Developer stacks votes to keep control of scheme

Hi Jimmy,

I’ve answered the first part of my post re the legislation that says “Until the owner has sold more than 50 percent of the units, the voting power of their unit entitlement is reduced to one third of the actual figure.” I found it in Schedule 1, Part 3 (14.2) of the Act.

Which leaves my more important question – can a developer vote using their Development Lot unit entitlements even if they have exempted themselves from paying any Strata Contributions through a clause in the Strata Development Contract?

Thanks Jimmy (and Bannermans).

As I hinted at in my original post, there have been other shenanigans regarding unit entitlements, no doubt following advice from the developers’ legal experts (who happen to include their daughter, a conveyancer).

The story goes like this (and remember, it’s a staged development, with total unit entitlements (UEs) of 1000 across 13 eventual dwellings):

On completion of Stage 1, consisting of 2 dwellings (Unit 1 which is owned by the developers’ sons and Unit 2 owned by to an unrelated young couple), the Strata was registered, with Unit 1 allocated 297 UEs and Unit 2 allocated 282 UEs and the remainder of the UEs (421/1000) allocated to the undeveloped Lots (owned by the developers). This apportionment of UEs was of course in accord with a valuation done at the time by a registered valuer as required by the Strata Schemes Development Act.

This allocation of UEs for Stage 1 had two important consequences – it triggered the need to hold the first AGM (under clause 14 of the Strata Schemes Management Act) and it also meant that as the developer had now sold more that 50% of the UEs their vote now counted in full, so when combined with their sons’ votes they had a total of 718 UEs. While not quite enough to force through Special Resolutions, it was certainly a sizeable majority.

At the first AGM, presumably in anticipation of the imminent creation of the next two Lots (Units 3 & 4) following the subdivision of the development lot forming Stage 2 of the development, the developers proposed and passed a resolution to create a By-law which purported to re-allocate UEs based on a new valuation of “estimated” UEs once the development was fully completed. This sought to dramatically alter the UEs so that Unit 1 had its UEs reduced from 297 to 89, Unit 2 reduced from 282 to 80, and the soon-to-be-created Units 3 and 4 would see an increase in their UEs from 30 and 29 respectively to 80 each. The remnant undeveloped Lots would now have UEs totalling 671/1000. This By-law was then duly registered with the Registrar General by the Strata Manager (who, by the way, is an Associate Director with a Strata Management company in Sydney with a significant portfolio of properties in urban and regional NSW).

A truly cunning plan – this re-allocation would give the developers (and their sons) a total of 760 units out of 1000, so enough to pass Special Resolutions and also block anything that the owners of Units 2, 3 and 4 might propose that the developers didn’t like. Coupled with the fact (see my original post) that the developers had excused themselves of having to pay any strata levies on undeveloped Lots, this meant that the developers and their family now only paid around 25% of total levies collected while obtaining total control.

Only problem with this plan was that I came on the scene shortly after the AGM as the purchaser of Unit 3, and became concerned when I noticed that my first levy notice was based on 80 UEs and not the 30 UEs shown on my Certificate of Title at the time of purchase. I questioned the Strata Manager about the discrepancy, who initially responded by sending me a copy of the new By-law and saying “At the general meeting (the) bylaw (was) approved….to do with the entitlements adjustments. The bylaw is needed due to Land titles being unable to register the new entitlements until the whole of the site is complete and the final subdivision has occurred….Once the full subdivision is completed then the entitlements will be updated on the title.”

I’ve been around Strata (as an owner and Committee Member in another building) long enough to be suspicious of this answer, and further research all but confirmed that it was highly unlikely that a By-law could change UEs even on an interim basis. I therefore asked the Strata Manager to provide me with authoritative legal advice to support his assertion. After a few days he forwarded me a letter on the letterhead of a Law firm that alleged that all was above-board and that the re-allocation of UEs was to restore fairness in the UEs, and that “the effect of the By Law adjusts the unit entitlements for the whole of the development, from that shown on the title deed”. However, this letter was signed by the developers’ conveyancer daughter, which raised a red flag.

I stood my digs, questioning the letter and suggesting I would get independent legal advice (from Bannerman’s of course), the cost of which I would expect to be reimbursed should I prove to be correct. After 10 days and a bit of further pushing I finally received a further response from the developers’ Law firm (this time signed by a real lawyer) through the Strata Manager, telling me that “the developer and…majority lot owner, have instructed us to now proceed to make an application to NCAT, on their behalf, for an order to amend the Unit Entitlements, as per the updated valuation. We also understand that once the Order is granted, and the same registered with the NSW Department of Land Property, under the Strata Scheme Management Act 2015 the Owners Corporation, can then adjust the levies accordingly to reflect the amended unit entitlements”.

The lawyer’s letter then goes on to say “If the NCAT order is granted, the amended unit entitlements will remain in place until all stages of the development are complete. If, however the NCAT order is not granted, then the levies would revert to the original unit entitlements. Either way, once all stages of the development
are complete, the developer will organise a final valuation and subject to the same, the unit entitlements will be finally adjusted and/or confirmed based upon the values at the time”.

I think that is vindication of my stance, but still have some reservations. Firstly, having seen the valuation that the re-allocation of UEs was based on, it very clearly says it is an estimate only – which I assume will not be enough for NCAT even if no current Lot owners oppose a re-allocation of UEs to make them fairer (a likely scenario). Secondly, are there traps for young players in leaving it to the developer to apply to NCAT – for example, could the developers seek reimbursement for all costs, such as a proper valuation, from the Owners Corporation (which of course they don’t pay levies to)?

I also wonder whether a senior Strata Manager has a duty of care, and before issuing Strata Levy notices based on changed UEs should have advised the Owners Corporation (and then us when we asked the question) that a Bylaw could not alter UEs. Similarly, I query the ethics of a law firm that initially provides what seems to be incorrect advice, perhaps designed to fob of my concerns and mislead.

Your opinion would be welcome.