Amendments to the Unit Titles Act 2010 were passed into law this month, May 2022. Once in force, these amendments will have implications for owners, developers, building management companies and others.
Over the next few months, we will be issuing a series of articles to discuss the changes.
Many changes clarify or adjust governance processes, aimed at better governance of multi-unit buildings and higher density living. We have summarised these at the end of this article.
In today’s article, we look in more detail at the new power to assign multiple sets of utility interests, each targeted at a particular service or amenity, thereby allowing differential apportionment of operating expenses between units.
Current position – who pays for what?
The funding of repair, maintenance and operating costs are currently apportioned on a utility interest basis, which is the relative value of a unit compared to the others in the development. This relative value is certified by a registered valuer, or determined by a singular assessment that assigns utility interest differently, provided that other assessment is fair and equitable having regard to the relevant costs and benefits to units.
Once the legislative changes come into force (the precise date isn’t confirmed and might be as much as two years away) a developer or an existing Body Corporate may assess multiple services and amenities and then apportion share of funding for these differentially. This percentage liability may then be specified to an owner for that service or amenity.
“(2B) A utility interest assignment for the purposes of subsection (2A) may be—
(a) a single uniform interest; or
(b) a multiple set of interests,
(i) each targeted at a particular service or amenity; and
(ii) which may be, for a specific interest targeted at a particular service or amenity, assigned to some units only.”
Why the change?
This appears to have been intended to introduce flexibility in the apportionment of running costs –loosely a ‘fairness’ approach. Take the Select Committee report in developing the legislation:
“In general terms, units that use more of the unit title development’s utilities, such as plumbing and lifts for top storey apartments, will have a larger utility interest and pay more in levies.”
That characterisation is misleading. It suggests a user pays type model, which is not what the legislative change does. Nor, in our view, is the change about use of ‘utilities’. Rather, utility interest acknowledges the differing utility (ie, cost/benefit) of a service or amenity to a unit.
Nevertheless, the change does aim to give buildings the ability to re-allocate what an owner needs to pay to run and maintain a building based not on the relative value of their unit, but based on how much benefit or value a particular budget line item accrues to an owner.
Multiple utility interests are likely to provide a useful mechanism for developers of mixed-use buildings by allowing for the differential demands or costs of running residential versus accommodation versus retail versus commercial. This would avoid retail units having to pay for a pool and owner occupiers bearing the expense of a reception desk.
It will be important for purchasers off-the-plans and their legal advisers to require confirmation of what the utility interests will be, before committing to a purchase or going unconditional.
Is it a good change?
We would suggest the change is both conceptually problematic, as well as functionally problematic.
Introducing notions of fairness or relative benefit to the determination of who has to pay inevitably creates a playing field for arguments over what is fair and who benefits. Given an owner’s share of costs can impact the value of the property, the possibility your costs could be increased if 75% of owners say so (the threshold for reassessing utility interest), raises the question of whether such uncertainty undermines the reliability of due diligence when deciding to purchase.
Ironically, the interaction between running cost and property value that led to the apportionment of such costs on a relative value basis.
Judicial reasoning on disputes over who benefits have usually pointed to the fact that owners knew what their percentage liability was when they purchased, so they can hardly complain later. That certainty is weakened by the attempt at ‘fairness’ introduced by the notion of utility interest.
It is concerning that the published regulatory impact assessment for the new Unit Titles Act amendments does not include any economic assessment of utility interest changes or how these might impact the market or title.
Because utility interests are used to determine apportionment of every kind of Body Corporate expense (except capital improvement matters) we expect disputes to arise over what should or shouldn’t be reassessed under the new utility interest provision, and what budget item or expense is or isn’t a service or amenity, or whether such expense can be targeted or particularised in sufficient isolation to allow a reassessment.
Interestingly, the report of the Select Committee on the utility interest changes said: “We would expect bodies corporate to only do this [reassessment] if it were beneficial to their circumstances.” Given the communal nature of unit titles, and the diversity of owners’ interests or perspectives on what might be beneficial, the expectation of the Select Committee is more wishful thinking than anything else.
Overview of the Unit Titles (Strengthening Body Corporate Governance and Other Matters) Amendment Act 2020 (Amendment Act)
Improving information disclosure to prospective unit buyers
Given it can be difficult for a buyer to gain information about unit title developments where there is limited access to aspects of the common property, the Amendment Act substantially alters the disclosure regime by not only adding to what must be disclosed, but requiring the body corporate to certify certain disclosures.
Prospective buyers would also have the right to delay or even cancel settlement where they have not been provided with a complete and accurate pre-contract disclosure statement.
Strengthening body corporate governance arrangements
Significantly, the Amendment Act requires a body corporate committee to comply with a code of conduct contained in the Regulations. This code includes the requirement that a committee member gains understanding of anything in the Act or the Regulations relevant to their role on the committee.
The Amendment Act also alters the decision making and record keeping processes.
These changes to body corporate governance are intended to balance providing benefits to unit holders and additional compliance costs imposed.
Increasing the standards of body corporate managers
As well as the body corporate committee, a body corporate manager would also be required to comply with a code of conduct. This includes requirements that the body corporate manager:
- Always act in the best interests of the body corporate
- Acts in good faith, exercises due care and diligences and does not make improper use of the position
- Discloses any conflict of interest to the body corporate committee upon becoming aware of them
Ensuring that unit title developments adequately plan for and fund long-term maintenance projects
The Amendment Act adds to existing long-term maintenance provisions by extending the term of a long-term maintenance plan from 10 years to 30 years. These plans must be reviewed every three years.
Additionally, if the body corporate has decided to not establish a long-term maintenance fund, the Amendment Act requires this decision to be reviewed annually.
With these changes coming into force by 9 May 2024 at the latest, if you have any questions about how they might affect you please do not hesitate to contact someone at Lane Neave.