Property developers are a powerful force in the way out cities and towns are presented. Quite literally to develop a community is to give it physical form.
Where I live I see the marks of the developer everywhere; in the size of the blocks, the layout of the streets and the lack of footpaths. All this results from deals between the developer and the local Council.
In body corporates the property developers have an even larger role as they’re designing and controlling the construction of the entire building. They’re in charge of everything from the way it looks, the materials used and the size and shape of both lots and common property.
Unfortunately for body corporate’s the impact of a property developers doesn’t stop once the lots are finished and settled.
The Process of Developing A Body Corporate
All projects begin the same way. With an idea.
In this case it’s joined by a piece of land, some talented professionals and a property developer intent on making a profit. Throw in a local council and a substantial amount of money and you have a development.
Two important things happen in this phase that impact the body corporate.
- The builder is appointed
- Lot entitlements are set
Assuming everything goes to plan, eventually the building is complete, the lots are registered and the body corporate comes into being.
Before the lots settle the property developer, or as he’s now called, the Original Owner, has some duties to the Body Corporate. In fact there’s quite a bit of detailed business to be conducted. The first Extraordinary General Meeting (EGM) is called.
The Original Owner, and therefore the only owner has the majority vote. They can enact any motion they want within legislative guidelines.
A lot of things happen at the first EGM but for the purposes of this discussion about impacts I’m only interested in two:
- Entering into Care-taking and Letting Agreements
- Setting the first round of levies
The lots now settle and people begin moving into the building.
The Problems That Impact The Body Corporate
There are several key things stemming from the development process that impact the body corporate including:
- Majority lot owners
- Building defects
- Levies and levy arrears
- Disputes re Care-taking & Letting Agreements
- Contribution Lot Entitlement adjustments
Majority Lot Owners
All body corporates are vulnerable to majority lot owners. By definition they have the majority and can get most motions passed. Which is a problem if the other owners do not agree.
For further reading see The Dangers of the Majority Lot Owner
At this stage the majority lot owner usually enters into Care-taking and Letting Agreements, allocates exclusive use and enters into management contracts with other service providers, such as the strata manager.
It’s not unknown for property developers to include a clause in the sales contract that effectively gives them control of the voting rights of a building for 12 months following settlement to ensure they have the voting power to enact what they want.
Building Defects
Now is when you find out if a good builder was appointed as building defects come to light.
In itself defects don’t need to be too much of an issue. All buildings have defects, it’s the nature of buildings. What makes the difference is the severity of the defects and how well the builder responds to warranty claims.
There are two types of building defects:
- Category 1 or structural defects
- Category 2 or minor defects
Category 1 defects are warranted for six years and eight months.
Category 2 defects, which are cosmetic defects, are only warranted for six months.
Building defects will likely be within the lots and common property. The owners are responsible for reporting defects within their lots and the committee for reporting defects in common property.
Things are further complicated for lot owners, or potential lot owners, when developer stock doesn’t sell quickly. By the time residents move into a lot the warranty period may have already expired.
Levies and levy arrears
One of the biggest issues with a majority lot owner is that along with their majority votes they are responsible for the majority of the levies.
Problems can quickly arise if they get behind and substantial levies in arrears can cause liquidity issues for the body corporate.
Luckily through this period it’s usually in the property developers interests to keep the levies as low as possible. In most cases they will try to offset body corporate costs to keep levies as low as they can, using their majority votes, and subsidising some of the works around the scheme.
For early lot owners subsidised levies are a bonus, but be aware, it will likely change, and quite quickly.
Disputes re Care-taking and Letting Agreements
In Queensland, depending on the regulation module, the maximum term for a Care-taking and Letting agreement is between 10 or 25 years. Consequently most agreements are entered into for 10 or 25 years. And for substantial amounts of money.
For property developers it’s an integral part of the value of the development.
For the body corporate it’s a substantial investment of money and time. Further caretakers are appointed mostly on the requirement that they can afford to buy the lot and Management rights, with varying degrees of success.
Disputes between body corporates and building managers are common and can be about anything from interpreting wording in the contracts to poor performance. They are usually long, involved and costly processes for all parties.
Contribution Lot Entitlements Adjustments
There isn’t any subject in a body corporate more likely to fuel animosity than how much levy each owner is charged. It’s an emotionally charged subject that lead to shots being fired at one body corporate in 2009.
The contribution lot entitlements are used to determine who pays what levy.
They’re also set by the developer prior to registration.
There are stringent rules now for entitlement calculation but that wasn’t always the case. Lot entitlements were at one stage set for no more reason than helping the developer sell lots. Not the fairest of systems for lot owners.
Over the last couple of years Queensland has gone through some difficult times with lot entitlements changes, and reversions. Sadly lot entitlement issues are not yet finalised as parliament continue to discuss changes.
Conclusion
The developer, and to a lesser extent the builder are in a position to have a substantial impact on the body corporate and lot owners, particularly over the first few years. If you are thinking of buying off the plan it’s a good idea to research the developer.
Developing any land is difficult, strata titled land even more so. I imagine that’s why there’s a lot of money in property development.
photo credit: Alan Cleaver via photopin cc