Converting Company Title Buildings to Strata: A 2021 Update
Transforming older apartment title structures into more modern versions ...
Before strata title, most privately held apartments were under company title structures. Many survive today and have a band of loyal adherents. But, many have and want to convert to strata title. Here’s an updated guide to the process and key issues.
[12.25 minutes estimated reading time, 2461 words]
In one of my past [strata] lives I presented at seminars, conferences, and training events around the world on strata title topics. My presentations varied from legalistic dissertations to fun ‘hypothetical’ style panels. So, you may as well have access to the more useful of them via this newsletter.
Here’s a 2021 update of my paper for the Andreones Lawyers’ strata manager training sessions I used to run in the noughties.
It’s a non-technical overview of the fundamentals and issues relating to converting company title buildings to strata title for anyone wanting to better understand this process.
Francesco ...
June 09, 2021
CONVERTING COMPANY TITLE BUILDINGS TO STRATA [2021 UPDATE]
Introduction
Company title is a way of dividing the ownership of a multi dwelling or occupier building without a subdivision of land or creating separate legal titles and sits outside the strata regulatory environment.
Company title buildings are characterised by the following key features.
The land and structures for the building are owned by a limited liability company and not individuals.
There is only one title.
The apartment owners are the shareholders in the company.
The shareholders are given exclusive occupancy rights to their respective apartments by means of provisions in the company’s constitution (with or without a formal lease document).
The constitution regulates the control and administration of common areas of the company’s land and buildings and the powers and duties of all persons involved in the scheme (including the directors).
Company title buildings are governed by the Corporations Act 2001.
Many company title buildings have converted and want to convert to strata title. So, this paper covers the main issues and processes involved in the conversion process.
Power & decision to convert
Before taking a decision to convert to strata title, the company must have the power to do so.
Many companies will not have this power, because they were incorporated before the first strata titles legislation was proclaimed in 1961 and are therefore not covered by the ‘ultra-intra vires policy’ provisions of the newer Corporations Law. If this is the case, the company’s Memorandum of Association [old constitution] will need to be changed to provide the necessary power.
Before converting to strata title, it is also necessary to determine the wishes of shareholders by:
informally canvassing the opinions of shareholders by means of a circular or at a general meeting of the company; and/or
proposing a motion along the following lines to a general meeting of the company.
MOTION: ‘The shareholders approve conversion of the company home unit scheme to a strata title home unit scheme supports the directors in their proposed investigation of such a course of action.’
Issues to consider that affect conversion
A number of matters affecting conversion to strata title require consideration including the following.
A. Corporate Issues
Whether the shareholders have separate contractual rights with the company for the occupation of the apartment allocated to them by the constitution notwithstanding a conversion to strata title. This situation arises regularly.
Whether the conversion to strata title will amount to a modification of the rights of the shareholders, thus requiring formal consent pursuant to the provision relating to the modification of constitutional provisions conferring rights. This is unusual but sometimes happens.
Whether it is necessary to change the constitution of the company by a three-quarter majority shareholder decision to empower it to proceed with the conversion. This will be necessary in most conversions to strata title.
These matters can only be determined after consideration of the constitution.
B. Local Government Requirements
Although it is beyond the scope of this paper to detail local government requirements, in summary, they typically involve the following issues for a company title conversion.
Planning requirements may require development consent for conversion. This is not usually the case because most company title buildings have existing use rights as residential apartments.
The state of repair of the building may require upgrading to satisfy local government requirements. This may involve guttering, painting, electrical, or plumbing work and the work involved may be substantial. Usually, fire safety works or upgrades present the greatest problems.
Car parking requirements [especially for visitor spaces] may also become important and can be complicated by any existing company title parking arrangements involving licence arrangements with shareholders.
C. Survey matters
A strata plan needs to be prepared delineating the lots in the new strata corporation and, consequently, the common property areas.
