Playing with unit entitlement and levies – developers beware!
Developers are responsible for determining the unit entitlements for each lot when a strata scheme is first registered.
There is often no scientific method in allocating unit entitlements and there have been cases where unit entitlements have been set in an unfair way, either intentionally or unintentionally.
In New South Wales, unit entitlement should be based on the independent valuation of each lot immediately prior to registration of the strata plan.
However, sometimes lots may be given the same unit entitlement, despite the lots being of different sizes and values. Other times, different unit entitlements are allocated to lots that are essentially the same size and value.
Unit entitlements are important as this is how levies are determined. Also, if a poll is called at a general meeting of the owners corporation, owners’ votes will be based on unit entitlement. Developers’ “discretion” in relation to unit entitlement is currently being looked at by the NSW government with a move afoot to introduce more transparency in the way unit entitlements are set.
A similar position exists in relation to levies. There have been cases where developers use their influence (either in the initial period or at the first AGM) to settle annual levies at unsustainably low levels in order to help with unit sales. This can lead to a big jump in levies for future years as the new owners face the realities of running the strata scheme.
A classic example is lifts, which are covered by warranty agreements for the first couple of years following installation. Thereafter however, the owners corporation must enter into maintenance agreements with the lift installers, which add significant expenditure to the administration budget.
To avoid this happening in the future, the NSW government is looking at owners corporations being able to take the developer to the tribunal if it can be shown that the developer used its influence to set unrealistic levies during the initial period and/or for the first year of a scheme after the initial period ends.
The tribunal will be given the power to make an order that the developer be required to pay compensation to the owners corporation if the tribunal determines that the budget and levy amounts were not adequate, taking into account the maintenance schedule and other reasonable costs of running the scheme.
When introduced, developers in New South Wales will need to become much more accountable to their buyers – similar to the current position in Queensland where developers have a significant obligation to ensure that administration and sinking fund levies are realistic.
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