So you are involved in a company title building and you’re considering converting the building to strata title. There are many reasons why the owners of a building may wish to convert to strata title, including better marketability of your property, as well as a more ‘modern’ regulatory regime for your communal living.
We will step you through the process!
Potential stamp duty issues
Before kicking things off, you should take the time to ensure that each of the shareholders is able to establish that stamp duty was paid on the contract by which they acquired their shares. Without this proof, stamp duty can be payable on the historical share transfers prior to the conversion being able to take place.
Step 1 – The Company’s approval to convert to strata title
The first step is to ensure that enough of the owners are onboard with the idea to convert to strata title.
You will need to get at least 75% of the shareholders (or, if a poll is called, 75% of the shares) to vote in favour of the conversion. That said, in reality, you really need all of the shareholders to be behind the conversion. If one or more shareholders hold out against the conversion, the costs involved will significantly increase.
Formal conversion is a two-step process:
- First the members must resolve to convert from company title to strata title; and
- Secondly, the members must lodge a strata plan at the Land and Property Information (LPI).
Step 2 – Local council approval
Before you can lodge a strata plan at the Land and Property Information, the Council needs to give a development approval to the conversion of the property from company title to strata title.
It is important to have an understanding of the development process. Importantly, you will need to satisfy the following minimum criteria:
- Does the building comply with the relevant Building Code of Australia? Note that most buildings do not but there may be certain exemptions available.
- Is the building compliant with fire regulations?
- If the building has any tenants, are the tenant arrangements regulated low income housing? Low income housing is regulated by State Environmental Planning laws, which requires landlords not to convert properties from low income housing. This policy includes the conversion from company title to strata title. It is important that you understand what rentals are being paid at the time the DA is submitted.
- Sydney Water requires each lot in a strata plan to be separately metered. This may require the installation of either separate metering for each lot, or auto metering for each lot.
All the above matters are complex, and we suggest the Board of the company title building engages an experienced project manager. The project manager will charge a fee, but this can save a tremendous amount of time and money. As an indication, John Avigdor (phone 02 9331 4027) was engaged on one conversation for a fee of around $1,500 per unit.
The other consultants that the Board will need to engage include:
- A fire consultant;
- A hydraulic consultant in relation to the water metering;
- A surveyor to prepare the survey; and
- If necessary, a town player may be required in relation to the development application.
Step 3 – Obtaining the Development Approval
When the DA is obtained, the members will need to vote to approve the lodgement of the strata plan. The strata plan only needs to be signed by the company, as it is the company that still owns the property at this point.
If the company has any mortgages or charges over its shares, or has provided any mortgages over the property, the security holders will need to be informed and approve of the proposed conversion from company title to strata title. Bear in mind the company will need to supply the certificate of title for the land to obtain the strata titles. Without the certificate of title the strata plan cannot be lodged at the Land and Property Information (LPI).
Step 4 – Lodging the strata plan at the LPI
The next steps to be taken are as follows:
As the property is currently owned by the company, the company needs to transfer the property to a strata plan. A transfer will need to be prepared. The transfer is from the company to the Owners Strata Plan.
The strata plan should be lodged with the Land and Property Information for a pre-inspection. This will ensure so requisitions are raised.
Upon registration of the strata plan, the titles to all the lots will be issued by the LPI. This means that the owner of each lot will still be the company in the first instance. There will then need to be a separate transfer from the company to each individual lot owner.
If an owner has a mortgage over their shares, the mortgage will need to be noted on each strata title.
- All owners should inform the mortgagee that the company is converting from company title to strata and should arrange to have new mortgage documents prepared and signed. Those mortgage documents would then be lodged with the transfer from the company to the owner of the shares and the mortgage would be noted.
- Stamp duty on the transfers from the company to the owner needs to be considered. If the individual owner can show that they have a contract to purchase these shares that has been stamped, there should then be no stamp duty payable. However some owners may have owned their shares for many years and the contract of even the stamp duty evidence may not be available. If they are unable to produce their contract, a separate application has to be made to the Office of State Revenue confirming that the owner has exclusive use and rights to occupy the unit and that there is no charge in the beneficial ownership of the shares compared to beneficial ownership of the strata title lodged at the start. Statutory declarations are usually required in this regard.
