Consider this alternative view when buying a strata apartment in WA. Which of the two assets that you are acquiring is more valuable?
1 What are we talking about?
So you are about to purchase a strata Lot (“unit”), the location is great so it’s the layout, balcony and car bay. All exactly what you wanted, but stop! Did you know you are actually buying a second asset concurrently which may be more valuable than the unit? Were you even aware of the second asset? Did you even know the second asset may come with hidden liabilities? Before the “offer to purchase” becomes unconditional it is extremely important that you do your due diligence on the second asset! Buyers beware!
2 What is the second asset?
When you buy a strata unit in WA you buy the rights to occupy the unit. The critical strata plan, especially on new properties, will define the strata Lot boundaries. These boundaries define what you personally own and what the strata company owns.
The strata plan also defines what percentage of the strata company you will own! That’s right, by buying a strata Lot you become, by automatic default, a member (like a shareholder) of an unlisted strata company – the second asset! The question remains, which of the two assets (the physical Lot or your share of the strata company) is the more valuable asset?
3 Strata Properties– same, same but often very different
Firstly, not all strata properties are the same and not all strata companies are the same. The amount of strata company common property can vary dramatically. Sometimes the amount of common property the strata company owns is minor and sometimes, it has been argued, it is the majority of the strata assets. Let’s look at some variations.
3.1 Independent buildings on strata titles
In the above example (single tier strata) the strata properties are really completely separate dwellings on essentially their own portions of land. The only common property that all three strata company members own is essentially the driveway that runs down to the rear unit, which one unit owner (the street front unit) is unlikely to ever use. The driveway is the only strata company (common property) asset. All members of the strata company collectively own the driveway and must maintain and insure that driveway.
3.2 Independent buildings on strata titles – private road
In the above scenario (survey strata) everybody independently owns their own block of land and the dwelling upon it. The strata company (hence strata company members) actually own the private road within the boundaries (ring road in the above picture).
3.3 Shared property
In the above example the strata company common property can include shared areas such as driveways, roof cover, roof plumbing, roof frames with the balance of the structure being individual Lot property. The line between individual Lot property and strata company common property starts to blur.
3.4 Predominantly Common Property
In many multi storey (multi-tier) strata properties the individual strata Lot boundaries are the surfaces of the internal permitter walls (including windows and external doors), floors and ceilings. Everything beyond the surfaces of these areas is common property owned by the strata company. This has led to some describing the scenario that when you buy a strata Lot in a multi storey strata building you are essentially buying the “air” within in the strata Lot boundaries.
4 So what does all this mean?
So there are some critical issues here. Strata Lot buyers and owners must consider some critical issues!
4.1 Where are the individual strata Lot boundaries?
It is critical that strata Lot buyers/owners have absolute clarity over exactly where their Lot boundaries are. The question that needs to be asked is where is the Lot boundary?
- The permitter of the parcel of land
- The external surface of walls and roof covers
- The mid plan between strata units
- The internal surface of walls, floors and ceilings
- What is the difference between Lots, part Lots and exclusive use areas?
- Do any strata By-Laws have any impacts on Lot boundaries or the maintenance obligations of Lot owners?
Having clarity in the above is exceptionally important as amongst other things it defines what you are or will be liable to maintain and what the strata company is liable to maintain.
4.2 What is common property and hence what does the Strata Company own?
In its most simplest and rawest form, what is not Lot property is strata common property. As in the examples above, common property could be limited to a driveway between strata Lots. Conversely it could represent every building element, including all plant and equipment beyond the surface of the internal Lot perimeter walls, floors and ceilings. In other words, common property could be essentially the vast majority of the strata assets. Hence, a Lot buyer or owner’s interest in the strata company (and its common property) could be a bigger asset than the Lot.
Looking at it from a different perspective, if you are denied access into your Lot because of a major structural defect in the building what is your biggest asset then?
5 What is really scary?
Would you ever consider investing from say $300,000 or even many millions of dollars in an unlisted company without undertaking reasonably thorough due diligence? Would you be surprised that this happens every day in WA?
Almost every reasonable “Offer to Purchase” contract relating to strata units prepared in WA includes (or ought to include) a strata company due diligence clause which essentially enables the buyers to conduct due diligence on the strata company records held by the strata manager. If the buyer does not like what the due diligence on the strata company reveals, then they can withdraw from the contract. Anecdotal evidence from many WA Strata Mangers indicates that they actually receive very few requests from buyers to inspect the books of the strata company! In short, due diligence on these strata companies is rarely being undertaken.
