Subdividing a Mixed-Use Building – Key considerations for Developers & Project teams

Written by Holly Westcott, Senior New Development Specialist at Netstrata, and Robert Monteath, Director at Monteath & Powys.

INTRODUCTION 

It is very common in the industry today for new development projects to incorporate a variety of different components such as residential apartments, retail shops, food and beverage stores, commercial offices and even local council purpose-built spaces such as youth centres and libraries. 

In the past these entities were often kept separate, however, it is now common practice to have a mix of different uses within the same building and the interests of all those uses must be considered during the subdivision of the building. 

It is therefore important that developers and their teams have a basic understanding of how the development will operate and function after its completion. It is paramount that the interests of all of the different users of the building are equally safeguarded. 

The first step in the right direction is to engage specialist strata consultants, lawyers and a surveyor to address the question “how can I best subdivide my project to ensure everyone is happy?” To answer this question, it is necessary to consider the two most common ways in which the building can be subdivided. They are: 

1. Mixed-use single strata scheme; and
2. A stratum subdivision of the building with then one or more strata schemes. 

MIXED-USE SINGLE STRATA SCHEME 

To subdivide a building into strata units has been possible for many years. In the past buildings built for a sole purpose be it residential, commercial or industrial have been subdivided by a single strata plan. Under certain circumstances, it is possible to successfully subdivide a mixed-use building by a single strata plan. 

Such circumstances are when a predominantly residential building contains one or two small commercial or retail tenancies. See Diagram No 1. 

In such a building, the interests of the residential and commercial occupiers can be addressed in the strata by-laws. These interests include: 

• For the commercial owner to use some of the outdoor common property for seating. 
• The commercial owners right to affix signage to the exterior of the building. 
• For the separation of costs: 
• For the kitchen exhaust or grease arrestor for the commercial operator to be maintained solely by the commercial operator. 
• If the ground floor commercial operator does not use the lift, then that operator is not required to pay for the operation and maintenance of the lift. 
• The common property facilities provided for the residential occupiers such as barbecue area, swimming pool and gymnasium are only to be used by the residential occupiers. 

If the by-laws are drafted properly, then the operational concerns and cost separation can be effectively mitigated for both residential and retail / commercial purchasers. 

Such by-laws can be drafted by very experienced strata consultants and specialist strata lawyers. Due to the current conveyancing disclosure laws, it is imperative that a developer engages with these professionals prior to marketing the development. The strata consultant can review the architectural plans for the building and determine the appropriate by-laws to be drafted so that all owners and occupiers of the building have their rights protected. 

The strata scheme is then governed by the Owners Corporation in accordance with the Strata Schemes Management Act 2015 and the schemes by-laws, once registered. 

STRATUM SUBDIVISION THEN STRATA SUBDIVISION OF A BUILDING 

The other method of subdividing a building includes a stratum subdivision of the building followed by subsequent strata subdivisions of parts of the building. This method of subdivision is typically used where a building has a large residential component as well as a large commercial or retail component. These buildings may contain a shopping centre with a food court and / or several floors of offices. This type of building is likely to have a loading dock. Diagram No 2 is a cross-section of such a building. A stratum subdivision can also be used for smaller developments or developments with smaller commercial or retail components, however a developer should seek the advice from their specialist team when weighing up the pros and cons. 

To enable the different needs of the various occupants to be accommodated, a large mixed-use building can be subdivided into stratum lots, each of which can be sold or further subdivided by a strata scheme. Diagram No 2 is a multi-storey building on a city block containing a car park with two underground levels, retail outlets at ground level, followed by four levels of office space and finally, 11 floors of residential units at the top of the building. The residential units and some of the car park may form a separate strata scheme subdividing one of the stratum lots while leases may be created for the commercial offices and / or shops comprising the other stratum lots. 

As mentioned above, the ongoing operation of a strata plan is governed by the Owners Corporation, the Strata Schemes Management Act 2015 and the schemes registered by-laws. 

When a building is subdivided by a stratum plan (then strata plans), the overall building is governed by a Building Management Committee and the Strata Management Statement which is registered at NSW Land Registry Services. Each owner of a stratum lot is a member of the Building Management Committee which manages the building in accordance with the Strata Management Statement. 

Just as an Owners Corporation looks after the common property within a strata scheme, a Building Management Committee looks after the shared facilities within a stratum subdivided building. 

Shared facilities are those parts of the building which are used by most, if not all, of the owners and occupiers in the building. For example, if there is a basement car park containing the car parks for all of the stratum lot owners, then the entrance and access down to the basement car parks would be classified as a shared facility. Other examples of shared facilities would be the integrated fire security system for the building, the insurance of the entire building, the disposal of waste, the main electrical switchboard, the main telecommunication room etc. 

The drafting of the Strata Management Statement and its schedule of shared facilities requires a great deal of care and involvement of specialist strata consultants and lawyers. 

Before such a project is marketed, it is essential that these consultants are called upon to review the architectural design plans in order to make recommendations as to: 

• How many stratum lots are required in the building and the boundaries of these stratum lots. 
• Determine the shared facilities for the building and allocate the percentage of costs that each lot will contribute for the operation of those shared facilities. 
• Prepare the Strata Management Statement. 
• Prepare the subsequent strata plans and strata by-laws for each of the stratum lots to be subdivided by strata plans. 

CONCLUSION 

Every project is different. In determining what is best for you or your client, you must consider a cost benefit analysis, taking into consideration the nature of your project and what outcomes you are hoping to achieve. 

Some considerations include: 

• Flexibility – is it important to have the option to sell your commercial or retail lots together in one line or individually? Do you have any major anchor tenants who have specific requirements as part of their operations which need to be addressed? 
• Timing – is it important to you to be able to deliver your development in different stages and to make changes within those stages? 
• Cost – what allowances have you made within your budget for the required consultants and documentation required? You may need to weigh up the different costs of engaging the right consultants to prepare the various management documents and the ongoing management costs once complete. 
• Disclosure – have you already marketed your project? Under the new disclosure requirements in the Conveyancing Act, it is important to assess what has already been disclosed to the market and what implications there may be for changes to your titling strategy which may result in a perceived ‘material change’. 

The end user or customer must be considered when deciding your titling strategy, and it is very important that you have engaged the right consultancy team to ensure that the considerations of these important stakeholders are adequately thought through early, to ensure the ongoing success of your project upon completion.