for rental income and capital gain.

To determine the exact day when the initial period expires, the original owner or an appointed agent must check the strata roll, to ascertain when there are owners whose unit entitlements total at least one-third of the aggregate unit entitlement.

From the day that the initial period expires, it is the original owner’s obligation to convene and hold the first annual general meeting. The meeting must be convened within 2 months from the date of the expiration of the initial period. 

FURTHER INFORMATION

This Information Outline is provided courtesy of Yandell Wright Stell who are experienced in this area of law. They are located at Level 5, 139 Macquarie Street SYDNEY NSW 2000 or call them on (02) 9252-2278 if you would like more information on this legal topic, or you wish to obtain formal advice regarding your situation.

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