Changing Strata Entitlements or Liabilities in VIC

What to do when the original lot entitlements or liabilities aren’t right …

It’s very common for some strata owners to believe their lot entitlements or liabilities are incorrect and want them changed.  But, the processes are complex, lengthy, expensive and legally intricate as this overview of the VIC rules and cases demonstrate.

[13.21 minutes estimated reading time, 2673 words]

Introduction & overview

Lot entitlements and lot liabilities are important in Victorian strata buildings as they determine voting rights, strata owners’ liability for strata expenses, their ownership share in the common property and the proportionate division of the net assets of the strata scheme if it is ever terminated or sold.

In Victoria [unlike some other states] there are two different kinds of lot entitlement ratios that apply to strata lots and strata owners.

1.     Lot entitlements: covering voting entitlements and the strata owners’ proportionate interests in the common property and other strata building assets.

Lot entitlements must be allocated by the developer, who must specify the basis for allocation on the strata subdivision plan according to Land Use Victoria’s guidelines.

2.     Lot liabilities: covering the proportion of strata building expenses each strata owner pays.

Lot liabilities must also be allocated by the developer, who must specify the basis for allocation on the strata subdivision plan according to Land Use Victoria’s guidelines.

This two-part system effectively separates a strata owner’s rights and interests in the strata building [their equity] from that strata owner’s obligations to contribute to strata building expenses [their usage obligations].

Those lot entitlements and lot liabilities are noted in the schedule to the strata subdivision plan. 

Lot entitlements and lot liabilities must be a whole number and the total of all lot entitlements and lot liabilities unit entitlements is called the aggregate entitlement.

Lot entitlements and lot liabilities can change if the strata subdivision plan is modified to create, eliminate or merge strata lots or if the strata owners agree or there is a VCAT order.  If they ever change then the new lot entitlements and lot liabilities will be shown on the certificate of title for the common property.

So, in practical terms, the common property title is the most reliable source of the information about the lot entitlements and lot liabilities rather than the strata subdivision plan.

By a combination of the provisions of the strata laws, decided cases, and, the new Victorian strata laws that begin later this year, it’s clear how lot entitlements and liability entitlements in Victorian strata buildings should be allocated.

Controls on strata lot and liability entitlement allocations

The Victorian strata laws currently provide that lot entitlements and lot liabilities should be allocated as follows.

• In the case of lot entitlements, to reflect the extent of the strata lot owner's interest in any common property affected by the owners corporation [see sections 3 and 27F of the Subdivision Act 1988].

  Land Use Victoria’s guidelines describe a suitable but not mandatory basis for allocation as ‘the value of each lot and the proportion that value bears to the total value of the lots’ and that’s the typical basis for allocation as it’s an objective measure.

  But, because there is no obligation for developers to have the lot entitlement verified by a valuer, or, in any other way when first creating a strata building subdivision, there is both a temptation and looseness that allows developers to allocate them incorrectly.  

• In the case of liability entitlements, to reflect the proportion of the administrative and general expenses of the strata building that the strata owner is obliged to pay [see sections 3 and 27F of the Subdivision Act 1988].

  Land Use Victoria’s guidelines describe a suitable but not mandatory basis for allocation as ‘the amount that is just and equitable for the owner of each lot to contribute towards the administrative and general expenses of the owners corporation’ but, that more difficult to determine as it differs in every strata building and is a subjective matter.

So, as one well known Victorian expert said in one of the cases:

‘these days it is industry best [practice] to treat entitlement and liability separately. Unless otherwise advised by a client, liability is generally determined primarily on floor area including a factor of the external area if in existence and entitlement is determined primarily on cost/valuation of the lot’

which is a neat summary of the current conventional thinking on these matters.

Later in 2021, the Victorian strata laws will change to different and more prescriptive provisions about how lot entitlements and lot liabilities should be allocated due to the start of the changes in the Owners Corporations and Other Acts Amendment Bill 2019.

So, from then they will be as follows.

• Lot entitlements must, in future, be allocated on the basis of the market value of the strata lot, and the proportion that value bears to the total market value of all the strata lots.

  So, that allocation basis is now expressly required rather than impliedly from Land Use Victoria’s guidelines.  But, there’s still no requirement for formal valuations.

• Liability entitlements must, in future, be allocated equally between the strata lots unless one or more of the following things exist [which almost always will]:

  • the strata lots differ substantially in size,

  • a strata lot impacts the consumption or use of common property utilities,

  • a strata lot impacts the cost of maintaining common property,

  • the number of strata lot occupiers impacts the consumption or use of common property utilities, or

  • the number of strata lot occupiers impacts the cost of maintaining common property.

