Property development is a multifaceted business, encompassing activities that range from buying land, raising finance, designing, obtaining necessary approvals, building projects, marketing property, leasing and selling and in many cases, managing the property as well. All too often however, the function of setting up the Owners Corporation, in line with legislative requirements, is delayed, neglected or as is sometimes the case, forgotten completely. When a developer has failed to follow the prescribed legislative processes in setting up an Owners Corporation, they are exposed to delayed settlements, buyers walking away, angry owners and additional expense in rushing through the compliance requirements. To avoid getting caught out, and to avoid unnecessary grief, worry and extra work it's important that you think about the Owners Corporation when you are in the initial stages of the development.
What constitutes an Owners Corporation?
An Owners Corporation is automatically created when a Plan of Subdivision containing Common Property is registered at Land Victoria. In other words, wherever there is common property, an Owners Corporation exists. It must also be set up or activated. Remember also that an Owners Corporation is a legal entity and can sue and be sued, so care must be taken when setting rules that might involve occupational health and safety and other issues. All Owners Corporations have statutory duties and powers as set out in the Owners Corporations Act 2006. If you own property affected by an Owners Corporation then you automatically become a member of that Owners Corporation and have responsibilities under the Act.
Owners Corporations should be set up by the developer early enough in the construction phase to ensure that everything is in place when the new owners purchase their units / homes. It is much easier at this stage because the developer is the sole owner and can make all the relevant decisions, decide on rules and sign any contracts. It is then transparent and clear for the incoming owners exactly what they are committing to and what their costs will be. This is the purpose of the OC Certificate.
Owners Corporation certificate
The Owners Corporation certificate is part of the vendor's statement or section32. It is the responsibility of the lot owner who is selling the property to ensure that the certificate is included in the section32. If an Owners Corporation is not set up then settlement of a property transaction cannot take place because an Owners Corporation certificate and other documentation must accompany the Section 32 so the conveyancer typically then has to search for someone who can assist them to urgently set up the OC. This is particularly important when you are progressively completing units in your development and you start selling them while you are still working on the rest of the construction. You may find yourself becoming distracted in trying to organize Owners Corporation Certificates when your mind should be on other things.
Your Builder (Construction) Insurance ceases the moment your Certificate of Occupancy is signed. If you don't have strata insurance in place to cover the entire premises (including public liability insurance for the common property), your entire project could be uninsured. In general terms, an Owners Corporation is responsible for the following main insurances:
- The main building and any outbuildings
- Public liability
- Workers Compensation
- Voluntary workers cover
If you are unsure, then I strongly recommend you address your insurance questions to a strata insurance specialist.
Decide on the Rules that will be used to manage the Owners Corporation. If you are the developer, you make the rules. All Owners Corporations have rules for the control, management, use or enjoyment of common property and lots. The rules cover day-to-day issues such as parking, pets, noise and dispute resolution. Rules made under the Owners Corporation Act 2006 and registered at Land Victoria apply to:
- The Owners Corporation
- Lot owners
- Occupiers or tenants.
Many developers decide on the stock-standard Model Rules. There are many occasions where you should consider making special rules. For instance, you might be building a staged development where you require constant access through the existing common property, or a special rule might be required to determine that future air conditioners must be installed on the blind side of the unit. You might have arranged for special visitor parking that requires special rules. Or you might decide that the exterior colour scheme must adhere to a particular heritage colour scheme. It is up to you, but the time to do it is well before you begin selling your units. The time to set the rules is when you are the sole owner, and this means you should do it early on in the development's life.
Lot entitlement and lot liability
'Lot Entitlement' refers to the owner's share of ownership of the common property and determines their voting rights (a lot for example, may have an entitlement of more than one vote). 'Lot Liability' represents the share of Owners Corporation expenses that each lot owner is required to pay. These entitlements and liabilities are determined by the developer at the time of subdivision. When determining the lot entitlement, the Owners Corporation must consider the value of each lot and the proportion that value bears to the total value of the lots affected by the Owners Corporation. When determining the lot liability, the Owners Corporation must take into account the amount that is just and equitable for the owner of each lot to contribute towards the administrative and general expenses of the Owners Corporation. The entitlement and liability of each owner is expressed in the plan of subdivision.
Budgets and fees
Your Owners Corporation will be required to pay annual fees to cover general administration, maintenance, insurance and other ongoing costs. As developer you may decide the Owners Corporation requires a maintenance fund, and therefore the annual fees must include contributions to that fund. Owners will be required to pay their share of annual and special fees according to lot liability that you will establish in the Plan of Subdivision. Your Owners Corporation budget will cover a wide range of potential future running expenses and includes insurance, gardening, repairs and maintenance, painting, public lighting and public water. To determine its fees for the financial year, your Owners Corporation will need to prepare a budget. Naturally, you should set the first budget. You should also set it early so you have time to consider any alterations.
Annual general meeting (AGM)
It is critically important, as well as required by law that you convene the inaugural AGM for your Owners Corporation. It is here that all the above items are finalized, locked in and registered. The inaugural general meeting is the first meeting of the Owners Corporation held during the initial period. This meeting is not classed as the first annual general meeting of the owners as it is conducted as if it were an extraordinary general meeting. Matters that must be determined at this meeting include insurance, contributions to the administration, the financial institution at which funds should be deposited, the executive committee (if required) and the common seal. Also discussed and agreed upon are the rules and other requirements.
Other Important considerations
- Registering the Plan of Subdivision with the Titles Office
- Registering an ABN
- Ordering a Common Seal and Building Sign
- Ensuring Occupancy Certificates
- Creating Reports and Minutes Folders
- Setting up a Cashbook and Trust Account for OC funds
- Creating an Owners Corporation Register
- Providing a list of Warrantees from tradesmen and ongoing maintenance contracts
Many Owners Corporations use professional managers to assist with finances, insurance, administration, meetings and maintenance functions. Larger Owners Corporations usually engage paid professional managers because complex legal, technical and people skills are required to manage the property. An Owners Corporation may appoint a manager to carry out any powers or functions it is able to delegate at a general meeting. The Owners Corporation usually delegates powers to a manager in a contract of delegation. This enables the manager to make decisions on behalf of the Owners Corporation. The appointment must be in writing or through a contract of appointment on the approved form. However, some Owners Corporations may be self-managed by a committee or a lot owner who has been delegated powers on a voluntary basis.