First Collective Sale Approved by the Land and Environment Court

First Collective Sale Approved by the Land and Environment Court
First Collective Sale Approved by the Land and Environment Court

Introduction

The new strata laws which commenced on 30 November 2016 introduced laws concerning strata renewal. Those laws enable a developer to acquire or redevelop a strata scheme with the agreement of at least 75% of the owners and the approval of a court order. Those laws were novel in Australia and attracted much media attention. But up until recently no one had succeeded in using the strata renewal laws to acquire a strata scheme without the agreement of all of the owners. On 8 August 2019, the Land and Environment Court approved the first collective sale of a strata scheme under the strata renewal laws. In this article we discuss the key points to take away from the case.

Seasons Harbour Plaza Case

The case involved a serviced apartment strata scheme at 252-258 Sussex Street, Sydney. The scheme contains a 25-level building with 119 serviced apartments, a café, hotel reception and a lobby, office, gym and basement carapaces. The apartments in the building are mainly leased to Seasons Harbour Plaza Pty Ltd which runs a serviced apartment business for all but one of the apartments in the building. The building is zoned “B8 Metropolitan Centre” under the Sydney Local Environmental Plan 2012. The owners of the apartments in the building are investors. Many of them do not reside in Australia.

The Collective Sale Arrangement

The owners corporation of the site elected a strata renewal committee to pursue a collective sale. The strata renewal committee appointed Colliers International as the sales agent for the collective sale of the site. Colliers conducted 4 rounds of expressions of interest to arrive at a final bidder for the site. The expressions of interest campaign resulted in bids from 16 bidders that ranged from $50 million upwards. The final sale price for the site was $81.1 million. That price was agreed in November 2017.

It was a record price. The court was satisfied that there was no pre-existing relationship between the owners of the site and the purchaser and that an arm’s length, competitive expressions of interest campaign had enabled the strata renewal plan for the site to be prepared in good faith. The court had to be satisfied that the strata renewal plan had been prepared in good faith in order to approve it.

 The Required Steps

The court also had to be satisfied that all the required steps for a collective sale under the strata renewal laws had been completed before it was able to approve the strata renewal plan. The court identified at least 9 steps which needed to be completed. Those steps commenced with the preparation and submission to the strata committee of a strata renewal proposal. The strata committee was then required to (and did) consider that proposal and refer the proposal to a general meeting for further considerations. At that general meeting, the owners were supportive of the proposal and formed a strata renewal committee. Written notice of that decision had to be (and was) given to all owners within 14 days. The strata renewal committee then prepared a strata renewal plan. The requirements of that plan are set out in strata renewal laws and are very prescriptive and include the preparation of valuations on 2 bases – valuations of the individual lots within the site and a valuation of the whole building and the site. After the strata renewal plan was prepared, the plan was considered and approved at a general meeting of the owners corporation by special resolution. The owners corporation decided to (and did) give the strata renewal plan to owners within 14 days of that decision.

At least 75% of the owners of the lots (excluding utility lots) had to support the strata renewal plan. Those owners had to (and did) provide written support notices consenting to the strata renewal plan within a certain period. The owners corporation was then required to (and did) hold a general meeting to pass a resolution to apply to the Land and Environment Court to have the strata renewal plan approved. The owners corporation then filed its application with the court. Ultimately, the court was satisfied that the owners corporation had completed each of the steps set out in the strata renewal laws.

Distribution of the Sale Proceeds

The strata renewal laws require the proceeds of any collective sale to be distributed among the owners in shares proportional to the unit entitlements of their lots. However, those laws also require each owner to receive an amount from the sale proceeds that is equal to or better than the compensation value of their lot as if the lot was compulsorily acquired by a Government authority. The valuation reports obtained by the strata renewal committee recognised that there was a disparity in values across the lots because, for example, the commercial lots had a higher relative value than the serviced apartments.

This would have resulted in the proposed distribution of the sale proceeds for some of the lots being less than the compensation value of those lots which the strata renewal laws require each owner to receive. In other words, the court recognised the tension in the strata renewal laws between the requirement (on the one hand) for the sale proceeds to be distributed among the owners in the same proportions as their unit entitlements and (on the other hand) for the distribution of the sale proceeds to each lot not to be less than the compensation value of the lot based on compulsory acquisition legislation.

The court resolved that tension by concluding that it could reallocate the unit entitlements in any manner it deemed fit if it considered that it was appropriate or necessary to do so in the circumstances to facilitate the approval of the strata renewal plan. This resulted in a small portion of the unit entitlements of each serviced apartment and car parking lot being reallocated to 5 commercial lots so that the owners of those commercial lots received an appropriate amount of compensation by way of disbursement of sale proceeds to them in compliance with the strata renewal laws.

Leases

There were a number of leases registered over the lots in the building. The strata renewal plan provided for the collective sale of all the lots in the building subject to those leases. The court concluded that where a strata renewal plan provides for a sale of a strata building with vacant possession any leases in the building will be terminated if the court approves the strata renewal plans. However where, as was the case here, vacant position is not required, the approval of a strata renewal plan by the court does not terminate any leases.

Contracts for Sale

The strata renewal plan that was approved by the court provided for the lots to be sold by way of a contract for sale in the standard form copyrighted by the Law Society of NSW and the Real Estate Institute of NSW with special conditions. The strata renewal plan proposed that contracts for sale would be exchanged within 5 business days of the court approving the strata renewal plan. The court saw nothing wrong with that arrangement and observed that the court’s order approving the strata renewal plan would be binding on the owners corporation, all of the owners and mortgagees and the purchaser under the strata renewal plan, City Hotel Enterprises Pty Ltd.

The Court’s Orders

The court made orders approving the strata renewal plan for the collective sale of all of the lots in the building. Those orders required each of the owners and the purchaser to exchange a contract for the sale of their lot within 5 business days of being served with a copy of the court’s orders. Those contracts provided for a 90-day settlement period. The court also reallocated the unit entitlements of the lots to ensure that the sale proceeds were distributed fairly among the owners. The court directed that the funds held in the administrative fund of the owners corporation be distributed to the owners in shares proportionate to their unit entitlements within 14 days of the termination of the strata scheme.

Conclusion

The Seasons Harbour Plaza case is the first time the Land and Environment court has approved a strata renewal plan for the collective sale of a strata building. The case highlights the care which must be taken to ensure that each of the steps set out in the strata legislation in relation to a strata renewal are completed correctly. The case also highlighted some of the problems in the strata renewal laws, particularly the provisions dealing with the distribution of sale proceeds among owners, and how the court intends to overcome those problems. The case will provide useful guidance for developers and owners corporations in relation to the strata renewal laws.

Jeremy Stone

Jeremy Stone

Jeremy joined Netstrata in 2001 and is now responsible for the organic growth of Netstrata where he works with new and existing schemes looking for higher quality strata management, and managing the transition process to Netstrata. Jeremy is a member of the Institute of Strata Title Management, National Committee Title Institute and the Urban Development Institute of Australia (UDIA) where he sits on the Strata and Community Title Development Committee. In 2010 Jeremy was a Finalist in the Inaugural Schindler Lifts ISTM Young Business Person of the Year.

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