- The timing for the transfer for the lots into the individual owners’ names will depend upon the provision of the stamp duty declarations and the marking of the transfers from the company to the owner.
It is in all owners’ best interests to have the one firm of solicitors advising all of the owners in relation to the transfer from the company to ensure that the transfers are effected correctly, i.e. that their name is put on the correct title for the unit and any mortgages are recorded correctly for the unit.
The Land Title Office (LPI) charges for registering a strata plan $298.30 per unit. While the cost of preparing the strata plan is subject to a surveyor quoting on the work.
Step 5 – WINDING UP THE COMPANY
Once the strata plan has been registered and the company has transferred all the lots into individual owners’ name, the company has no need to exist.
Most company title buildings will not have any capital gains tax issues as the assets were acquired prior to the introduction of capital gains tax.
An accountant needs to be engaged with the aid of your company manager to take steps to wind up the company or to dissolve the company. This would require the following:
- A resolution of all the shareholders;
- A cancellation of all the relevant shares;
- The allotment of one share to one Board member; and
- The Board member taking steps to wind the company up.
The company may either be would up or dissolved, but more likely than not it would be dissolved.
Who would be involved in the process?
- Activity relating to the company’s resolution usually requires a solicitor experienced in company title matters;
- A project manager should be engaged with the Board to do all the things associated with obtaining the development approval for the strata plan;
- Managing the relationship with the Office of State Revenue in respect of stamp duty usually requires the company to engage its solicitors to manage the stamp duty obligations;
- Managing the transfer of the land from the Owners Corporation to the individual owners is usually done by the same solicitor as it will be a cost saving;
- Dissolving the company can be done in conjunction with the company’s accountant and/or the company manager.
How long would the process take?
Usually the timing in these matters will take approximately twelve months.
Is the process worthwhile?
The Board of the company should obtain an appraisal from a reputable real estate agent of valuer to confirm that the conversion will increase value to individual shareholders.
A cost benefit analysis needs to be prepared as to the other costs associated with the conversion as to how the conversion will increase the value of the shareholders’ units.
What would the cost be?
A project manager should be engaged. As I have indicated, Mr Avigdor has charged $1,500.00 per unit for project management for a recent smaller block.
Solicitors will need to be engaged to advise the Board and the company in relation to:
- The meetings of the members;
- Submitting of forms to the Office of State Revenue and the payment of stamp duty;
- Submitting of the documentation to the Land and Property Information;
- Liaising with each individual shareholder about the status of the stamp duty on their contract to purchase the property;
- Liaising with shareholders who have mortgages over their shares to ensure the mortgage in correctly on the correct title of the lot.
Solicitors should be able to give you an estimate of that work with a detailed breakdown. The solicitor’s costs are usually between $1500 to $12000 +GST and disbursements per unit.
Individual consultants, such as town planners, fire consultants and hydraulic consultants will need to be engaged and they should provide an hourly rate estimate.
What structural work on the building required?
Mr Avigdor should be able to give an indication to the Board of the company as to what anticipated structural work such as fire and other matters would cost.
The company should prepare a budget and all members should vote on the budget at the first meeting after the dissolution is passed to proceed with the conversion from company title to strata.
General questions asked by the company and the Directors
Is it worthwhile going through the process?
Strata title buildings do have a defined method of resolution and the benefit of the Strata Schemes Management Act 1996 (NSW) does give Boards and owners in a strata building a right to resolve any disputes that may occur,
The amendments to the Local Court Act 2007 (NSW) do provide for a simpler and cost-effective way for company title buildings to resolve disputes.
Will the members’ units increase in value as a result of the conversion?
The company should obtain some market appraisals confirming an increase in value before they proceed to incur and additional fees.
If you would like any assistance in answering such questions about changing a company title to a strata title, please contact JFMLAW for more information.