Strata titles law reform a hot topic

Attorney Daniel Priestley and property management specialist Tim Hepburn reviewed recent changes and upcoming proposals regarding the Cayman Islands’ strata law. 

Amid a years-long review of the current longstanding strata legislation by the Law Reform Commission, legislators independently passed their own amendment to existing law that granted stratas flexibility and powers to acquire land and redevelop property. 

Approved in late August, the new amendment raised the hackles of the Cayman Islands Real Estate Brokers Association, who said in mid-March the amendment “was hastily passed by the Legislative Assembly without any real study that we are aware of, which changed numerous aspects of the Law, some of which were completely against the public input the committee had already received”. 

The brokers association urged the commission to extend the public comment period on the comprehensive strata titles reform for an additional month. The commission assented, and the period for public comment now ends 12 April. 

When the amendment was before the assembly in May 2012, Priestley said he believed the changes, while not comprehensive, were needed. 

Priestley, the director of law firm Priestleys Ltd., whose areas of specialisation include strata law and practice, echoed and elaborated upon his earlier opinions during the Cayman Islands Property and Construction Conference held 28 February. The event was hosted by the new Cayman chapter of the Royal Institution of Chartered Surveyors. 

Priestley was joined at the conference by Hepburn, who is a director of BCQS International, specialising in day-to-day management of commercial and residential property. Priestley focussed on the 2012 amendment, while Hepburn discussed the pending comprehensive reform bill. 

 

Updating 1950s Australian law  

Beginning in January 2009, the Law Reform has been working to review and update the Strata Titles Registration Law (2005 Revision). The original strata legislation was enacted in 1973 and is based on Australian statute from the 1950s. 

The commission’s discussion paper and first draft bill were made public in April 2011. However, the first bill was never officially brought before the Legislative Assembly for consideration. The commission has put together a second bill that incorporates the provisions in the first bill and also covers all other areas of strata regulation.  

“Obviously with the strata titles regime originating so long ago, the need for reform has been fairly clear for some time,” Priestley said. 

“Life was a lot simpler back then, and in the intervening period, life has gotten a lot more complex. The issues that face stratas have become very complex,” he said. 

Priestley said certain portions of the comprehensive reform bill were “stripped out” and enacted under the strata amendment law, which took effect in October 2012. 

“What probably informed the decision to do that was to address those concerns, which were felt to be completely pressing and have to be addressed, given the state of play,” he said. 

 

Power to buy, sell and redevelop 

Before the 2012 amendment, the law required strata corporations to secure a unanimous vote by proprietors to make decisions regarding insurance, transferring property, amending corporate bylaws, and granting/accepting easements or restrictive agreements. 

Under the new bill, “unanimous resolutions” would be replaced by “special resolutions” or “super-majority resolutions”. 

For stratas located in beach resort/residential, commercial, hotel/tourism or industrial zones, special resolutions require a two-thirds consensus and super-majority resolutions require a three-quarters consensus. 

For stratas located outside those zones, special resolutions require a three-quarters consensus and super-majority resolutions require a nine-tenths consensus. 

The old law permitted stratas to sell or lease common property only with a unanimous resolution, and the amendment changed that to a super-majority resolution. 

The amendment also gave stratas the new power to acquire land, by transfer or lease, with a special resolution. 

The legislation also makes it easier for stratas to redevelop their existing property, and provides guidelines on how to compensate proprietors. 

“The lack of legislative regime dealing with redevelopment has undoubtedly made it more difficult for stratas to be redeveloped, even as there are increasing numbers of aging structures in desperate need of redevelopment,” Priestley said. 

He said, “The original framers of the Strata Titles Registration Law may have believed that the decision to redevelop should require a unanimous consent of all proprietors on the basis that where a critical decision affecting the strata arises, the proprietors would come together and do that which is in everybody’s best interest, and all the significant changes in rights and obligations of proprietors should not be implemented without that proprietor’s consent. 

