Purchasing in a non-functioning body corporate (Owners Corporation)

We are seeing several buyers purchase properties in non-functioning body corporates (owners corporations) across Queensland, New South Wales and Victoria.

BELOW WE COVER:

What is a non-functioning body corporate
What are the risks of purchasing in a non-functioning body corporate
Practical steps a Buyer can take to minimise the risk

1. WHAT IS A NON-FUNCTIONING BODY CORPORATE

This means the body corporate is not properly discharging its statutory duties including but not limited to, holding of meetings, maintaining common property, keeping records, insuring the building and/or common areas or levying and collecting contributions. We find that non-functioning body corporates are particularly common in small lot schemes and duplexes.

2. WHAT ARE THE RISKS OF PURCHASING IN A NON-FUNCTIONING BODY CORPORATE

While on the face of it, low or nil levies may be appealing there can be a host of unknown issues and risks that buyers should consider.

BELOW ARE THE KEY RISKS FOR A PURCHASER

Insurance – the body corporate may have failed to take out, renew or maintain adequate building and public liability insurance. If there is insurance in place, it may not be adequate and/or may not cover common property which includes exclusive use areas. This exposes lot owners to significant risk and lenders will be unlikely to lend on a unit that is not properly insured.
Deterioration and safety issues – the condition of the building and/or common property may fall into disrepair, creating safety hazards and reducing property value. Without the regular documentation of issues and collection of levies lot owners will bear the cost of remediation works. If a lot owner does works which are not compliant, it may also expose a future owner to a claim from a regulatory authority and/or a tenant for failure to meet minimum housing standards (for example if sufficient fire safety measures have not been completed between shared/party walls). There may also be disputes as to who is liable in the event of leaks or defects that can spread across a building.
Uncollected levies and shortfalls – if levies are not being raised or collected, there will be insufficient funds for maintenance, insurance and statutory obligations. Buyers may inherit significant arrears or be required to pay special levies to cover accumulated debts or urgent works.
Non-compliance with legislation – body corporate legislation in each state mandates the need for meetings, record keeping and financial management among other things. Non-compliance can result in penalties and orders.
Difficulty selling – Sellers are required to provide an Owners-Corporation certificate in Victoria, Section 184 Certificate in NSW and a Disclosure Statement (soon to be a Body Corporate Certificate) in Queensland. If records are not kept, this may be impossible to provide.
Disputes and Litigation – in the absence of proper governance, disputes between lot owners are more likely.
Personal liability – if the body corporate is not insured and a claim arises (eg. injury on common property), individual lot owners may be personally liable for damages.
Special levies – once the body corporate is reactivated, special levies may be imposed to address years of neglect, insurance and compliance failures.

3. PRACTICAL STEPS A BUYER CAN TAKE TO MINIMISE THE RISK

A BUYER SHOULD CONSIDER THE FOLLOWING:

Obtain and review the strata records – we always recommend buyers obtain a pre-purchase strata report. If records are missing or incomplete, this is a red flag.
Confirm insurance – confirm that building and public liability insurance is current and adequate.
Review meeting minutes and financials – look for evidence of meetings, budgets and levy collection.
Neighbours – knock on the door of your proposed neighbour and ask if they are aware of any defects, disharmony in the body corporate or any issues that may not have been disclosed.
Council records – contact Council to confirm if there are any outstanding Council or fire orders in place.
Building inspection – obtain a building and pest inspection to understand any defects and/or future works. Also consider if any additional requirements are necessary ie. combustible cladding regulations and/or shared party wall fire safety measures.
Special conditions – consider requesting the Seller remedy any non-compliance prior to settlement or provide evidence of insurance and/or financial health.