Sometimes, problems can be encountered in surveying for conversion to strata title. In particular:
any encroachment of the building onto adjoining land will necessitate a re-subdivision before conversion,
existing easements and rights of way affecting the property may complicate, if not preclude, conversion,
exactly how the lots are configured can cause disputes with shareholders who believe through long-term unsanctioned use of common areas those areas should be within their new lot, and
whether to include parking and storage areas in a single lot with the dwelling or create multiple separate utility lots.
D. Mortgagees of shares
If any shareholder has mortgaged their shares, the mortgagee/s of those shares will need to approve the proposed conversion and execute a range of share and property-related documents.
This consent is usually obtained as a matter of course because mortgagees recognise the improvement in their loan security that usually results from the conversion.
However, most mortgagees will impose conditions on their consent (including payment of all of their costs) which can be procedurally messy and costly. Typically, the shareholder/lot owner will pay those costs, but that needs to be clarified and agreed upon so that the conversion is not delayed.
So, the company should satisfy itself that it can meet those conditions and/or cover them off in its arrangements with shareholders.
The advantages & disadvantages
Like all decisions in strata land, there are advantages and disadvantages to conversion to strata title.
The disadvantages include:
The ability of a company title home unit scheme to decide who will be permitted to become members and in some cases occupants of units will end after conversion. This can be a valuable right and an important consideration.
Strata title lots usually attract a higher rate liability (for council and water rates) overall than company title apartments.
Land tax liability may be adversely affected by conversion although this differs in each case and depends on the landholding and exemption entitlement of the individual shareholders. Some shareholders will usually be better off under a strata title scheme while others will be worse off.
In most company title schemes shareholdings can be forcefully sold in certain circumstances [like for unpaid contributions]. This is not possible in relation to interests in a strata title scheme except by the indirect process of bankruptcy action.
There may be a capital gain liability that accrues to some shareholders upon a conversion depending upon the application of the ‘roll-over’ provisions of the tax laws even though the unit is not actually sold.
The advantages include:
Unlike the difficult enforcement procedures for company title schemes (ie: Supreme Court proceedings and local court action for some disputes), strata title schemes have a readymade dispute resolution procedure through mediation, and the various CATs [NCAT, VCAT, QCAT, etc].
Strata title lots are readily acceptable as valuable mortgage security whereas company title share ownership is not generally regarded as equally good security for loan purposes.
Ordinarily having a strata title lot means a higher market value than a company title for the same apartment.
There are also a few other differences to consider as follows even though their impact is relatively neutral:
The administration and management aspects of both types of titling schemes are fairly similar.
Some insurance covers required by members (particularly commercial occupiers) are more readily available within a strata scheme.
The costs of conversion are likely to be significant because of the procedural complexity of the process, the need to undertake repeat processes for each shareholder/owner, and the third-party fees and charges payable to councils, land registries, duties offices, surveyors, planners, banks, etc.
12 steps for company title conversion
Here are the 12 steps to converting a company title home unit scheme to strata title.
1. Altering the constitution
The first step in the conversion process involves an alteration of the constitution to empower the company to proceed.
The procedure for such an alteration is as follows:
The directors resolve to convene an extraordinary general meeting of the shareholders to consider a motion for a three-quarter majority vote to add the power to convert.
The shareholders’ meeting is convened by the secretary (who should ensure that 21 clear days’ notice is given) and then the necessary three-quarter majority vote is passed.
Notification to the Australian Securities Commission should be prepared and lodged with the Australian Securities Commission about the constitution changes.
2. Formal decision to convert
So far there has only been an informal decision to proceed to conversion as well as a change to the memorandum empowering the company to effect the conversion.
So, there must also be a formal decision by the company to proceed with the conversion.
In most companies, the Board of Directors may make that decision. But, they should do this with the confidence of knowing that the members have already approved of the plans to convert to strata title.
3. Consent of shareholders
At this point, the consent in writing of all shareholders should be obtained for the conversion.
