Ways To "End" A Strata Scheme

Mascot Towers case study on termination of strata scheme and collective sale

Introduction

Once a strata scheme is created on registration of the strata plan, an owners corporation will only be able to "end" the strata scheme in limited circumstances.

The Mascot Towers is a "cautionary tale" of what owners corporations should look out for when relying on Parts 9 and/or 10 of the Strata Schemes Development Act 2015 (NSW) (SSDA) to "end" their strata schemes.

Termination of the Strata Scheme

In 2019, Mascot Towers was deemed unsafe because of structural defects. Owners evacuated and were given a significant bill to rectify the defects.

The costs to rectify the defects were too costly for the owners corporation to bear and the owners corporation of the Mascot Towers attempted to terminate the strata scheme under section 135 of the SSDA. That was unsuccessful.

The Owners – Strata Plan No 80877 v Lannock Capital 2 Pty Ltd [2023] NSWSC 1401

The owners corporation of the Mascot Towers sought an order from the Supreme Court of New South Wales to terminate the strata scheme under section 136 of Part 9 of the SSDA, permitting the owners corporation to be wound up and a liquidator appointed to sell the building to a developer.

The orders sought by the owners corporation would have enabled the lot owners to be absolved of their obligation to make any further contributions towards the owners corporation's debts (other than from the sale proceeds) including the debt owed to Lannock Capital 2 Pty Ltd who lent money for the specific purpose of funding the rectification works. In other words, the Court was asked to treat the owners corporation as a limited liability company being wound up in insolvency.

The Court refused to terminate the strata scheme and decided that a strata renewal process of collective sale under Part 10 of the SSDA was more appropriate for the following reasons:

1. there was no evidence that the owners corporation could not pay its debts as required, and so the owners corporation was not insolvent;
2. the Court was not satisfied that the owners were sufficiently or correctly informed of the costs of rectification and the value of the building if repaired;
3. this was not a straightforward case where termination of the scheme and demolition of the building was inevitable; and
4. the termination power ought to be used sparingly. There is limited precedent in these matters but the precedent under historical legislation and respected academic commentary did not favour exercise of the termination power in these circumstances.

The Court refused the application to terminate the strata scheme.

Collective Sale

A collective sale of a strata scheme means the sale of the whole strata scheme in one transaction. It is a way to end (renew) the strata scheme.

Part 10 of the SSDA sets out the legal framework for collective sales. There have been changes to Part 10 of the SSDA since our article on strata renewal process here.

Below is a summary of the key changes recently made to Part 10 of the SSDA pursuant to Strata Legislation Amendment Act 2023 (NSW) (Amendment).

Summary of the Strata Legislation Amendment Act 2023 (NSW)

The Amendment incorporates several key changes to Part 10 of the SSDA, set out as follows:

• the Amendment extends the operational period of Strata Renewal Committees from one to two years in section 166(a) of the SSDA;
• the Amendment requires the Land and Environment Court (LEC) to consider whether a person objecting to the application for strata renewal is acting in good faith under section 182(4B) of the SSDA. This was not previously included in the SSDA.
  Note that the Amendment also expands the disclosure obligations under section 165 of the SSDA so that full disclosure of conflicts of interest must be given to the owners corporation by a person nominated for election as a member of the strata renewal committee or a member of the committee; and

• the Amendment allows the LEC to disregard whether there is a defect or irregularity when considering whether or not to approve a strata renewal under s182(4A) of the SSDA, provided the defect or irregularity has not caused and is unlikely to cause substantial injustice. This was not previously included in the SSDA.

Issues with collective sales

Even if the required level of support is obtained in the approved form from owners of at least 75% of lots (excluding utility lots) in the strata scheme, and an application is submitted by the owners corporation to the LEC for an order to give effect to the strata renewal plan after passing a resolution at the general meeting, the strata renewal plan may still fail if there is just one dissenting owner objecting to the application under section 180 of the SSDA.

For example, in the 2019 failed sale of 1-3 Cottonwood Crescent and 2-4 Lachlan Avenue in Macquarie Park, the dissenting owners filed an objection to the collective sale, and the owners ultimately chose to abandon the collective sale where they would risk further legal costs without any assured outcome.

The collective sale process is cumbersome and can be costly.

Final solution to the Mascot Towers saga

Given the "exceptional" situation of the Mascot Towers, the NSW Government ultimately stepped in and facilitated a "collective sale" deal with the owners (with the exception of 18 owners who opted out).

The Government also negotiated with lenders to provide up to 40% mortgage discounts for owner-occupiers, while investors will receive up to $120,000 in means-tested support payments.

The package was aimed at assisting owners in the Mascot Towers to move on from the crisis, although it was not well received by all of them.

Key takeaway

"Ending" a strata scheme under SSDA Parts 9 or 10 requires navigating complex legal and financial processes. The Mascot Towers case demonstrates the importance of considering both termination and collective sale options carefully.

Proposals for strata renewal plans must also be prepared prudently to minimise the chances of owners dissenting to the collective sale.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.