Legal Insights

Owners Corporations - Significant changes on the way for developers

By Nick SparksAthina McGregor

• 07 May 2021 • 6 min read

What’s happened?

After a long and storied journey through the Victorian Parliament, the Owners Corporations and Other Acts Amendment Act 2021 (Vic) (OC Amendment Act) has finally been enacted and received Royal Assent in February 2021.

The OC Amendment Act changes the Owners Corporations Act 2006 (Vic), the Subdivision Act 1988 (Vic) and the Retirement Villages Act 1986 (Vic). The changes will come into effect on 1 December 2021, unless proclaimed earlier.

Setting up the most appropriate owners corporation structure in developments has become increasingly complex in recent times, particularly with a greater number of mixed use projects involving not only traditional residential apartments, but also a variety of other product ranging from serviced apartments and hotels to retail, office, childcare, independent living units and beyond.

The OC Amendment Act adds further layers of complexity, and developers need to understand the impacts of the changes on their duties to the owners corporations they create.

How does the OC Amendment Act impact developers?

Some of the main changes include:

  1. Certain contracts are limited to 3 years
  2. Certain terms are prohibited from inclusion in contracts of appointment of managers of owners corporations
  3. New requirements for the first meeting of the owners corporation
  4. New five tier system of owners corporations

Certain contracts limited to three years

Which contracts are limited?

The term of an appointment of a manager of an owners corporation is limited to 3 years.

Also limited to 3 years are other contracts that:

  • are entered into by the applicant for registration of the plan of subdivision (Developer)
  • relate to the owners corporation; and
  • benefit the Developer.

Is there are carve out?

Before the OC Amendment Act was passed, a carve out for hotel and resort management contracts relating to hotels, resorts and serviced apartment complexes was incorporated. As a result, the 3 year limit does not apply to those types of contracts. For more information, see our recent eAlert on this issue.

What other types of contracts are excluded from the 3 year limit?

The amendments do not appear to capture:

  • contracts entered into by a third party, who is not the Developer, that relate to the owners corporation; or
  • contracts entered into by the Developer which do not benefit the Developer – such as where the contract benefits a third party.

Therefore, contracts entered into by the owners corporation and a related entity of the Developer would, on one reading of the OC Amendment Act, not be limited to 3 years.

However, a developer should be mindful of its overarching statutory duty to act in good faith towards the owners corporations it creates, and the case law around Developers being caught burdening owners corporations with onerous contracts. Make sure you seek advice on the best structure and the nature of the documentation to be entered into.

Contract of appointment of manager of owners corporation

Which terms can’t be included in a contract of appointment?

Certain terms may not be included in a contract of appointment of a manager of an owners corporation. Examples of such terms are those that:

  • permit the manager to renew the contract at the manager’s option;
  • provide for the automatic renewal of the contract if the owners corporation fails to give notice of its intention not to renew;
  • restrict the ability of the owners corporation to refuse consent to an assignment of the contract to another manager.

First meeting of owners corporation

New disclosure obligation

At the first meeting of the owners corporation, the Developer must disclose:

  • its relationship with the manager of the owners corporation; and
  • any immediate or future financial transactions that will, or will foreseeably, arise out of the relationship with the manager; and
  • any specific benefits which flow to the applicant as a result of that relationship.

Limitation on appointment of Developer as manager

The Developer or an associate of the Developer may not be appointed as manager of the owners corporation. However, it is worth noting that the expression ‘associate’ in the OC Amendment Act is fairly narrow and does not expressly include a related body corporate (although arguably an agent of the applicant which is included in the expression ‘associate’ could be). If you are considering appointing an entity that is related in some way to the Developer, make sure you seek advice on the nature of that corporate relationship and the terms of the OC Amendment Act.

New five tier system for owners corporations

What are the five tiers?

TierMeaning
Tier 1More than 100 occupiable lots (and not a services only owners corporation)
Tier 251 to 100 occupiable lots (and not a services only owners corporation)
Tier 310 to 50 occupiable lots (and not a services only owners corporation)
Tier 43 to 9 occupiable lots (and not a services only owners corporation)
Tier 5

2 lot subdivision or a services only owners corporation

What are the implications of the five tier system?

Larger owners corporations will be subject to a greater number of requirements and smaller owners corporations subject to less regulation about the following:

  • committees
  • financial statements
  • audits of financial statements
  • maintenance plans and funds.

For example, the OC Amendment Act makes it compulsory for tier 1 and 2 owners corporations to prepare and approve a maintenance plan. Transitional provisions state that a tier 1 owners corporation has 12 months after the commencement of the changes to prepare and approve the maintenance plan. A tier 2 owners corporation has 24 months to do so. Tier 3, 4 and 5 owners corporations may prepare maintenance plans, but it is not compulsory.

Consider owners corporation structuring early

As many developers are aware, setting up the most appropriate owners corporation structure is not an exercise to be left to the last minute.

Conceptualising the most appropriate structure, and considering disclosure obligations to prospective purchasers, at the outset of a project is critical to allow the vision for the development to be realised. Equally important is how that structure is then documented and put in place when the plan registers and the owners corporation is created.

The OC Amendment Act adds further layers of complexity to navigate.

Our team can help you steer through the legal risks and requirements.

Need help understanding your obligations under the new Act?

Contact our Development team

By Nick SparksAthina McGregor

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