If you are a company title director for any period of time, there is a good chance that you will receive a proposal for major renovations to a home unit.
Dealing with renovations can be tricky for several reasons; the most obvious being that the building itself may be devalued if the renovations are overly disruptive or carried-out incorrectly. Unfortunately, it will be the volunteer members of the Board of Directors (the Board) who must deal with the ensuing outrage of the building’s occupiers.
Company Title Governance Documents
Upon receiving a proposal for major renovations, your first act should be to consult the building’s governance documents, being the Articles of Association (or Constitution) and House Rules. Unfortunately, many company title documents omit any reference to ‘major renovations’, and even if they do, the relevant articles are often vague. This is particularly the case for buildings constructed and incorporated in the mid-1900s.
Evaluating a building’s governance documents will often reveal several other problems. For example, if the Articles need updating to include provisions about major renovations, they may require the consent of the entire Company to make amendments to the House Rules (instead of a simple Board resolution) or the existing renovations rule itself may require this kind of consent. Such clauses can be very problematic if a minority of members are opposed to the renovations.
There is a modern way of dealing with major renovations proposals that we encourage all company title directors to consider. We provide a brief summary of that procedure below, along with some useful suggestions as to how to protect the building from any negative consequences as a result of renovations going awry.
How should my building manage renovations?
Your governance documents should provide as follows:
- The Articles empower the Board to make rules and regulations for the building and to amend these when necessary through a Board Resolution.
- The House Rules include a ‘Major Renovations’ clause empowering the Board to approve or reject proposals for Major Renovations.
- The House Rules include a ‘Renovations Policy’ outlining the steps needed to seek approval from the Board.
- The Renovations Policy requires a Member submitting a proposal for a Major Renovation to sign a ‘Major Renovations Deed’ when their proposal is accepted by the Board.
What is a Renovations Policy?
The Renovations Policy clarifies the approval process for renovations. It is usually contained within the Company’s House Rules and outlines the following:
- A definition of ‘major renovations’ that reflects the definition applied by Strata Title buildings1;
- A definition of ‘minor renovations’2 that communicates to Shareholders that the Board’s written approval is not required for minor renovations; and
- An outline of the process to be followed when a Shareholder proposes major renovations.
Including the Renovations Policy in the House Rules ensures that the process is applied to all Shareholders over time.
What is a Major Renovations Deed?
Once the Board is empowered to approve major renovations under the Constitution, the Company should take advantage of this power and ensure that this approval is contained within a formal, legally binding document.
The written approval of the Board should be contained within a Major Renovations Deed that imposes legally binding obligations on a Shareholder. The purpose of the Major Renovations Deed is to ensure that the Company’s main asset (the Building) is protected at all times by ensuring that major renovations are compliant with the Building Code and other Australian standards. This protection will apply even after the Shareholder has sold their shares.
The Major Renovations Deed also ensures that Shareholders and their successors in title are responsible for any damage caused to the building. Without a legally binding document, it will be difficult for the Company to pursue a Shareholder (or future Shareholder) if the renovations are later found to be defective.
Finally, the Major Renovations Deed provides the Company with a legal basis to compel a Shareholder to ensure that the major renovations are compliant and in accordance with the Board’s approval. In the worst-case scenario, the Major Renovations Deed will allow the Company to bring a court action for an order that the Shareholder complies with their obligations.
If you have received a proposal for a major renovation from one of your company title building members and don’t know what to do or if you would like us to review the current renovations approval process in your company title building, please give us a call on (02) 9199 8597 to see how we can help you.
1 ‘Major Renovations’ usually include changes to property structure and/or the external appearance of the property, waterproofing and any other renovation that requires external approval, such as council permission
2 A Minor Renovation usually includes kitchen renovations, installing or replacing wood or other hard flooring, reconfiguring walls or recessed light fittings and installing an air conditioner or clothesline.