Truth v myth; the must know facts about buying company title: Brad Caldwell-Eyles

There are many myths associated with company title property ownership and most are not positive. You will often hear statements like “I wouldn’t touch company title with a barge pole”. For some – this is a valid and educated position; for others it is a form of hysteria born of ignorance and misunderstanding.

Make no mistake – there are a number of issues pertaining to company title property ownership that can be vastly less than ideal. Before addressing the pros and cons we should understand just what company title ownership is and provide some comparison to the modern and now more customary strata title ownership.

Company title ownership was essentially the legal precursor to strata title. It allowed for the subdivisionof an apartment building so that there could be individual ownership of home units or flats. A company was formed and share parcels created. The company owned the building (and the land it occupied) and individuals could acquire specific share parcels. Each of these share parcels were linked to a respective flat (and/or other improvements such as a parking space or storeroom). The owner of a share parcel essentially became the tenant of the associated flat and was insomuch bestowed the exclusive and quiet enjoyment of the pertinent residential space. Their ownership is indeed that of shares and those shares are in a company formed specifically as owner of the building concerned.

To clarify this – let’s create a fictional building. Let’s call it “Park Royale”. Park Royale has 10 equally sized flats and the company Park Royale Pty Limited is the owner of the building. Park Royale Pty Limited comprises 1,000 shares and these are divided into 10 share parcels (ie one for each flat). Share numbers one to 100 are for flat #1; shares 101 to 200 are for flat #2 and so on. A buyer seeking to buy flat # 2 is actually buying shares 101 to 200 in Park Royale Pty Limited.

And now our story begins...

Strata title ownership offers a defined area within a building (ie as defined in a surveyed strata diagram). It is clear what area of the building and precisely what square metres you own. In almost all cases, no such diagram of specifically defined area exists for company title ownership (in very rare instances – company title buildings have prepared a survey diagram of the flat areas. This is very much the exception). In company title, one does not actually own a specific area of the building – rather they are buying shares in the company and the exclusive use of a particular flat.

As is normal with corporations law – Park Royale Pty Limited will have a constitution and articles of association. This will establish definitions and the manner and form of the company’s operation. Most of this detail is fairly standard; however amongst the articles of association and then the “house rules” you will find the level of restriction associated with this particular building. People often state “you can’t rent in a company title building” or “the banks won’t lend against company title”. These are generalisations that are sometimes true and sometimes completely erroneous. Here is a list of some of restrictions/allowances to look for when considering a company title purchase:

  1. Are there restrictions upon who may actually be approved to purchase the shares (eg does a minor criminal infringement preclude board approval)?

  2. Is renting of the flat allowed (ie sub-letting given you are already the ‘tenant’)? Some buildings completely prohibit renting (ie the shareholder must be in residence).

  3. If renting is allowed; are there restrictions?

    1. Is there an exclusion period of ownership before renting is allowed (eg no rental for first 12 months of ownership)?

    2. Is there a time limit to how long a flat may be let (eg four years then must be returned to owner/occupied)?

    3. Does the tenant need to be approved by the company board?

    4. Is there any control on the weekly rental price (minimum or maximum) that the flat may be leased for (eg some buildings may set a minimum rental price to ‘control’ the quality or calibre of tenant)?

    5. Do the articles limit or restrict the level of mortgage that may be taken against the shares (eg some buildings insist on certain levels of equity/deposit to purchase)?

    6. Are there restrictions upon the style/plan of any renovations to the flat (eg some buildings control the use of certain tiles/materials hoping to maintain character)?

    7. Can the board resume shares (ie if the board feels the owner is not ‘appropriate’; they can seek to resume the shares and force their sale essentially evicting the owner)?

Some company title buildings are very restrictive and others are essentially laissez faire. Some company articles specifically resolve in favour of renting and providing comfort to borrowers.

Having considered some of the issues that may arise within a specific company title building, we should also focus upon broader issues that are fundamentally significant to this type of share ownership. We return to the matter of owning shares versus a defined portion of real property.