6 So what is the issue?
The strata company owns the common property. The strata company maintains, insures, repairs, replaces and refurbishes the common property. The cost of undertaking these activities is shared by all of the Lot owners. The percentage that each Lot owner contributes to this expense is detailed in the strata plan.
So strata companies will have an annual operating budget to cover the day to day expenses of running the strata, this may range from a very modest amount of hundreds of dollars to many millions of dollars. Similarly, the strata company should (but often does not) have a reserve to cover the repairs, replacement and refurbishment of key strata assets.
A thorough review of the strata company records is critical to understanding the health of the strata company and its ability to manage potentially multimillion dollar strata common assets. Let’s look at some examples:
6.1 Structural Cracking
Let’s say you are buying into a strata complex which is 4 storey high and contains 10 lots and is 20 years old. The unit you are buying appears sound. However, at the other end of the strata complex there is structural cracking on an external wall. The strata company is aware of the issue and they have obtained structural engineers advice. Issue being that there is currently no funds available for the $200,000 remediation. The strata Lot owners will have to contribute to extraordinary levies to fund repairs. These levies will not be raised until after you own the Lot so you will have to contribute.
6.2 No Reserve
The strata complex is 30 years old and minimal work has been undertaken over the past 20 years to maintain the property. It is apparent that maintenance work is required which may extend to plant and equipment. There is no reserve to pay for this work. Special levies will need to be raised. In short what you think are the Strata fees may be about to change significantly.
6.3 Construction Defects on 3 year old 4 level building
The strata company has identified a range of significant construction defects which will cost a substantial amount to be remediated. The builder has now entered bankruptcy and there is no reserve available to cover the required repairs. There is no builder’s indemnity insurance.
While the above are extreme examples, they are very real. While these situations may only existing in a small number of strata properties, the key issues is it is important you find out if they exist in the property you are about to purchase, or even own now.
7 What to Do
If you are buying a strata Lot then give very strong consideration to:
- Reading and understanding the strata plan and associated By-laws is critical. Understand exactly where the Lot boundaries are, where part lot boundaries are and what Exclusive use means if it exists. Understand the By-laws.
- Make sure you walk through the entire complex. Look for potential issues beyond the strata Lot you want to buy. Remember you will be sharing in the costs to maintain the entire strata complex not just the Lot you want to buy.
- Review the last five years AGM minutes, EGM minutes and financial records. Look for warning signs.
- Review the maintenance plan and sinking fund for the strata complex. The Legislation changed in 2018 so hopefully by 2020 we will start to see 10 Year Maintenance Plans being prepared and submitted to AGM’s for the majority of strata plans. When this occurs, buyers and owners should at least have a better understanding of the nonoperational expenditure that that may need to incur.
- Determine the size of the reserve and whether or not it is proportionate to the strata assets.
- See if you can speak with existing Lot owners or current or past Council of Owner members. That may be a wealth of information about the strata property.
- Understand that buying a strata Lot is not the same as buying a freehold title. There are some fundamental differences, the most notable being you are joining a strata community and a strata company. Having clarity on these key differences is absolutely key to successful strata Lot ownership.
8 In summary
When you buy a strata unit you are essentially buying two assets. One asset is the strata Lot. The second asset is your share in the strata company which owns the common property. Sometimes the common property is relatively insignificant and will not impact your buying decision. Sometimes the strata company owns and controls the major share of the strata complex. Understanding the health of the common property and the strata company can be more important than the look and feel of the strata Lot.
At a minimum, if you are buying a strata apartment it is important that you do your due diligence on the strata company, because if you do buy the unit, you will become a member of the company with the positives and negatives that this may bring.
The above is not intended as legal advice. Consider seeking legal advice prior to purchasing a Strata Lot.
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Houspect conducts a large number of strata building inspections for Strata Companies including:
- Pre Hand Over – Strata Common Property Practical Completion Inspections
- Post-Handover Defect Liability Inspections
- Maintenance Period Inspections
- Statutory Liability Period Inspections
- WA Building Commission Reports
- State Administrative Tribunal Reports
- Tribunal Attendance (WABC and SAT)
- Investigation Inspections
- Stage Construction/Maintenance Work Inspections
- 10 Year Maintenance Plans