‘Too Hard’: Developers Shy Away From Untested 75pc Rule

Policy changes aimed at unlocking ageing apartment blocks for redevelopment have not been the silver bullet Queensland developers hoped. A year after changes to allow the termination of community titles scheme with the approval of 75 per cent of lot owners were passed , none have come close to fruition, according to legal professionals, including Bryce Melville, head of real estate practice at RedeMont. “Everyone is gun shy,” Melville says. “There are lots of developers interested, but they hear about the difficulties. At this point, there needs to be a test case to show it can be done and within what parameters.” HWL Ebsworth Lawyers partner Mario Esera says they have been approached by several developers interested in the scheme. “Their interest tends to wane once they understand what is involved in termination for economic reasons,” he says. ▲ Antonio Mercuri of GV Property Group says it requires a developer willing to put the time and money into a case to prove its worth. GV Property Group director Antonio Mercuri says these challenges were highlighted early on. “We’ve had a couple of clients attempt, but it hasn’t proceeded any further or it’s been shut down, because there’s just too many reasons for it to be appealed and too much uncertainty for money to be invested where you’re not hopeful of getting a result,” the Gold Coast-based Mercuri says. But there is an opportunity for developers to rise to the challenge. “We’re keen to partner with a suitable candidate to run the process, and we have multiple sites which could be explored, subject to putting in the resources and time to put it together,” he says. Economic viability hurdle Intended to resolve the stalemate where a small number of owners in an apartment block are against redevelopment, the policy change has faced a major sticking point in Queensland in comparison to similar New South Wales legislation—the economic viability test. The government determined that termination could only occur where the body corporate has agreed there are economic reasons for termination which mean that the building is not “economically viable” or will not be so within five years. “We’ve got this legislation where we have no guidance on economic viability and what the threshold is,” Melville says. “Proving that is a convoluted process, you need reports by a structural engineer, a quantity surveyor and then a suitably qualified person to review those reports and say the scheme is not economically viable. ▲ Bryce Melville of RedeMont (formerly Minter Ellison Gold Coast): Everyone is gun shy. “Well, the first problem is who is going to put their hand up? Suitably qualified persons might be reticent to put their heads above the parapet, it’s not a good look if you end up in the Supreme Court having written a report and it’s successfully argued that the scheme is economically viable. Questions of impartiality are also likely to be raised,” Melville says. “Another issue is that every decision can be challenged by any interested party at any point—the whole process could potentially be mired in dispute. “It’s all so new, there aren’t really any set parameters at this stage and the government’s guidance on economic viability is negligible, we’ve pressed on that as well and there’s simply no guidance.” Case study: Nobby’s Outlook An example of where the economic viability test worked successfully, although not under the current policy amendments, is Nobby’s Outlook on the Gold Coast. “What will likely end up happening [with the current policy changes] is that people will look to use existing mechanisms and one of those mechanisms has been used successfully on the Gold Coast with the Nobby’s Outlook,” Esera says. Nobby’s Outlook was a dilapidated 1960s building that needed $3.8 million in repair costs to bring it up to reasonable standards and was the subject of a development proposal in 2010. Due to one dissenting vote at the body corporate general meeting, the motion to go ahead with the development failed. That meant the only alternative for the body corporate was to apply to the District Court for a Termination Order, which was successful in 2013. ▲ According to RP Data, Nobby’s Outlook, now called Nalu Apartments, was sold in 2017 for $23.75 million. “We acted for them many years ago and assisted to achieve that termination order,” Esera says. “Economic reasons were how we ended up getting that order. We argued that it was unjust to force 45 out of 46 owners to spend millions to bring the scheme up to a good and structurally sound condition, when all but one of them wanted to accept the developer’s offer and cash out.” Eventually the one objector consented to the termination order being made. “But while that dispute was ongoing, the developer walked away, and the owners collectively lost millions as a result.” Urban legends Managing the termination of a community title scheme can be tricky at the best of times and developers have taken different approaches over the years, but this has given rise to some urban legends. “Usually developers will walk away when they encounter a “holdout” situation, like what happened with Nobbys Outlook. That can be risky for the other lot owners, especially with a run-down scheme,” according to Esera. “But some developers can also massively increase their offer, and those scenarios quickly become urban legend, particularly on the Gold Coast. “Most developers we know will walk away and look elsewhere.” ▲ The Gold Coast is expecting 308,000 extra residents by 2041. However, the risk of a scheme termination might be just as important as the ability to terminate itself. “What it did do in NSW was switch the mindset of people. It made lot owners open their minds to developer approaches,” Melville says. “Lot owners will realise a statutory termination process exists and be subtly reminded of that process, and if that can be avoided termination may happen quicker and there may be more money for everyone.” That’s not to say the legislation does not need a rethink. “The new Government could look at removing the economic viability threshold, and that is of particular interest in a time where we are grappling in the midst of a housing crisis,” Melville says. “All the boxes need to be ticked and the stars need to align,” Mercuri says. “The State Government needs to properly look at this, why do we have this in place and what is our intention, because it’s not structured in a clear and precise way but we’re waiting and ready.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

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