NSW: Q&A Steps to Sell Off or Purchase Common Property

NSW Lot Owners have questions about selling off common property and also purchasing the right to use common property. Emma Smythies, Bugden Allen Graham Lawyers provides a few options plus the steps involved.

Table of contents:

• QUESTION: We would like to sell off an area of common property to a neighbouring property, with proceeds going to the capital works fund. Would we need to pay income tax and would the sale change unit entitlements?
• QUESTION: I want to purchase the roof space above my apartment to build another bedroom and the committee has agreed. What happens now and how do we work out the appropriate price to pay?

Question: We would like to sell off an area of common property to a neighbouring property, with proceeds going to the capital works fund. Would we need to pay income tax and would the sale change unit entitlements?

We have an area of the common property which has never been used since the original SP was established in 1975. We would like to sell this area (approx 190 m2) to a neighbouring property, with the proceeds going to our Capital Works fund. However, we are not sure about two issues:

1. Would the Owners Corporation be liable to pay income tax and/or GST on the proceeds?
2. Due to the change in our property boundaries, would legal or conveyancing changes mean a change to each of the 20 lot owners’ titles?

Answer: Normally, the sale of part of the common property would be subject to capital gains tax as the sale of a capital asset. If it is only common property that is being sold there will be no changes to unit entitlements.

Response to Question 1: Income tax

Normally, the sale of part of the common property would be subject to capital gains tax as the sale of a capital asset. GST would also ordinarily be payable as the part of the common property being sold is a vacant area of land and not an existing residence. We recommend you seek advice from an accountant on the tax consequences of the sale as there may be circumstances specific to your scheme which may change the usual tax consequences of the sale.

Response to Question 2: Unit entitlements

If it is only common property that is being sold there will be no changes to each of the individual lot titles or unit entitlements.

The owners corporation is empowered to transfer common property under section 33(1)(a) of the Strata Schemes Development Act 2015.

The process for selling the common property area is generally as follows:

1. A special resolution of the owners corporation will be required to authorise the subdivision and sale of the part of common property.
2. A deposited plan of subdivision will be required which subdivides the part of the common property to be sold into a new lot (New Lot).
3. The owners corporation will need subdivision development consent from the local council and a certificate of compliance from the water authority confirming that the subdivision complies with the water authority’s requirements.
4. The neighbour purchasing the land and will need to pay stamp duty on the transfer of the New Lot.
5. The New Lot is transferred to the neighbour and the purchase price is paid to the owners corporation.

This post appears in Strata News #362.

NSW: Q&A Right To Use Common Property: How Much for the Roof Space?

Question: I want to purchase the roof space above my apartment to build another bedroom and the committee has agreed. What happens now and how do we work out the appropriate price to pay?

Answer: We provide 2 options: Strata Plan of Subdivision OR Exclusive Use – Common Property Rights by-law. We detail the steps involved in both options and even make a suggestion on the best way to proceed.

There are 2 ways in which you can be granted the right to use the common property required to build your new bedroom:

1. Option 1: Strata Plan of Subdivision

   You can be granted a special privilege to build the new bedroom pursuant to section 108 and section 142 of the Strata Schemes Management Act 2015. You can then purchase the relevant common property from the owners corporation. This will involve subdividing the existing apartment lot and the common property required for the bedroom into a new lot by way of a strata plan of subdivision. The subdivision is done after the new bedroom is built.

2. Option 2: Exclusive Use – Common Property Rights by-law

   You can be granted a special privilege to build the new bedroom and exclusive use of it by way of a common property rights by-law pursuant to section 108 and section 142 of the Act.

Steps involved in Option 1 Strata Plan of Subdivision

If you will be purchasing the common property pursuant to option 1, the following steps will need to be undertaken:

1. A by-law is to be granted providing you rights to construct the bedroom, to approve the strata plan of subdivision and new unit entitlement schedule and accept a transfer of the former common property from the owners corporation. This process will require special resolutions of the owners corporation and registration of the by-law at LRS;
2. You will need to have a surveyor prepare a strata plan of subdivision to subdivide the existing apartment lot and the common property required for the bedroom into a new lot;
3. If you have a mortgage, you will need the consent and co-operation of your financier;
4. You will need to apply to Council for subdivision approval;
5. You will need to appoint a valuer for two purposes:
   
   1. The first purpose is to value the common property which following subdivision will form part of the apartment lot. This valuation can be used to agree with the owner’s corporation the price being paid for the common property; and
   2. The second purpose is to value each lot in the strata scheme for a new unit entitlement schedule for the scheme. The Strata Schemes Development Act 2015 requires a re-assessment of all unit entitlements in the strata scheme because common property is subdivided by a strata plan of subdivision.

Steps involved in Option 2 Common Property Rights By-Law

If you will be granted a common property rights by-law for exclusive use pursuant to option 2 the following steps will need to be undertaken:

1. A common property rights by-law is granted providing you with the special privilege to build the new bedroom and exclusive use of the common property within which the bedroom will be built. A plan is used to define the area over which you will have exclusive use. This by-law will require a special resolution of the owners corporation and registration at LRS;
2. You will need to have a surveyor prepare a plan showing the area of common property on which the bedroom will be built. This plan will be used in the common property rights by-law;
3. You will need to appoint a valuer to value the common property over which exclusive use is being granted. This valuation can be used to agree with the owner’s corporation the price being paid for grant of exclusive use of the common property. There will not be a re-assessment of unit entitlements. While payment for common property in cases like this is not obligatory, it is likely to be expected by other owners and a valuation is an appropriate method to fix the price.

All of the above steps in either option 1 or option 2 can be covered by a one or more resolutions at a meeting of the owners corporation. There may be a second meeting needed for Option 1 to approve the re-assessment of unit entitlement within the time limits required under the Act.

Which option do I aim for?

Option 1 gives greater security – as you will own the new bedroom as part of a new lot for the whole of your apartment. This may increase the value of your apartment based on holding freehold title to the bedroom area, rather than an exclusive use right under a by-law. However, option 1 will involve additional time and cost of subdivision and council approvals and a re-assessment of unit entitlement for your lot and perhaps others.

Other lot owners may not want to undertake a process which may result in their unit entitlement changing (for example, a new valuation may result in a lot owner’s unit entitlement being increased resulting in the payment of increased levies). Option 2 is less complex and may result in an increase in the value of your apartment. However, a purchaser or new mortgagee may be concerned about the inferior level of “ownership” relying on a by-law.

Emma Smythies
Bugden Allen Graham Lawyers
E: [email protected]
P: 0412 046 966

This post appears in Strata News #298.

Have a question about either selling off or purchasing common property or something to add to the article? Leave a comment below.

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This article does not constitute legal or other advice and should not be relied upon this way. Readers should take legal or other advice before applying the information containing in this publication.

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