If you live in an apartment block or unit property, you probably own a ‘strata title’ property. However, in NSW, prior to 1961 and before the introduction of strata title, these types of property were covered by something called ‘company title’. Although becoming rarer, this form of property ownership still exists.
If you bought a company title property, you are probably aware that this ownership scheme is not like any other. If you inherited such a property or are acting as an agent for someone looking to sell a company title property or home unit, you may not be aware of these differences and the significant implications this form of property ownership has for property transactions.
There are some important points to be aware of in most company title transactions. Before engaging in the sale process, we highly recommend seeking advice from a legal professional about your rights and obligations.
What is company title?
‘Company title’ describes a scheme of property ownership where a company owns a unit complex. People wishing to live in the complex purchase shares in the company. Ownership of these shares confers ‘home unit’ occupancy rights on the shareholders. We call these entities ‘home unit companies’ to reflect the fact that they are a special kind of company that owns and operates units in a residential building.
It is important to understand that home unit companies are the only proprietor listed on the Torrens Title Register for the property (subject to the involvement mortgagees and other lenders). ‘Owners’ in company title scheme merely own shares in the company which confer certain rights (including occupancy and usage rights) on those ‘owners’ in respect of their home unit and the building’s common areas. The shares do not confer ownership of the ‘home unit’ that you occupy.
So, how do you sell an interest in a company title or home unit property? The process is not the same as in normal conveyancing transactions, and you are certain to run into trouble if you don’t do things the right way from the beginning.
What is different from the usual conveyancing process?
Apart from the obvious fact that you are selling shares in a company not an interest in land, there are three main differences that all home unit vendors should be aware of:
- The vendor needs to obtain approval from the Board of Directors of the home unit company to sell their shares;
- Certain unique documents must be prepared to enact a conveyance of shares; and
- There are mandatory disclosures and warranties that must be made to the purchaser.
Obtaining approval from the Board of Directors
In all home unit companies, shareholders and directors are bound to act in accordance with the governing rules of the company. These rules are usually contained within a company’s articles of association or constitution, which may be supplemented by rules enacted by the board of directors. It is important to understand that shareholders and directors cannot deviate from the procedures within these documents unless the wording of the rule allows for discretion.
Home unit companies will often require that the Board of Directors provide written consent to a prospective owner before a transfer of shares can take place. Vendors are often surprised by this requirement and there can be some stressful weeks attempting to pressure the board to provide rapid approval. It is important to note that the board does not have to provide its consent, especially if it is concerned about the status of the purchaser or vendor.
To avoid a transaction falling through, a vendor must seek board approval as early in the process as possible. In some cases, the board of directors may need to seek legal advice before granting consent. Accordingly, it is important to maintain constant contact with the company and its agents once consent is sought and to engage independent legal advice if problems occur.
Documents to enact a conveyance
The main document needed to effect a sale of a home unit is a ‘Contract for Sale of Shares’ (CoSS). Obviously, this document is different from a typical ‘Contract of Sale’ for land and is primarily governed by Australian companies’ legislation.
The draft CoSS must be made publicly available when the Vendor offers to sell their shares. It needs to include several important facts, including a summary of particulars relating to the area(s) to which the shares relate, the nature of the rights attached to those shares, and other relevant disclosures relating to the land as a whole.
The other document required is a ‘Transfer of Shares’ (ToS) agreement. Like a registerable dealing in a typical land conveyance, the ToS must be stamped by Revenue NSW and must be executed to formally transfer the shares from the vendor to the purchaser.
Disclosures and warranties to the purchaser
The vendor in a home unit transaction is also required to make several disclosures to the purchaser that are unique to these schemes.
In particular, the vendor will need to disclose whether the company is subject to ongoing legal proceedings, whether it is being wound-up (especially in circumstances where the building is undergoing a transition to strata title), and whether there are any contingent liabilities relating to the company. These disclosures may arise in respect of local council Fire Orders and charges, pending legal decisions etc.
By law, the vendor is required to make warranties to purchaser concerning the above events and liabilities. These may be contained within the CoSS.
Why do you need a lawyer?
As you can see, the conveyancing process for home units is not as simple as for a typical plot of land. This is because you own shares in a company, not an interest in the land itself.
First, you must seek the consent of the board of directors to enact the transfer of shares. This needs to be done early to prevent any delays in the conveyance.
Second you will need to prepare the relevant documents to enact a transfer of shares. Many non-lawyers will be unfamiliar with the drafting of a CoSS or ToS agreement meaning that you will need to engage a competent solicitor to prepare and help you to execute these documents in accordance with the applicable corporations law.
Finally, you will need to make sure that you cover off all of your legal obligations as a vendor of ‘shares’ – including making the necessary disclosures and warranties required under the corporations legislation.
If you’re a company or shareholder selling a company title home unit, we can assist you in fulfilling your obligations. Just call JFMAndreyev on (02) 9199 8597 for a chat.