Changes to the Owners Corporations Act – what developers need to know

Developers have an obligation to act honestly, in good faith and with due care and diligence in the best interests of the Owners Corporation created on registration of a plan of subdivision for a development under the Owners Corporations Act 2006 (Vic) (OC Act).

There has therefore been a tension between the developer’s obligation to act in the best interests of the Owners Corporation and the appointment by the developer of Owners Corporation managers and building managers or the engagement of embedded network providers with whom they have an existing relationship or may receive a financial benefit from. In addition, it is not uncommon for developers to grant leases or licences in respect of common property areas either to the developer or related entities or third parties.

Recent amendments to the OC Act seek to better define and clarify a developer’s obligations with respect to the establishment of an Owners Corporation and the entering into of associated agreements or contracts.

On 18 February 2021, the Owners Corporations and Other Acts Amendment Act 2021 (Vic) (Amendment Act) was passed by the Victorian Parliament and received Royal Assent on 23 February 2021. The Amendment Act comes into operation on the earlier of the day to be proclaimed, or 1 December 2021.

The Amendment Act introduces a range of changes to the OC Act that seek to expand (or clarify) developers’ duties to the Owners Corporations.

In this e-update, we provide an overview of some of the key changes to the OC Act that affect developers.

Key changes

Relationship with and appointment of Owners Corporations Managers

Developers must now disclose at the first meeting of an Owners Corporation:

• any relationship they have with the Owners Corporations Manager (OC Manager); and
• any immediate or future financial transactions that will arise out of the relationship with the OC Manager, and any specific benefits which flow to the developer as a result of that relationship.

Developers cannot appoint themselves or their associate to be the initial OC Manager and a contract of appointment for any OC Manager must not exceed three years.

Further, developers are prohibited from receiving any payment from the appointed OC Manager in relation to the OC Manager’s contract of appointment.

Initial budget and disclosure documents

The initial budget of an Owners Corporation set by the developer must be reasonable and sustainable.

Additional documents must also be provided by the developer at the first meeting of an Owners Corporation, including building maintenance manual, asset register, copies or details of any warranties and any specifications, reports, certificates, permits, notices or orders in relation to the plan of subdivision.

Other changes

Other notable changes to the OC Act include the following:

• developers’ obligation to act honestly and in good faith and with due care and diligence in the interests of the Owners Corporations is extended to operate until 10 years (previously five years) following registration of the plan of subdivision;
• introduction of five tiers of Owners Corporations that allow for the degree of regulations of Owners Corporations (for example, in relation to appointment of OC Manager and preparation of annual financial statements and maintenance plan) to be based on the number of occupiable lots;
• an Owners Corporation has the power to levy:
  • an additional annual fee on a lot owner if the Owners Corporation has incurred additional costs arising from the particular use of the lot by the lot owner and an annual fee set on the basis of the lot liability of the lot owner would not adequately take account of those additional costs. This is primarily aimed at lot owners using their lot for short term letting purposes (e.g. Airbnb) so that the Owners Corporation can recover any additional costs for undertaking additional repair and maintenance of the common property as a result of such uses; and
  • fees to cover the premiums for reinstatement and replacement insurance or for any excess amount on insurance claims; and
• an Owners Corporation is no longer required to have or use a common seal, and can authorise a document to be signed by at least two lot owners for separate lots.

Practical implications

Developers, being the sole owner of the development when the plan of subdivision is registered, have a significant level of control over Owners Corporations when they are first established. The obligations imposed under the Amendment Act are not new obligations, rather, the Amendment Act seeks to clarify what a developer must (and must by implication not) do to act in the best interests of the Owners Corporation and provide greater transparency over the establishment and management of Owners Corporations.

Developers need to be aware of their expanded duties, especially in relation to the disclosure obligations. Existing or long term relationships between developers and OC Managers are common and such relationships often benefit both developers and the OC Managers. Any such relationship or benefits that flow between the parties must now be disclosed to lot owners.

A developer who obtains a financial benefit from appointments associated with the Owners Corporation has always run the risk that such involvement or benefit breached the developer’s obligation to act in the best interests of the Owners Corporation and whilst this is not expressly prohibited by the amendments, such financial benefits will have to be disclosed. Developers may therefore be more wary of entering into such arrangements.

Restrictions on the appointment of OC Managers by developers seeks to ensure that independent OC Managers who have the necessary experience and expertise to manage Owners Corporations are appointed, and will prevent long term appointment contracts at excessive fees be entered into by the OC Manager and the developer.

In addition to providing adequate and accurate disclosure to lot owners, developers must ensure that the initial budget set for the Owners Corporation is accurate, realistic and sustainable, so that lot owners are not misled as to the Owners Corporation fees and levies payable by them and a sharp increase in such fees and levies in subsequent years can be avoided.

As always, developers must act honestly and in the best interest of the Owners Corporation in accordance with the OC Act and are now held accountable for a longer period of time after registration of the plan of subdivision.

Ultimately, adherence to good governance of Owners Corporations that run with higher levels of integrity and professionalism will benefit not only the Owners Corporations and individual lot owners, but also developers in building and maintaining a good business reputation.

For more information please contact our Property team.

If you are an embedded network provider or other service provider and require assistance in relation to regulatory requirements, please contact our Technology team.

Authored by:

Brihony Boan, Partner
Karena Leung, Associate