In brief - Amendments contained in the Bill will ultimately impose greater obligations and restrictions on developers and owners corporation managers to protect the interests of owners corporations, purchasers and owners of lots affected by them
The Owners Corporations and Other Acts Amendment Bill 2019, which will amend the Owners Corporations Act 2006 (Vic), the Retirement Villages Act 1987 (Vic) and the Subdivision Act 1988 (Vic), seeks to:
- rationalise regulation of owners corporations;
- improve quality of owners corporation managers;
- expand and improve developers' duties to the owners corporations they create;
- enhance protection for owners corporations;
- improve governance and financial administration of, and internal relations in, owners corporations.
Reclassification of owners corporations into tiers
The concept of a "prescribed owners corporation" (i.e., an owners corporation that levies fees in excess of $200,000 in a financial year or consists of more than 100 lots) has been replaced with the following tiers of owners corporations:
|Tier one||More than 100 occupiable lots and not a services only owners corporation.|
|Tier two||51 to 100 occupiable lots and is not a services only owners corporation.|
|Tier three||10 to 50 occupiable lots and is not a services only owners corporation.|
|Tier four||3 to 9 occupiable lots and is not a services only owners corporation.|
|Tier five||An owners corporation for a 2 lot subdivision or a services only owners corporation.|
Tiers establish requirements for committees, financial reporting and maintenance plans
The tiered system is intended to establish different requirements in respect of committees, financial reporting and maintenance plans depending on the size and nature of the owners corporation.
Larger owners corporations will be subject to more rigorous requirements, whereas smaller owners corporations will be subject to less stringent requirements.
As an example, tier one, tier two and tier three owners corporations must prepare annual financial statements in accordance with Australian Accounting Standards for presentation at the annual general meeting of the owners corporation.
Tier one owners corporations must, at the end of each financial year, have their financial statements audited by a registered or authorised auditor.
A tier two owners corporation must, at the end of each financial year, cause its financial statements to be reviewed by an independent person who is a member of CPA Australia, the Institute of Public Accountants or Chartered Accountants Australia and New Zealand.
A further example is the requirement for tier one and tier two owners corporations to have a maintenance plan, albeit this requirement is deferred until 12 to 24 months after commencement of the Bill depending on the number of lots in the owners corporation (noting there is no such requirement for tier three, four and five owners corporation - who may prepare and approve a maintenance plan).
What the changes mean for developers
Subdivision Act 1988 (Vic)
The Bill amends the Subdivision Act 1988 (Vic) (Subdivision Act) to provide new requirements for a licensed surveyor to set out initial allocation of lot liability and lot entitlements when preparing a plan of subdivision under Part 5 of the Subdivision Act, and also to include a statement detailing how the lot entitlement and lot liability are allocated having regard to the following principles:
(a) Lot liability in the plan must be allocated equally between the lots unless:
(i) there is a substantial difference in size between the lots;
(ii) different lots have a bearing on the consumption or use of common utilities or the cost of maintaining the common property; or
(iii) 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; and
(b) 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.
Owners Corporations Act 2006 (Vic)
New requirements for first meetings and the appointment of owners corporation managers are intended to provide greater protections to owners corporations, purchasers and lot owners.
Any term of a contract of sale of a lot that limits or controls the voting rights of the purchaser of the lot in relation to the owners corporation is void (these are not uncommon in off-the-plan sales contracts).
The requirement for a rule of an owners corporation to not unfairly discriminate against a lot owner or an occupier of a lot has been expanded. Under the Bill, a rule of an owners corporation is of no effect if it is oppressive to, unfairly prejudicial to or unfairly discriminates against, a lot owner or an occupier of a lot. For staged projects, proposed rules that deal with the future development of the project will need to be carefully reviewed in light of this new requirement. Alternative titling/management structures may also need to be considered (e.g., volumetric subdivision).
The following additional documents will now need to be provided at the first meeting:
- maintenance plan;
- building maintenance manual;
- an asset register;
- copies of any warranties, or, if copies are not able to be provided, details of any warranties (such warranties must be assigned to the owners corporation);
- copies of any specifications, reports, certificate, permits, notices or orders in relation to the plan of subdivision.
Developers will now be required to disclose any relationship with a manager of the owners corporation and benefits that may flow to the developer arising from that relationship.
Further, where the developer appoints a manager who is not the developer (i.e., initial owner) or a lot owner, the contract of appointment of that manager expires at the first meeting of the owners corporation.