 


Interestingly, until recent years, almost every company title sale by an agent was in contravention of the Financial Services Reform Act. This also applied to the majority of bank valuations upon such sales. When given due thought – the issue is somewhat obvious. Rarely is an agent nor a valuer also a holder of a Financial Services Licence under the Act. That is neither are licenced to represent a sale nor provide an a opinion of value for shares – which is precisely what is happening when selling and valuing company title properties. As the REINSW outlined:

“ASIC have identified this as an anomaly in the legislation and accordingly by Class Order [CO 00-213] has exempted real estate agents from the licensing regime under the Act in respect of the sale of company title property.

 

"Class Order [CO 05/1243] ensures that persons providing financial services by providing valuations of shares in real estate companies are not subject to the burdensome and inappropriate regulation under the financial services regulatory regime.

"The exemption recognises that the valuation of shares in real estate companies is equivalent to valuing and providing advice on the valuation of real estate, rather than providing financial product advice in relation to shares in a company.”

 

This concession by ASIC helped draw company title ownership a step closer to strata title by acknowledging that company title shares are relevant only to a specific piece of real property. Our fictitious Park Royale Pty Limited only owns “Park Royale” and shares 101 to 200 are specific to flat # 2. You can’t sell five shares (as you might sell part of a equity share portfolio on the stock market) and you as a shareholder in the company also have duties relating to the building and deposited plan as a whole (as a strata tile owner has with the common corporate body).

This was a small bonus; however the real “elephant in the room” which is not discussed often enough (especially between agents and buyers) is the issue of recourse or remedy.

What happens if there is a dispute or need for an interpretation within a company title building? If strata title – there are benchmark statutes and tribunal bodies for judgement and appeal. Company title buildings are governed ostensibly by Federal Corporations Law and the jurisdiction is court. Happily the Local Court Amendment (Company Title Home Unit Disputes) Bill 2013 means that many disputes may now be heard in the Local Court (previously the Equity Division of the Supreme Court action was required).

An owner who has a grievance or dispute that cannot be resolved “in house” must take their issue to court – a vastly more cumbersome, intensive and potentially costly exercise. When all is well in a company title building; as with everything – life is easy. When matters “go off the rails” – company title can be a horrible Pandora’s box.

For example – a young couple owned a two-bedroom company title apartment on the waterfront of Darling Point. By the time they had their second child; the apartment was simply too small for their family. They had owned the apartment for a number of years always as owner-occupiers. They decided to move out to a rented house and to try out a new area of Sydney. On this basis they decided to lease out their current apartment and enter into a two-year lease with another owner in the building (ie a board approved share holder) who also needed to upsize.

Whilst renting, the young family found a new house they wished to purchase; however they needed to sell their company title apartment to do so. A suitable buyer was found. The price was accepted and the buyer was deemed appropriate by the board. The issue was that the building restricted a new owner from leasing in their first 12 months of ownership. The subject flat still had 14 months to run on its lease. Insomuch the board refused the approval of the sale on the basis that its “house rule” concerning leasing could not be satisfied. The tenants were locked in and the board would not budge. The upshot is that the young couple were denied any opportunity to realise a sale and essentially meant that all of their property equity was tied up and not accessible.

Many appeals were made to the board with various undertakings about the intending new owner taking up residence the moment the tenants vacated and so on. The board was steadfast and an impasse was reached. It should be noted that the specific “house rule” had been varied over the years at the board’s discretion. The board could have easily approved the sale however it would not. The end of this story is happy – however it took a group of new board members being elected before the sale was able to proceed.

The events above may fall into the domain of an “oppressive board” as discussed in the 2006/7 New South Wales Law Reform Commission (NSWLRC) investigation into disputes in company title home units. The NSWLRC considered legislating company title ownership to more closely mirror strata title ownership in terms of rights and remedies available to shareholders.

It found that examples existed of individual or multiple shareholders feeling or actually being “oppressed” by boards (or members of). That is the board abusing its power and knowing that opposition would require involved court action. Some owners were found to be too frightened to oppose or speak up against a board or board member in fear of associated consequences or fall out. The initial board’s stance in the story outlined above essentially rendered the young family’s ownership with ‘zero equity’ and they were unable to move forward with their lives on the basis of the particular boards’ belligerent and unreasonable position on a unique anomaly.

