Introduction

In the ever-changing world of property management, strata schemes are now a big part of New South Wales (NSW) housing. These schemes, ruled by certain laws, are important for setting up how developers, Owners Corporations, and unit owners interact. A big piece of this puzzle is the ‘initial period’ of a strata scheme. What does it mean for everyone connected, and why is it so vital early on in a strata’s journey? Understanding this could unlock many secrets of successful property management in NSW, offering surprises and insights that might just change your perspective.

This article, curated for both developers and strata property owners, demystifies the concept, offering a deep dive into its implications, obligations, and restrictions. As PBL Law Group, our goal is to equip you with the knowledge you need, ensuring transparency and clarity in your strata dealings. So, whether you’re a seasoned developer or a strata property owner in NSW, this guide is tailored to illuminate the nuances of the initial period for you.

What is the initial period in a strata scheme and how long does it last?

In simple terms, the initial period is a specific time frame that starts upon the registration of a strata plan that results in the creation of the owners corporation and which converts the land owned by the developer into lots and common property. At the beginning of the initial period, the developer would hold all the lots in the scheme. The initial period expires once the developer no longer holds at least one third of the aggregate unit entitlement of the strata scheme.  The initial period does not end if the developer retains ownership of at least one-third of all lots. Technically, this means the initial period can last months if not years as long as this criteria is met.

Developer vs owners corporation during the initial period of a strata scheme

The developer holes a special role during the initial period because, specifically at the beginning of the initial period, the developer will hold a majority, if not all, of the lots within a strata scheme. This places the owners corporation under direct control of the developer allowing the developer to influence and make decisions that can have potentially long-lasting effects even when the developer no longer owns one third of all lots.

Given that the developer has such influence over the actions and decisions of the owners corporation during the initial period, legislation have been put in place to restrict what the developer and the owners corporation can do during this time. It needs to be emphasised that this legislation not only restricts what the developer can do in their role as the developer, but also what the owners corporation can do given the developer will, essentially, be in control of the owners corporation. Hence force, any references to restrictions on the owners corporation can be viewed to be restrictions indirectly placed on the developers for the period of time the developers can exert control over the owners corporation. We will now explore what these restrictions are in the rest of this guide.

What must the developers do during the initial period of a strata scheme?

During the initial period of a strata scheme, the developer has an array of obligations in NSW. Firstly, they must ensure the strata roll is up-to-date, particularly noting the company nominee’s details as voting rights hinge on this (Schedule 1 Part 4 clause 23(1) of the Strata Scheme Management Act). The developer is also obligated to convene the inaugural general meeting, which is essentially the first meeting post the registration of the strata plan, to undertake activities such as the appointment of a strata managing agent, determination of levies, and confirmation of insurances.

Until the first annual general meeting or until the roles are filled, the developer exercises the functions of the owners corporation’s chairperson, secretary, and treasurer (section 47 of the Strata Scheme Management Act), although they may assign these duties to an authorized agent. They must secure insurance, decide estimates, and set levies for the scheme’s expenditures during the initial period. If these levies fall short of actual needs, the developer might be liable for compensation (section 89 of the Strata Scheme Management Act).

Furthermore, within two months post the initial period, the developer is bound to arrange the first annual general meeting (section 14 of the Strata Scheme Management Act). Crucially, 48 hours before this meeting, they are obligated to deliver to the owners corporation a myriad of documentation as stipulated by section 16 of the Strata Scheme Management Act and clause 6 of the Management Regulation. This includes, but isn’t limited to, planning approvals, insurance policies, building contracts, and any relevant BASIX certificates. However, it’s worth noting that the developer only needs to provide these if they are within their possession, control, or reasonably obtainable.

What can developers do during the initial period of a strata scheme in NSW?

During the initial phase of a strata scheme, developers have certain rights and privileges, as stipulated by the Strata Scheme Development Act 2015 (NSW). Specifically, developers can:

1. register dealings related to common property;
2. subdivide a lot or common property; or
3. convert one or more lots into common property

but only if the developer owns all the lots in the scheme wne the owners corporation gives its approval or the NCAT has authorised it.

Restrictions on the owners corporation during the initial period under the Strata Scheme Management Act 2015 (NSW)

During the initial period of a strata scheme, developers face various restrictions to ensure the integrity and fairness of the strata scheme for its subsequent owners. These restrictions are outlined in sections 26, 132A and 140 of the Strata Scheme Management Act 2015 (NSW).

