Legal Insights
Design guidelines and owners corporations – The end of an era?
A recent Victorian Civil and Administrative Tribunal (VCAT) decision, Building Services West Victoria Pty Ltd v Owners Corporation PS507524P (Owners Corporations) [2022] VCAT 64 (Building Services West), have changed the landscape in which developers need to operate and structure their development design controls for projects with OCs. The decision, coupled with previous cases on the subject, has resulted in a significant reduction to the right of an OC to enforce design restrictions and built form control. Here, we summarise the key changes, and outline alternative approaches and key considerations for developers.
One of the primary concerns for developers is how best to maintain their built form vision and design integrity for lots within a development beyond once sold. The statutory planning framework is typically not specific enough and so design guidelines, which are usually a private contractual arrangement with purchasers that sit outside the statutory planning framework, are often used.
For any project with an owners corporation (OC), from townhouse projects to larger resort style residential land projects, design guidelines were often left to the OC to manage and enforce after a developer had sold out and exited from a project.
Read on to find out what the outcome of this VCAT case means, and what other solutions might be available for developers.
Building Services West Key Findings
| Item | Key Finding |
|---|---|
| Common property nexus | In Building Services West the court reminded the parties that the overriding principle in determining whether an OC can validly enforce a rule is to determine whether the rule has a direct relation to the ‘control, management, administration, use or enjoyment of the common property’ (section 138(3) of the Owners Corporation Act 2006 (OC Act). This test needs to be applied to every rule despite:
Rules that do not satisfy this test and merely ensure a certain look or feel to a development (such as façade changes, building setbacks) are unlikely to be enforceable by an OC. VCAT formed the view that the function of an OC is not to unduly limit the ability of a private property owner to use or develop their land (particularly where a use or development right is permitted under a planning scheme). As a result, the majority of the OC rules in that case that related to design guideline and design control regulation were held to be unenforceable. |
| Any design guidelines must be registered | If the OC is able to enforce design guidelines, having regard to the common property nexus principle, the design guidelines must be registered with the OC rules at the land titles office. The OC cannot enforce rules and documents incorporated into the rules by reference to documents that are not registered at the land titles office. |
Will your product be affected?
Townhouse, stand-alone built form product | Apartment product |
|---|---|
Direct impact – consider your options carefully | Most likely minimal impact |
| Developers delivering townhouse or built form product with integrated owners corporations need to be mindful of Building Services West. The usual minimal link between design control rules and common property in these types of developments will make enforcement of such rules through OC very challenging. In our view, as a consequence of the strict and limited interpretation adopted in Building Services West using an OC to manage and enforce design controls is no longer a valid option. | In our view, Building Services West is going to have minimal impact on enforcement of design control rules in the context of apartment developments. For example, the nature of an apartment development requires the external appearance and design features of the development to be managed and controlled directly as part of common property, and therefore clearly within the scope of an OCs powers. |
Additions to the OC Act | Section 138B
Section 138B of the OC Act came into effect on 1 December 2021, after Building Services West was considered. Section 138B expands the net slightly allowing OCs to enforce restrictions relating to the external appearance of lots in the following circumstances:
- Protection of the quiet enjoyment of all other lots and the common property during works (section 138B(1)(a))
In our view, this doesn’t add much in terms of additional enforcement rights for design control.
- Protection of the structural integrity of any building on the plan of subdivision (section 138B(1)(b))
This arguably expands the powers of OCs, giving them powers that extend beyond the management of common property to powers that protect structural integrity of buildings when external alterations are made.
- Ensuring that the market value of any other lot does not decrease as a result of works (section 138B(1)(c))
This is the broadest and most subjective enforcement right. However, given the general concepts being applied by VCAT members and judges considering the exercise of design control rights, expectation may be that the OC will need direct and clear evidence that any breach in rules would negatively impact a lot’s value.
Section 138B of the OC Act has not yet been tested. Due to both the minimalist approach to changes made to the model rules to accommodate the introduction of section 138B and the recent trend of decisions which limit the scope of the OC in design control functions, we consider any type of broad interpretation of these rights should be exercised with caution.
What other options are there?
With the restrictions imposed by Building Services West and the yet-to-be tested section 138B of the OC Act, developers and OCs may need to consider alternatives to OC rules to achieve their commercial and design goals.
| Options | What to consider |
|---|---|
| Restrictive covenants | Restrictive covenants are registered on certificate of titles or plans of subdivision and directly limit the way an owner can use and develop their land. The broad nature of this type of restriction can make it suitable for the management of some types of design control restrictions. Flexibility and enforcement and control for the developer is the key consideration here, together with the longevity of protection the covenant may offer. This should be considered and structured carefully both in the form of the covenant and obligations included in the developers initial sale contracts for the development. |
| Contractual obligations | It is common for developers to impose design control obligations within contract of sale (which could include, build timing requirements, building envelope restrictions and obligations to comply with a broad set of design guidelines which preserve the ‘character’ of a development). Contractual obligations of course have drawbacks in that they are only binding and enforceable by the developer and the contract purchaser. There are options to preserve these rights moving forward against future purchasers through on-sale restrictions. A developer needs to consider how long it wants to be involved and enforce these types of restrictions. |
| Design review panels and overarching corporate entities | A developer often establishes a design review panel that monitors, approves and administers design guidelines compliance. Passing the responsibility to operate, manage and enforce that function to an OC after a developer exits a project, will now result in the OC being unable to enforce the design guidelines. An alternative is to set up at the outset a separate corporate entity to manage and enforce the design guidelines, such as an unincorporated association or company limited by shares, that is not subject to the OC Act. There are a number of issues to work through with such a structure, including who will administer that corporate entity in the long term. |
With these recent changes to the scope of OC rules, we set out some key Do’s and Don’ts for developers and OCs:
- DO: Strategically draft OC rules so that they are directly and explicitly linked to the common property (to the extent possible).
- DO: Give consideration to your owners corporation OC structuring at the outset and build sufficient flexibilities into your sale contracts and OC Rules to allow maximum flexibility in your approach to design control management.
- DO: Explore alternative options and have a clear plan regarding protection of exterior facades, landscaping and similar design controls if these are important to your development vision long term.
- DON’T: Take inclusion of standard/template rules within OC rules for granted. The rules should be critically evaluated by developers ideally before going to market.
- DON’T: Pass responsibility for design controls to an OC where there is clearly no relationship or impact on common property.
There are a number of limitations to design control enforcement coming out of the Building Services West case. Whilst the judgement is quite limiting for OCs, developers and OCs need to be mindful that this is the current landscape to operate in.
Careful planning and structuring when launching a townhouse or built form development will be key to navigate the implications of this decision and ensure the developer is still able to retain the appearance and character of the development moving into the future. If you need assistance, we would be happy to discuss this further.
Do you need assistance around structuring design controls for your project?
Contact out Development Team
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