  And, these variation bases need to be specified by developers when lodging the strata subdivision plan according to Land Use Victoria’s guidelines.

So, it’s likely that these new and more prescriptive provisions about lot entitlements and lot liabilities will permit greater scrutiny over what the developer does when creating a Victorian strata building since their actions and reasons can be assessed against the requirements later and, therefore, challenged in VCAT applications.

Changing strata lot and liability entitlements

Changing existing lot entitlements and lot liabilities can happen in 2 ways as follows.

1.     By a unanimous decision of the strata owners under section 33 of the Subdivision Act 1988 that considers the value of the strata lots and the proportion that value bears to the total value of the strata lots for entitlement changes, and, the amount that it would be just and equitable for the owner of the lot to contribute towards the administrative and general expenses for liability changes.

Since a unanimous decision in Victorian strata buildings needs all strata owners to positively vote in favour of the decision [see section 95 of the Owners Corporation Act 2006] that’s practically difficult, if not impossible, to achieve.

2.     By a VCAT order under section 34D of the Subdivision Act 1988 which bypasses the need for a unanimous decision of the strata owners.

But, before making such an order VCAT must be satisfied about the following:

• the substantive basis for the lot entitlement or lot liability change is established,

• that at least half of the strata owners [counted by lot entitlements] consent to the changes,

• the change is likely to bring economic or social benefits to the strata building that outweigh any economic or social disadvantages to the non-consenting members, and

• that either:

  • a strata owner’s or owners’ vote can’t be obtained as they are dead, out of Victoria or missing, or

  • that it’s impracticable to secure their vote.

Victorian lot or liability entitlement cases

There have been a number of interesting and important VCAT decisions over changing lot entitlements and lot liabilities [some of which were reconsidered on appeal] as follows.

Nelson’s Case [VCAT] 2019

Where VCAT ordered changes to both of lot and liability entitlements of some lots [doubling them] in a complex CBD based strata building, that was later overturned on appeal as set out below.

Owners Corporation No 1 PS332330W v Nelson (Owners Corporations) [2019] VCAT 1963 (18 December 2019)

Conroy’s case [VCAT] 2014

At VCAT case that changed lot entitlements and lot liabilities and decided the following things, later confirmed on appeal.

• A Victorian strata building could change lot entitlements and lot liabilities at any time under section 34D of the Subdivision Act 1988.

• After lot entitlements and lot liabilities considering competing valuers’ evidence changed the lot entitlements.

• After considering a range of subjective matters relating to the use of the strata lots [including possible occupancy and what purchasers paid] decided they were not currently just and equitable and ordered changes to match the only expert’s evidence on allocation.

Conroy v Owners Corporation SP 30438 (Owners Corporations) [2014] VCAT 1413 (12 November 2014)

The LH Corporation case [VCAT] 2019

A case where an application to remove a strata lot from the commercial strata subdivision or reduce its lot liability was refused where it was an entirely self-contained lot operating as a car wash, was fenced off from the shopping complex and car park and did not share any utilities was refused by VCAT despite supportive evidence because there had been an earlier VCAT order [made in 2012 by agreement] that had already reduced the lot liabilities by almost half. 

So, the allocations were, after the earlier changes, no longer unjust or inequitable.

LH Corporation Pty Ltd v Owners Corporation SP028481W (Owners Corporations) [2019] VCAT 1624 (14 October 2019)

The Conroy & Concept Developer case [Victorian Supreme Court] 2015

A leading Victorian case on the principles applying to changing lot entitlements and lot liabilities was decided by the Victorian Supreme Court in 2015 in the Concept Developer case which set out the core principles to apply as follows.

This is the appeal of the Conroy case from VCAT.

• The consideration about entitlements takes place in the context of the legal obligations on strata owners to pay a proportion of the strata building’s expenses, as reflected in the concept of lot liability.

• You do not start from the assumption that a strata owner’s liability is or should be different from that specified in the plan of subdivision.

• When considering the entitlements that would be ‘just and equitable’ for strata owners to pay for strata building expenses, you consider:

  • the nature of the strata subdivision,

  • the number of strata lots,

  • the area, layout and uses of the common property,

  • how the existing lot liability was set,

  • the existing expenses of the strata building and how those expenses were incurred in relation to common property use, and

  • the existing contribution of each strata owner to the existing expenses.

Concept Developer Pty Ltd v Conroy [2015] VSC 464

The Real Estate Victoria case [Victorian Supreme Court] 2021

And, just in time for the strata laws to change, the Victorian Supreme Court decided another case [the Real Estate Victoria case] on lot entitlements and lot liabilities.