“Where a strata plan comprises only a relatively few number of proprietors, and where the issues that arose rarely required a decision that would have a significant effect on the proprietors’ rights or obligations, which may have been the case from the 1950s until relatively recently, this would be a sensible approach. 

“However stratas now routinely comprise a large number of proprietors, and the issues arising from property ownership have become more and more complex. In particular the increase in the number of proprietors in a typical strata now means that attaining unanimous consent can be practically impossible, as a single recalcitrant proprietor, whose motives may be less than pure, can effectively stymie the will of the majority to the detriment of all,” he said. 

 

Insurance  

Before the amendment, the law required stratas to insure the physical structures against material damage risks, such as fire and hurricanes, amounting to the full replacement value of the strata. The strata could only carry lesser insurance after a unanimous vote by proprietors. 

The amendment changed the unanimous requirement to a super-majority requirement. While he appreciated that insurance is often the largest expense for a strata, Priestly expressed concern about the possible effects of that measure. 

“The pangs experience in the aftermath of [Hurricane Ivan] are instructive. The fact that this rigid system required stratas to carry comprehensive insurance meant when disaster struck in 2004, the vast majority of stratas were able to rebuild without serious financial hardship being inflicted on its proprietors,” he said. “Even with this strict regime in place, I recall a number of stratas who had procured insurance on lesser terms, whether by way of unanimous vote or otherwise, and these stratas ended up having to call upon the proprietors to fill the funding gap for rebuilding, where the insurance in place was inadequate or where there was no insurance at all.” 

Priestley said, “Applied thoughtfully, this change can provide a measure of flexibility to allow stratas to balance risk and expense, but I am concerned that this new flexibility may result in proprietors knowingly or unknowingly taking greater risk in terms of insurance coverage than they are able to bear.” 

 

Draft bill  

Hepburn of BCQS said the Law Reform Commission’s draft bill, in his estimation, expands on the original strata law which he said is pretty basic and short on detail, creating a lot of areas for potential disputes. The draft bill also shifts the balance of power in strata law away from the strata corporation and toward the individual proprietor. 

“In the majority of cases that’s a good thing. The strata titles law needs to be fair to individual owners, without restricting the strata’s ability to operate financially,” he said. 

Hepburn said, “Something which is conspicuously absent by my reading is sharper teeth for the ability of the strata committee to recover debts from owners.” 

He said, “Looking at it from a practical standpoint, we’re aware of strata corporations who are genuinely struggling to operate because of one or two – a very small minority – of owners who simply refuse to pay. The legal system environment is not strong enough to enable a strata to recover that debt quickly enough, and consequently you end up with strata corporations who can’t pay the most basic bills, and sometimes jeopardise their insurance coverage, simply because of a very small minority of owners who don’t want to play the game.” 

Hepbun said the draft bill includes a definition of common property that should clear up the existing gray area about where the strata’s obligations end and the individual owner’s responsibilities begin. 

The draft bill tightens up restrictions on strata corporations in terms of insurance, by making stratas use policies with the lowest available deductible on the market, unless a super-majority of owners authorises a higher deductible. 

“To me that’s a good thing. Everyone wants to save money, but it shouldn’t be up to just the executive committee to gamble with the rest of the owners’ money. This could be a huge amount of money if they opt to take a 5 per cent or a 7 per cent or a 10 per cent deductible in the event of a catastrophe, when a 3 per cent deductible was available,” he said. 

Under the draft bill, stratas would no longer be able to screen or restrict the leasing of individual strata lots, although stratas would still be able to put restrictions on short-term rentals. 

“That’s aimed at preventing non tourist properties from attracting tourists into the complex,” 
he said. 

Under the commission’s 2011 draft bill, a unanimous vote would have been needed if proprietors wished to force the books of the strata corporation to be audited. The current draft bill changes that to a super-majority requirement. 

“Actually I think it should be a simple majority. If a simple majority of owners have concerns, then they should of course have the records audited,” 
Hepburn said. 

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