Any other contract entered into by the developer that relates to the owners corporation that benefits the developer must not have a term that exceeds three years (other than for Hotel and Resort Management Contracts that comply with the requirements of any regulations - see below). This would appear to be seeking to capture a wide range of agreements where the developer is to receive a benefit (including certain management rights procurement agreements, service agreements, caretaking and letting agreements, concierge agreements, and licences over common property (such as for signage)).
All agreements proposed to be entered into by a developer in relation to an owners corporation and under which the developer is to receive a benefit should be carefully considered in light of these new requirements..
The following additional restrictions are now imposed on the developer of an owners corporation:
- the developer and their associates may no longer be appointed as manager of the owners corporation they have developed;
- the developer must not propose an annual budget for the owners corporation that is unreasonable or unsustainable;
- the developer must not designate as a private lot what normally would be common property or services;
- the developer must not receive any payment from the manager of the owners corporation in relation to the manager's contract of appointment.
The "initial owner obligations" (i.e., acting in good faith and in the interests of the owners corporation and enforcing certain domestic building contracts) have been extended from 5 years to 10 years following registration of the plan of subdivision where the developer is the owner of a lot/s to which are attached the majority of the lot entitlements of the lots affected by the owners corporation (which changes the current position for the developer/ initial owner to be the owner of the majority of the lots affected by the owners corporation).
This obviously has the potential to extend a developer's initial owner obligations during staged projects depending on how lot entitlements are calculated for development/ future development lots owned by the developer.
What the changes mean for managers of an owners corporation
The term for a contract of appointment of a manager of an owners corporation (Contracts of Appointment) must not exceed three years.
New requirements specify a list of terms that must not be included in Contracts of Appointment, including the following (Prohibited Term):
- any requirement for the owners corporation to obtain a special or unanimous resolution or convene a general meeting of the owners corporation to revoke the Contracts of Appointment;
- a term that allows the manager to renew the Contracts of Appointment at the manager's option;
- a term requiring a tier one or tier two owners corporation to give three months' or more notice of its intention to revoke the manager's Contracts of Appointment;
- a term that restricts the ability of an owners corporation to refuse consent to an assignment of the Contracts of Appointment to a person appointed as manager other than a requirement that consent must not be unreasonably withheld.
For a Contract of Appointment entered into or renewed on or after the commencement of the amendments which contains a Prohibited Term, that Prohibited Term is void.
Further, any manager who is not a lot owner but who has the proxy of a lot owner may not vote on the appointment, payment or removal of a manager of an owners corporation. A contract of appointment of the manager made in contravention of this requirement is void unless affirmed by a special resolution.
Numerous additional duties have been imposed upon managers:
- to take reasonable steps to ensure goods or services procured by the manager are procured at competitive prices and on competitive terms;
- to not exert pressure on any member of an owners corporation in order to influence the outcome of a vote/ election;
- to give prior disclosure to the owners corporation of any payment or benefit to be received by a manger before a contract is entered into for the supply of goods or services to an owners corporation;
- holding of money on behalf of the owners corporation, including the provision of copies of financial statements and bank accounts upon request by the owners corporation;
- disclosure to the owners corporation of any beneficial relationship the manager has with a supplier of goods or services;
- disclosure to the owners corporation of any commission payment or other benefit the manager is entitled to receive in relation to a contract for the supply of goods or services to an owners corporation (e.g., insurance commissions);
- increased reporting obligations at each annual general meeting.
The eligibility requirements for registration of a manager have also been strengthened by excluding registration of persons who have in the last 10 years been convicted or found guilty of certain criminal offences (e.g. fraud, sexual offences etc).
Managers must now also be covered by professional indemnity insurance at all times and notify the Business Licencing Authority if that insurance ceases.
For agreements associated with the onsite letting, use of land, facilities management or caretaking in relation to hotels, resorts or serviced apartments that are affected by an owners corporation (Hotel and Resort Management Contract), amendments to the Governor in Council's regulation making power will allow the making of regulations to prescribe requirements for Hotel and Resort Management Contracts including in relation to:
- restricting the term of those contracts;
- limiting or placing parameters on fees and charges under those contracts or increases on those fees and charges;
- prohibiting or regulating the inclusion of specific terms and conditions in those contracts.
Following Royal Assent, the Bill will come into operation on a day or days to be proclaimed or if it does not come into operation prior to 1 December 2021, it will come into operation on that date.
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.