The Owners Corporations and Other Acts Amendment Act 2021 (Vic) (“OC Amendment Act”) has now passed Victorian Parliament, and will take effect from 1 December 2021, with a number of changes to the current Owners Corporation Act 2006 (Vic) (“current OC Act”).
Setting up the most appropriate owners corporation structure in developments has become increasingly complex in recent times, particularly with an increase in the number of “mixed-use” projects, which involve not only traditional residential apartments, but also a variety of other products ranging from serviced apartments and hotels, to retail, office, childcare, and independent living units, as examples. The OC Amendment Act adds further layers of complexity to setting up an owners corporation structure for these projects, and developers need to understand the impacts of the recent changes on their duties to the owners corporations they create.
What are some of the main changes?
The OC Amendment Act amends a significant number of provisions in the current OC Act, as well as makes changes to the Subdivision Act 1988 (Vic) and the Retirement Villages Act 1986 (Vic). The main owners corporation changes for developers to be aware of include the following. : –
- Certain manager contracts are limited to three years
The term of an appointment of a manager of an owners corporation is limited to three years. Also limited to three years are other contracts that:
- are entered into by the applicant for registration of the plan of subdivision (Developer),
- relate to the owners corporation; and
- benefit the Developer.
Before the OC Amendment Act was passed, a carve out for hotels, and for resort management contracts relating to hotels, resorts and serviced apartment complexes, was incorporated in the current OC Act. As a result, the three year contract limit does not apply to those types of contracts.
This particular amendment also appears not to capture:
- contracts entered into by a third party, who is not the Developer, that relate to the owners corporation; and/or
- contracts entered into by the Developer which do not benefit the Developer – such as where the contract benefits a third party.
Therefore, contracts entered into by the owners corporation and a related entity of the Developer would, on one reading of the OC Amendment Act, not be limited to 3 years. However, a developer should be mindful of its overarching statutory duty to act in good faith towards the owners corporations it creates, and of the case law around Developers being caught burdening owners corporations with onerous contracts. Make sure you contact us for advice on the best structure and the nature of the documentation to be entered into.
- Use of certain terms in the contract of appointment of a manager of an owners corporation
The use of certain terms cannot be included in a contract of appointment of a manager of an owners corporation. Examples of such terms are those that:
- permit the manager to renew the contract at the manager’s option;
- provide for the automatic renewal of the contract if the owners corporation fails to give notice of its intention not to renew; and/or
- restrict the ability of the owners corporation to refuse consent to an assignment of the contract to another manager.
- New requirements for the first meeting of the new owners corporation
These new requirements include new disclosure obligations. At the first meeting of the owners corporation, the Developer must disclose:
- its relationship with the manager of the owners corporation; and
- any immediate or future financial transactions that will, or will foreseeably, arise out of the relationship with the manager; and
- any specific benefits which flow to the applicant as a result of that relationship.
The Developer or an associate of the Developer may not be appointed as manager of the owners corporation. However, we note that the expression ‘associate’ in the OC Amendment Act is fairly narrow and does not expressly include a related body corporate (although arguably an agent of the applicant which is included in the expression ‘associate’ could be). If you are considering appointing an entity that is related in some way to the Developer, make sure you contact us for advice on the nature of that corporate relationship and the terms of the OC Amendment Act.
- New five tier system for owners corporations
The OC Amendment Act implements a new five tiers system which is to be used in the classification of owners corporations: –
- Tier 1 – More than 100 occupiable lots (and not a services only owners corporation),
- Tier 2 – 51 to 100 occupiable lots (and not a services only owners corporation),
- Tier 3 – 10 to 50 occupiable lots (and not a services only owners corporation),
- Tier 4 – 3 to 9 occupiable lots (and not a services only owners corporation), and
- Tier 5 – 2 lot subdivision or a services only owners corporation.
As a result of this system, larger owners corporations will be subject to a greater number of requirements and smaller owners corporations will be subject to less regulations, particularly with regards to committees, financial statements, audits of financial statements, and/or maintenance plans and funds. For example, the OC Amendment Act makes it compulsory for tier 1 and 2 owners corporations to prepare and approve a maintenance plan. A tier 1 owners corporation has 12 months after the commencement of the changes to prepare and approve the maintenance plan, whilst a tier 2 owners corporation has 24 months to do so. Tiers 3, 4 and 5 may prepare maintenance plans, but they are not compulsory.
Relevant changes to the Subdivision Act 1988 (Vic) (“Subdivision Act”) for developers
The OC Act requires a licensed surveyor to set out the initial allocation of lot liability and lot entitlement when preparing a Plan of Subdivision. The OC Amendment Act now requires a statement detailing how the lot entitlement and lot liability are allocated, in accordance with the following principles: –
- Lot liability in the plan must be allocated equally between the lots unless:
- there is a substantial difference in size between the lots, in which case the proportion sizes of the lots will determine lot liability;
- different lots have a bearing on the consumption or use of common utilities or the cost of maintaining the common property, in which case the size of the lot and the level of consumption/use by that lot of common utilities and the common property will determine lot liability; or
- the number of occupiers in relation to each lot has a greater bearing on the consumption or use of the common utilities or the cost of maintaining the common property than the size of the lot, in which case the number of bedrooms in the lot will determine lot liability; and
- Lot entitlement must be allocated on the basis of the market value of the lot, and the proportion that value bears to the total market value of the lots.
We suggest you consider your owners corporation structuring early
As many developers are aware, setting up the most appropriate owners corporation structure is not an exercise to be left to the last minute.
Conceptualising the most appropriate structure, and considering disclosure obligations for and to prospective purchasers, at the outset of a project, is critical for the vision of the development. Equally important is how that structure is then documented and put in place when the plan registers and the owners corporation is created.
Although the OC Amendment Act adds further layers of complexity to navigate, we can help you steer through the legal risks and requirements.
This artten by Hannah Newton and is intended for information only. For specific advice in relation to your circumstances please call Septimus Jones & Lee on 9613 6555.