On 8 August 2019, the Land & Environment Court, handing down the first decision in respect of giving effect to a collective sale under the strata renewal provisions of Part 10 of the Strata Schemes Development Act 2015 (the Act) in Application by the Owners – Strata Plan No 61299 [2019] NSWLEC 111.

The application was not contested. This means that the full extent of Part 10 was not challenged by objecting lot owners.

Owners corporations, lot owners, strata lawyers, potential purchasers/developers and valuers would all have been looking for guidance in terms of valuations from this decision and some guidance can be taken.

Two valuations are required in the process: one in the plan and one not less than 45 days prior to the application to the Land & Environment Court being made. The valuations are used to determine the price per lot based on unit entitlements and also a compensation value under the Land Acquisitions (Just Terms Compensation) Act 1991 (as varied by Part 10 of the Act).

Method of Valuation Used

The valuer in the case valued the building and its site by three different means (a discounted cashflow, capitalisation of income and a direct sales comparison) but ultimately concluded the price to be that obtained under the competitive and at arms-length expressions of interest campaign which had obtained a record price. As such, valuations should be approached with care and, if appropriate different methods used as a basis for calculation supported by clear reasoning as to why the chosen method should be relied upon.

Conflict under the Act between UE price v compensation value

The Act requires both a price per lot according to the overall sales price distributed according to unit entitlements (s171(1) of the Act) and also the compensation value of each lot (s182(1) of the Act). This was problematic as the unit entitlements did not reflect the compensation value of the lot mostly it seems due to the compensation value of the retail lots and utility lots.

The Court considered two options. The first, to base the value of each lot on the value of the highest lot so that each lot’s sale price was over its compensation value. Not surprisingly, this was argued to be commercially unviable as a commercially minded buyer would not set their price based on the highest value. The second option was to find that the requirement to distribute the sales proceeds according to unit entitlements was subordinate to the requirement to ensure lots were sold at their compensation value. This would require the scheme’s unit entitlements to be changed to more accurately reflect the value of the lots.

The Court held that when reading the Act harmoniously and as a whole section 186 which enables the Court to make ancillary orders (including orders to re-allocate unit entitlements) was in effect a circuit breaker enabling the conflict between unit entitlements v compensation value to be resolved. The Court when making orders giving effect to the strata renewal plan also made orders altering re-allocating the unit entitlements for the scheme. In doing so, it held it was not constrained by the requirements under s 236(1) of the Strata Schemes Management Act 2016 which required the unit entitlements to have been unreasonable either at registration of the scheme, when a revised schedule was lodged at the conclusion of a development scheme or to have become unreasonable due to a change in permitted use.

Please note: this is general information and does not constitute legal advice. If your scheme us undertaking strata renewal we recommend you obtain legal and financial advice specific to your circumstances.