Unit Titles Act 2010 Disclosure Regime

Monday January 19, 2015

BODY CORPORATE DISCLOSURE REGIME – SUMMARY AND PRACTICAL TIPS FOR BUYERS

Despite the Unit Titles Act 2010 ("the Act") being in force for over four years now, it is surprising that the disclosure regime outlined in the Act is sometimes still misunderstood and misapplied by sellers, buyers, real estate agents and Body Corporates. 

It is important for any discerning property investor to understand this disclosure regime if the investor wants to complete due diligence prior to purchasing a unit in that Body Corporate.

With the prevalence of weathertight and other construction issues, it is important for buyers to be aware of the risks of buying into Body Corporate developments. 

This brief article will quickly map out the legislative framework and then aim to give some practical tips and tricks for the buyer wishing to complete due diligence.

It is important to note that there is actually a prohibition on contracting out of the disclosure regime under the Act.  Failure to provide the disclosure statements may delay settlement of the purchase or alternatively allow the purchaser to cancel the agreement. 

The Act specifically states that a buyer may rely on the disclosure statements provided to them.

Pre-contract Disclosure

Even before a buyer enters into an Agreement for Sale and Purchase of a unit, the seller must provide a disclosure statement to the buyer. 

There is a specific form outlining the prescribed information in the Act and Regulations that needs to be included in this statement. This disclosure statement is divided into two parts.

Part one really only sets out basic unit information, including explanations regarding what a unit title property is and key definitions associated with Body Corporates. 

Part two of the statement sets out specific information about the unit, such as:

1.    The amount of the contribution levied;
2.    The period covered by the contribution;
3.    What the next 12 months' levies will be;
4.    Any maintenance to be carried out in the next 12 months; and
5.    Various other information about Body Corporate accounts etc.

Importantly it contains a statement whether the unit or common property has been subject to a claim under the Weathertight Homes Resolution Services or other civil proceedings relating to water penetration of the buildings in the unit development. 

Two important things to note about this pre-contract disclosure statement are that:

1.    The statement regarding weathertightness is only whether a claim is currently on foot, not whether one is anticipated or pending (although if that eventuates before settlement there is a duty on the seller to disclose the change to the buyer); and
 
2.    Secondly, the form is signed by the seller and not provided by the Body Corporate itself (meaning there is unlikely to be liability to the Body Corporate if the pre-contract disclosure is incorrect).

Additional Disclosure Statement

A buyer may request an additional disclosure statement prior to five working days after the date that the agreement was entered into or prior to the closing of the 10th working day before the settlement date (whichever is earlier).  Whereas the other two disclosure statements – pre-contract and pre settlement – are at the seller's cost, the seller may put the cost of the additional disclosure statement onto the buyer. 

An additional disclosure statement contains:

1.    The contact details for the Body Corporate and committee;
2.    The balance of all the funds in accounts that the Body Corporate has;
3.    Any outstanding invoices;
4.    Details of expenses;
5.    Amounts owed to the Body Corporate;
6.    Details of insurance;
7.    Details of every current contract entered into by the Body Corporate;
8.    Details of every lease entered into by the Body Corporate;
9.    Details of motions voted on at the last General Meeting;
10.    Copies of the Operational Rules if different from the prescribed Body Corporate Operational Rules and Regulations; and
11.    A summary of the long term maintenance plan. 

Practically the additional disclosure statement will be the most important to a buyer wanting a comprehensive snapshot of the Body Corporate's financial status and obligations. The statement provides important information on the solvency of the Body Corporate, its contractual arrangements, obligations and the long term maintenance plan – which should set out the cost and details of all ongoing maintenance for the Body Corporate.

Pre-settlement Disclosure to Buyer

No later than the fifth working day before the settlement date, the seller provides a disclosure statement.  This contains prescribed information and is accompanied by a certificate given by the Body Corporate, certifying the information in the disclosure statement is correct.  The pre-settlement disclosure statement largely confirms some of the previous information in the pre-contract disclosure statement, but goes on to outline specifics about the unit, such as:

1.    Whether a levy is outstanding;
2.    Whether legal proceedings have been instituted in relation to any unpaid levy;
3.    Whether any other charges or costs are outstanding;
4.    The rate of interest which may be accruing on any outstanding money;
5.    Whether there are any proceedings against the Body Corporate; and
6.    Whether there have been any changes to the Body Corporate Operational Rules since the additional disclosure statement or the pre contract disclosure statement. 

The pre-settlement disclosure statement outlines the risks of buying into the specific Unit and the  Body Corporate where there might be extensive litigation on foot. Once again it is unclear whether proceedings that have been threatened but not brought yet have to be disclosed to the buyer.

Unpaid levies are important to be aware of and factored into the purchase price.  Levies under the Act run with the Unit and may be recovered from future owners and can significantly reduce the benefit of buying a Unit. Because the levies outstanding are only disclosed in the pre-settlement disclosure statement it is recommended that the amount of levies outstanding is specifically requested prior to the agreement being entered into (or a clause inserted allowing for a deduction from the purchase price).

Note that the Body Corporate does certify the pre-settlement disclosure statement meaning that if the statement is wrong there maybe liability for the Body Corporate to the seller and/or the buyer.

Practical Tips

It seems pretty obvious, but it is important before a buyer purchases a unit in a Body Corporate that it understands how the particular Body Corporate is run.  This includes both the detail of how the Body Corporate Committee operates, such as what delegations that the Committee may have (powers it can exercise without all the owners voting), through to who the Building Manager is, how the Body Corporate operates and whether there is a letting pool on site. 

Many developers under the previous Unit Titles Act 1972 set up their own Body Corporate manager company and then entrenched this company as the manager with a 'sweetheart' deal. This has led to many Body Corporate management agreements being very manager friendly and for terms of, in some cases, up to 30 years. 

If intending to let out your apartment, understanding the letting pool arrangements that are in place is also important.  Some Body Corporates have encumbrances registered over the units which provide that the units can only be rented through the Building Manager.  This has been held to be enforceable by the Courts.  The more common approach, to simply state in the Body Corporate's Operational Rules that an owner must use the Body Corporate Manager to let their unit, has been held to be unenforceable by the Courts.

Largely, understanding the Body Corporate can come down to understanding personalities, both on the Committee, in management and fellow owners. I suggest, if possible, asking around about a Body Corporate's reputation or wandering around the Body Corporate to see how it feels prior to purchasing.  This can often alert you to any construction or other issues. 

Written by Ben Eagleson, Associate, Holland Beckett Lawyers

This article was published Associated News (Issue 40)

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