Ideally, that’s done by way of an agreement that sets out the process, what each shareholder must do, who pays for what between the company and the shareholder, and what happens when something isn’t done or doesn’t happen.
Proceeding without having binding agreements, risks a shareholder changing their mind or just failing to respond in a timely way or at all.
4. The strata plan
A surveyor must prepare the strata plan in consultation with the directors to ensure that each shareholder’s lot is identical with their apartment and other areas that are exclusively occupied by that person.
Unit entitlements for lots must be allocated. They should be proportional to the existing shareholding in the company but also reflect the relative market values of the lots which can create some conflicts. In a worst-case situation, the new lot values will need to be determined by a valuer.
After the strata plan has been prepared it should be approved by the directors and a copy should be sent to all members for their approval. In this way, any errors or omissions will be identified, considered, and resolved.
5. Shareholders’ details
When circulating the draft strata plan to shareholders, it is also convenient to obtain details of:
any current mortgages over the shareholding;
how the shareholder is to be described on title to the new lot;
approval for the solicitor to acceptance the Transfer of the title to the new lot on behalf of the shareholder;
agreement by the shareholder to the transfer of the new lot in exchange for the rights of occupancy of the apartment; and
where the certificate of title for the new lot should be sent when it issues.
This also helps identify any potential issues with shareholders.
6. Mortgagees
Once the mortgagees have been identified they should be contacted to ensure they approve the proposed conversion to strata title and the draft strata plan and to ascertain their requirements for re-documenting their security.
7. Local council approval
The strata plan is then lodged for subdivision approval by the local government or other relevant consent authority.
This may also require development consent in many cases due to the impact of local planning instruments.
8. Registration
After local government approval has been obtained and the registration documents are signed by the company, the strata plan is lodged for registration in the Land Titles Office and any requisitions they issue resolved.
Once registered the strata corporation for the new strata plan, the new lots and common property titles are created. Those titles will be issued:
in the name of the new strata corporation for the common property, and
in the name of the company for all the strata lots [since the company is like the developer or original owner].
9. Transfer of lots
Title to the newly created lots must then be transferred to the shareholders in the company by signing transfer forms.
The transfers are prepared on the basis of a nominal consideration [$1.00] and they must be stamped with applicable duty before they can be lodged for registration. Provided the Stamp Duty Office is satisfied (usually by statutory declaration) as to the following matters only nominal duty will be payable in respect of each transfer:
That the transfer is part of an arrangement under which the transferee takes an interest in the lot similar in effect and in substitution for the interest the transferee had in the lot immediately before the registration of the strata plan in which the lot is contained.
That the transferee was, immediately before the registration of the strata plan in which the lot is contained, entitled to exclusive occupation of the lot by reason of:
being the registered owner of certain shares in a company that had a memorandum of articles of association conferring that entitlement on the transferee,
being a lessee having the entitlement conferred upon him under a duly stamped lease for a term exceeding fifty years, or
rights under an agreement where those rights were dependent upon his being a co-owner of a parcel within the meaning of the Act.
Where there is a mortgagee, their new strata title mortgage will also need to be registered on the lot.
10. Strata title matters
Immediately after the strata plan is registered a number of routine matters must be attended to by the company as it becomes the original proprietor in the strata scheme.
These matters apply to all new strata title buildings and are beyond the scope of this paper but include setting up the books and records, establishing the funds, organising insurance, convening the first AGM, etc.
11. Transferring company assets & arrangements
Any other assets of the company like equipment and money need to be transferred to the new strata corporation.
Plus, any contracts or other operating arrangements with the building need to be transferred to, assigned to, or, remade with the providers by the new strata corporation
12. Winding Up the Company
Once the company has transferred the lots to shareholders and the assets to the new strata corporation, its commercial, financial and legal affairs should be put in order to enable its winding-up by a members’ voluntary winding-up.
The procedure is identical to that prescribed for all companies and also beyond the scope of this paper.
Once all these steps are completed there’ll be new strata corporation for the building and the old company will cease to exist.