Posted by Mark Foy | 11 June 2021 | Legal Developments
An investment in a strata titled apartment involves buying a ‘lot’ in a strata title scheme. This ‘lot’ will include the apartment and any other related strata building assets.
Investing in a strata titled scheme involves not only an investment in the specific lot. It includes both the:
Your property investment will involve an ongoing relationship with the body corporate, who manage building functions such as insurance, maintenance and repairs, body corporate assets, and financial aspects of the strata title scheme.
As an investor in a smaller scheme with less lots, it’s more likely that you will have more influence over decisions of the body corporate. By comparison, larger schemes often engage external body corporate managers to manage daily building management functions. So as a proprietor in the scheme, your input may be considered only at the Body Corporate AGMs or special meetings.
When investing in a strata titled apartment, there are a number of due diligence issues which need specific attention; such as requirements for the seller to disclose pre contract body corporate information on the state of affairs, assets and finances; insurance arrangements, etc.
Before you make an investment in a strata titled lot, it is essential you understand and accept that you are acquiring not just your lot – but also an interest in the body corporate, and that you are taking on legal obligations as the lot owner in the strata titled scheme.
For these reasons, it is strongly recommended that your lawyers thoroughly inspect the body corporate records – and not simply rely on the disclosure documentation, which is required to be provided at or before entering into a contract.
A proper inspection of body corporate records may reveal potential risks with the proposed investment; such as disputes between proprietors in the scheme, the body corporate or building manager.
An inspection should identify any major repairs or defects which will need to be funded by the body corporate’s existing funds or, if insufficient, by proprietors. Committee minutes or other records may highlight such issues long before a body corporate formally resolves to raise special levies to fund such work.
As highlighted in the recent media, bodies corporate in certain regions such as flood plains are experiencing difficulties in obtaining appropriate insurance for building damage risk. In these cases, additional funds may have to be raised by the body corporate to ensure appropriate insurance is in place.
An issue regularly presented in smaller schemes is improvements made by proprietors themselves, some even with modifications made with body corporate consent – but outside the boundaries of the strata lot. Roof solar arrays, external antenna, air conditioning units, externals shutters are all examples that need to be considered.
An investment in a strata titled lot also calls for particular attention to be paid to how the titling and ownership arrangements for additional apartment assets (car parks, basement or ground level storage lockers, courtyards, roof top terraces, etc) have been titled. For some strata title schemes, these areas will be feature in the surveyed lot and the owner when they purchase the lot will acquire title directly to these areas. While in others, title for these will be by way of exclusive use by law, licence or ancillary rights – which are not directly part of the lot.
Note: Some of these rights are only enforceable if certain registration activities have been finalised with the relevant titling authority. It’s not unknown for buyers to be severely disappointed when they find inadequate attention had been paid to this aspect and, although the seller may have been using the area for years unchallenged, that in fact their title rights to that area were not properly recorded – And this may negatively affect the future value of your investment.
As an individual investor in a proposed lot, it is not always practical or economic to obtain a building survey of a large and complex building, especially when purchasing into a building ‘off the plan’ and no physical building yet exists.
Investment in lots in new schemes brings the opportunity for significant depreciation allowances – however investing in a scheme which is say three to five years old means the investor has an opportunity to examine the finances of the existing body corporate scheme and take comfort that any major structural building defects would have been identified in this period.
Large body corporate schemes can offer significant lifestyle assets like pools and outdoor entertaining areas – and accompanying these assets, other building systems such as elevators, fire detection and suppression systems, and security systems. Depending on the scale and modernity of the building, these systems are becoming more complex and costly to maintain.
Whilst not featuring the same variety of amenities of larger modern buildings, investment in small strata title schemes may not necessarily involve expenditures by the body corporate to operate and maintain these assets.
The legal aspects outlined above highlight just some of the many reasons both first time and sophisticated real estate investors should always engage in a trusted and experienced property lawyer when purchasing strata titled investment properties.
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This publication is © Nexus Law Group and is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.
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