This is the appeal from Nelson’s case from VCAT.

In this case, a commercial building in Melbourne’s CBD was changed [adding an extra floor] and re-subdivided a number of times between 1994 and 2011 to create multiple owners corporations and differently sized and configured lots and a failed attempt to increase [doubling] the lot entitlements and lot liabilities for the strata lots on the two topmost building levels by unanimous decision.

VCAT approved the changes [as set out above] and the affected strata lot owners appealed.

In approving the appeal and overturning VCAT’s decision, the Victorian Supreme Court made the following important findings:

• The long-running dispute about whether a strata building could seek orders against itself [as in this case] was permissible as it was clearly intended in the strata laws, even though it went against conventional legal principles.

• That despite the earlier Victorian Supreme Court decision in Conroy’s case, an order changing lot entitlements or lot liabilities cannot be made without there having been an attempt at making a unanimous decision of the strata owners unless there is a proper consideration about whether that the proposed alteration was likely to bring economic or social benefits to the subdivision as a whole greater than any economic or social disadvantages to the members who did not consent [the test in section 34D of the Subdivision Act 1988].

• Confirmed the considerations set out in Conroy’s case for determining the ‘just and equitable’ aspects of the proposed changes to lot entitlements and lot liabilities as necessary steps to making orders.

Real Estate Victoria Pty Ltd v Owners Corporation No 1 PS332430W [2021] VSC 373 (25 June 2021)

Typical unit or lot entitlement issues

Despite the requirements of strata laws about lot entitlement and lot liability allocations, there are many strata buildings where they are misallocated.  But, they are not always obvious or identified by the stakeholders.

The main reasons why strata owners [and sometimes strata buildings] are unhappy with lot entitlements or lot liabilities fit into the following typical situations.

• One or more strata lots have very low lot entitlements or lot liabilities because they were intentionally or mistakenly kept low.  Sometimes these are owned by the developer, associated entities or consent authorities like the local council.

  Typically, these situations are easy to identify as the out of line strata lots area pretty easy to identify as they have very low lot entitlements or lot liabilities numbers and/or are very large in size.  They are often the only or few commercial lots in the strata building.

• There are obvious differences and anomalies in the size, location, value of the strata lots but the lot entitlements or lot liabilities are relatively similar.

  Typically, these situations involve identical lots on different strata building levels having the same lot entitlements or lot liabilities despite obvious differences in values or, conversely, very different lots having the same lot entitlements or lot liabilities.  So, that it’s quite obvious that they are not the same value.

• When there’s a change to the strata plan to create, eliminate or merge lots and common property by a strata subdivision but no changes or incorrect changes have been made to the lot entitlements or lot liabilities to get approval.

  Typically, these situations occur because of:

  • the politics of getting the strata subdivision plan approved between the lot owner and the strata building which create incentives and disincentives to make changes that impact on other strata lot owners and/or for the strata building to extract agreements for higher lot entitlements or lot liabilities [and therefore more strata levies] from the applicant lot owner,

  • the cost of properly investigating the market values of the strata lots with valuers, and/or

  • because the applicant strata lot owner doesn’t want to reveal the true market value of the newly created strata lots to avoid refusal, requests for compensation and/or paying higher stamp duty.

• When the use of a lot has changed and affected its value or the impact it has on common property activities.

  This happens in 2 main ways.

  Firstly, an owner simply starts using their strata lot for higher value activities which increase its value but that is not detected when a strata subdivision plan is approved and/or in other situations.  Think about residential strata lots becoming used for commercial purposes or vice versa in some situations where old commercial space is converted to high-end residential.  Or, the use of strata lots for serviced apartments or Air BNB activities.

  Secondly, when the zoning or other planning controls change to permit higher intensity or value activities in a strata lot and therefore increase its value [whether or not the use of the strata has changed].

Conclusions

There has been a generally accepted and adopted approach to the way lot entitlements and lot liabilities have been allocated in Victorian strata buildings for a long time with difficult processes and/or VCAT applications required to change them.

And, there’s a good line of VCAT and Victorian Supreme Court decisions clarifying many features of the strata laws.

But, that history is due to change later in 2021 when updates to the Subdivision Act 1988 strata impose formal requirements on those allocations and a default position for lot liabilities that permits displacement on only a few specific grounds that need to be explained and supported.

So, we’re likely to see more opportunities to challenge the initial lot entitlements and lot liabilities for strata stakeholders which will require them, VCAT and superior Courts to revisit how the new and different strata laws work.

This could open up previously impossible challenges and create new situations for those stakeholders.

September 27, 2021

Francesco ...