Significantly – whilst the NSWLRC recommendations did result in some important revisions, there remained a view that company title ownership had its own particular idiosyncrasies and benefits that had appeal for a section of the home owning community and that the Commission was loathe to attempt a change upon a system that conferred a type of control that the majority of owners are aware of when making their purchase decision. Many owners relish the level of control over the approval of their co-owners or the limitation or complete prohibition of renters. It is this “quality control” that often appeals to intending company title purchasers.

 


Returning to the question of equity is a segue to the matter of mortgages or lending for a company title purchase. The fact remains that the sale concerned is that of shares and some lenders simply don’t lend for company title. It is an in-house risk and legal assessment and some institutions just don’t offer the requisite facility.

Other lenders do; however they may require a larger injection of upfront cash equity (ie their loan to value ration or LVR may be lower). In these cases lenders may only be prepared to lend 60 to 70% of the sale price – the balance needing to be paid in the form of a larger deposit. Having said that, some of the major lenders will allow an LVR of 80 to 85% with company title purchases (subject to the restrictions in the articles of association). Company title borrowing is certainly widely available; however not as easily as against its strata-title cousin.

Conveyancing for company title is another item to address. Whilst a contract will require council zoning and sewerage diagrams – these are pertinent to the overall building and deposited plan. The contract will require company financials; copy of the share certificate; the constitution and articles of association; special conditions and so on. Whilst being a sale of shares – there is no cooling off period applicable. That is the sale is essentially unconditional and no 66W certificate is involved.

Essentially unconditional is the case in so far as most company title share sales involve a special condition that the sale is indeed subject to the company board’s approval of the purchaser and transfer. The purchaser cannot “cool off” and they are obligated to conduct their best endeavours to satisfy the board’s inquiries; however until the transfer is approved – the sale remains conditional.

Having given attention to all of this; what is the attraction to owning a company title home unit? One significant factor is that of actual value for money. Despite all of the ‘baggage’ that may be involved; the silver lining is that purchase prices are often lower than buying strata title. I regularly hear comments like “company title is 10% lower” which is actually a complete shot in the dark. A much broader context applies – not the least is the market expectancy. That is whether or not company title is a regular or expected event within a certain market place. If one considers Potts Point or Elizabeth Bay then company title is very much regular place and a large proportion of wonderful art-deco buildings in this area are indeed company title.

There is often a certain cache attached to company title in these areas. They are reminiscent of the elite New York co-operative buildings filled with celebrities and the mega-rich. Often these New York buildings are cash only ownership and approval is a genuine ordeal with new owners having to provide vast details of their personal history and financials. The postcode 2011 isn’t at these exclusive levels; however buying company title in Potts Point/Elizabeth Bay isn’t nearly the impediment that the solitary company title building in Dover Heights might present.

This Eastern Ave block is a surprise stand alone amongst a deluge of neighbouring strata title lots and is often met with “Company title? Out here? What?”. This building is assisted by a very ‘helpful’ set of articles of association; however it definitely suffers price-wise against its competing strata title offerings. A company title flat with restrictive articles not in an “accepted” locale will incur significant buyer resistance which is usually only offset by a genuine price advantage.

The message in all of this is that company title ownership is quite distinct from strata title apartment ownership. Strata title is a vastly more uniform pursuit with clear rights and obligations and opportunities for recourse in the event of dispute. Company title may represent a saving in the upfront purchase and it may offer an improved level of “quality control” for owner occupiers.

Each instance is quite specific and particular due diligence is required on a case by case basis. In certain situations (such as owning in a grand building in Potts Point or Elizabeth Bay) there is almost no avoiding it. Company title ownership shouldn’t be treated as ‘buyer beware’ – instead it’s more a case of ‘buyer be aware’.

 


Brad Caldwell-Eyles is a principal at 1st City - Hasemer+Caldwell-Eyles.

 

 

 

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