31 OCTOBER 2010
Executive Summary
The Minister for Fair Trading recently released the Body Corporate and Community Management Amendment Bill 2010 (“Bill”), proposing to amend the Body Corporate and Community Management Act 1997 (“Act”), for public consultation. The significant points of the Bill are:
(a) The Bill prescribes principles for setting contribution schedule lot entitlements, with different principles applying to schemes with standard format lots and building format lots.
(b) The amendments from a developer’s perspective result in, for standard format lots, the equality principle being the only option available for setting contribution schedule lot entitlements and for building format lots, both the equality principle and the relativity principle being available.
(c) From a practical perspective, the law continues to give developers significant flexibility on how they wish to structure the entitlements to focus on the key commercial factor, which is market acceptability. For commercial tenancies which generate higher cash flows there is the ability to set higher entitlements and for residential schemes, where owners are more conscious of costs, entitlements can be lower; and
(d) The amendments provide that once contribution lot entitlements are set, an owner can only challenge the lot entitlements in very limited circumstances. In our view, the proposed legislation is less favourable then the current law to the initial drivers behind the changes, namely lot owners, because under the new legislation there is no general right of review of lot entitlements.
Objectives of the New Lot Entitlements System
The objective of the Bill is to provide a new lot entitlements system by:
(a) providing several principles for the setting of contribution schedule lot entitlements; and
(b) limiting the ability to adjust contribution schedule lot entitlements.
The Bill appears to stem from the concern that under the current system, lot owners have been able to apply for and successfully obtain adjustments of contribution schedule lot entitlements, with the effect of reducing their contribution schedule lot entitlement to the detriment of other lot owners within the scheme. The intention of the Bill is to provide “more appropriate and flexible principles for setting contribution schedule lot entitlements”.
Principles for Setting Contribution Schedule Lot Entitlements
The contribution schedule lot entitlement is the basis for calculating a lot owner’s share of the body corporate levies and the value of each lot owners vote for voting on ordinary resolutions.
The current principle under the Act for setting and adjusting contribution schedule lot entitlements is that they must be equal, except to the extent to which it is just and equitable in the circumstances for them not to be equal (“the equality principle”). For example, it may be just and equitable for lots in layered community titles scheme with different uses, such as commercial and residential uses, to have unequal contribution schedule lot entitlements.
Under the Bill it is proposed that the contribution schedule lot entitlement must be consistent with:
(a) for schemes with standard format lots or volumetric lots (for example, most town house and flat land schemes), either:
(i) the unimproved value principle; or
(ii) the equality principle;
(b) for schemes with building format lots (for example, most units in multi-storey buildings), either;
(i) the equality principle; or
(ii) the relativity principle.
The Unimproved Value Principle
The unimproved value principle is the principle that the lot entitlements must be proportionate to the unimproved values of the lots.
The “unimproved value” of a lot is the unimproved value of the lot within the meaning of the Valuation of Land Act 1944 (Qld).
For new developments, it is difficult to see how this principle can be applied as there will be no separate unimproved values for lots that are not yet created. In most circumstances therefore, the unimproved value principle will not be used and the existing equality principle will continue to be applied.
The Relativity Principle
The relativity principle is that the lot entitlements must demonstrate the relationship between the lots by reference to one or more particular relevant factors. The relevant factors are prescribed and restricted to the following:
(a) how the scheme is structured;
(b) the nature, features and characteristics of the lots;
(c) the purposes for which the lots may be used;
(d) the impact the lots may have on the costs of maintaining the common property; and
(e) the market values of the lots.
The factors prescribed are effectively those that would be considered when applying the equality principle and therefore this principle also appears to be of little significance.
Adjustments to Contribution Schedule Lot Entitlements
Under the current Act, an individual lot owner is able to apply for an order of a specialist adjudicator or the Queensland Civil and Administrative Tribunal (“QCAT”) for an adjustment of a scheme’s contribution schedule (and interest schedule) lot entitlement.
Under the Bill, lot owners in community titles schemes established both prior to and after the commencement of the Bill will only be able to adjust contribution schedule lot entitlements if it is unanimously agreed by all lot owners, by resolution without dissent.
For those schemes established after the commencement of the Bill, a lot owner may still apply to a specialist adjudicator or QCAT to adjust the contribution schedule lot entitlements, but only if:
(a) there is a material change to the scheme that significantly affects the contribution schedule lot entitlements (for example, this may include the addition or removal of lots from the scheme); and
(b) the owner believes an adjustment of the contribution schedule lot entitlements is necessary because of the change.
The order of the specialist adjudicator or QCAT may only be in accordance with the contribution schedule principle which already applies to the contribution schedule lot entitlements. That is, if the equality principle applies the order can only adjust the contribution schedule lot entitlements to reflect the equality principle, the order can not adjust the contribution schedule lot entitlements to reflect for example, the unimproved value principle.
The Bill also provides the ability for those community titles schemes established prior to the commencement of the Bill which have been subject to one or more orders to adjust contribution schedule lot entitlements to revert the lot entitlements to their original settings prior to any, and all, adjustment orders. This reversion can be achieved by one individual lot owner. This may have a significant impact for lot owners who have previously successfully obtained an order adjusting their contribution schedule lot entitlements.
Principle for Setting Interest Schedule Lot Entitlements
The interest schedule lot entitlement is the basis for calculating the lot owner’s share of common property, the lot owner’s interest on termination of the scheme, including its share in body corporate assets and the unimproved value of the lot for rating and land tax purposes.
The same principle as currently applies under the Act will apply to the setting of interest schedule lot entitlements. That is, the interest schedule lot entitlements must be consistent with the market value principle.
The market value principle is the principle that the lot entitlements must reflect the respective market values of the lots, except to the extent to which it is just and equitable for the individual lot entitlements not to reflect the respective market values of the lots.
Adjustments to Interest Schedule Lot Entitlements
The current provisions under the Act for seeking adjustments to the interest schedule lot entitlements continue to apply. That is, an individual lot owner can apply for an order of a specialist adjudicator or QCAT for an adjustment of a scheme’s interest schedule lot entitlement.
Final Comments
It appears that the additional principles for setting contribution schedule lot entitlements proposed by the Bill in fact add little to the pre-existing concepts in the Act and therefore do little by way of assisting in achieving the Bill’s objective of creating certainty for and fairness amongst lot owners. It is important that developers, in setting contribution schedule lot entitlements, retain documentation to support the principle applied.
Public consultation on the Bill closed on 23 September 2010. We expect to see some requests for amendments to the Bill resulting from the public consultation. We will keep you advised of any significant amendments to the Bill and if the Bill is subsequently passed.