Initial Period Restrictions under Section 26

During the initial period, section 26 of the Strata Scheme Management Act 2015 (NSW) constrains the owners corporation (and by extension, the developer to the extent the developer holds enough control over the owners corporation) from:

1. making alterations to the common property such as removing essential features;
2. accumulating a debt greater than what is available in the administrative fund or capital works fund;
3. appointing a strata managing agent, building manager or another person to assist in the management, maintenance or repair of the common property for a period of time extending beyond the first annual general meeting; and
4. borrowing money or giving securities.

An example of this restriction’s implications can be seen in Bondlake Pty Ltd v the Owners – Strata Plan No 60285 [2005] NSWCA 35 (the Bondlake case). In this case, the owners corporation entered into a caretaker agreement for the appointment of a caretaker for a period of five years with three options for renewal each for five years. This agreement was entered into and signed a little over a week after the strata plan was registered and the owners corporation was created. 

Both the NCAT and the NSW Court of Appeal found the owners corporation breached section 26 by accumulating a debt greater than what was available in the administrative fund or capital works fund. This was the case as part of the agreement signed, the owners corporation, and by extension the developers (who had control of the owners corporation at the time), agreed to pay monthly payments that totalled to a sum of over $84,000 in the first year. However, the owners corporation’s administrative fund nor the capital works fund had enough funds, which was barely a month-old, did not have enough funds to pay the caretaker’s first month’s invoice. 

Initial Period Restrictions under Section 132A

The owners corporation is also restricted in relation to agreements they enter into for the supply of electricity, gas or other utilities. Specifically, those agreements must expire at the conclusion of the first annual general meeting if the agreement was executed during the initial period or before the strata plan registration.

Initial Period Restrictions under Section 140

Section 140 prohibits an owners corporation from changing the by-laws during the initial period which would result in a right being conferred or an obligation being imposed on one or more (but not all) owners or in respect of one or more (but not all) lots.

What happens if the owners corporation breaches the initial period restrictions under the Strata Scheme Management Act 2015 (NSW)?

When the owners corporation (which was under control of the developer) violates the restrictions under sections 26 and 140 of the Strata Scheme Management Act 2015 (NSW), several remedies are available for the lot owners and the subsequent owners corporation (which is no longer under the control of the developer) against the developer:

• For a breach under section 26, lot owners can claim damages for breach of a statutory duty, reflecting any losses they have incurred due to the contravention. However, if the breach concerns incurring a debt, the owners corporation has the right to recover from the developer any amounts the owners corporation incurred as a result of the breach (e.g. any penalties or fines the owners corporation had to pay because developers, acting as the owners corporation, incurred a debt). This does not mean the owners corporation can sue the developers to pay for the actual debt incurred.
• For contraventions of section 140, both the owners corporation and individual lot owners can recover damages for losses due to the breach of a statutory duty.

Importantly, developers have potential defenses against allegations of breaches under sections 26 and 140. To defend themselves, developers must demonstrate one of the following:

1. they were unaware of the contravention;
2. they couldn’t influence the owners corporation’s conduct concerning the breach; or
3. they took due diligence measures to prevent the contravention.

It’s noteworthy that seeking remedies under sections 26 or 140 does not negate the possibility of pursuing other legal remedies.

Restrictions on the owners corporation during the initial period under the Strata Scheme Development Act 2015 (NSW)

During the initial period under the Strata Scheme Development Act 2015 (NSW), there are certain restrictions placed on the owners corporation, primarily aimed at ensuring the developer’s significant influence is appropriately balanced. Firstly, the owners corporation cannot register a dealing related to the common property, as outlined in Division 6 of the Development Act, unless the developer owns all lots or the NCAT grants specific authorisation. Furthermore, the subdivision of a lot or conversion of lots into common property is restricted unless the developer retains ownership of all lots or gains the NCAT’s approval.

Additionally, the owners corporation is restricted in its voting capacity on issues related to building defects and their rectification as per section 15 of the Strata Scheme Management Act. Notably, if the developer’s total unit entitlement equates to half or more of the overall unit entitlement, their voting value is diminished by two-thirds in various scenarios, such as determining special resolutions, electing officers, appointing strata managing agents, or when a poll is demanded on certain motions. These restrictions are designed to protect the interests of individual lot owners against undue developer influence.

Conclusion

Grasping the dynamics of the initial period in a strata scheme in NSW is crucial for developers, owners corporations and strata property owners alike. Our comprehensive guide aimed to shed light on the rights, obligations, and legislative restrictions that shape this pivotal stage in property management to ensure a fair balance between the rights of the developer and lot owners. Whether you’re an established developer or a budding strata property owner, PBL Law Group has more than 50 years of legal experience dedicated to delivering transparent and actionable insights for every strata transaction. Contact one of our experienced strata lawyers today.