Realising the full potential of multi-lot collective sales

Property owners are realising the potential of joining forces to sell entire apartment complexes or adjoining properties to developers. Through the power of collective negotiation, apartment or adjoining property owners may be able to achieve prices far exceeding what they could achieve through individual sales.

Developers are realising the benefit of securing quality infill sites with valuable development potential at a time when competition for large parcels of developable inner-suburban land is extremely high. Developers are sourcing collective sale opportunities using various methods, including off-market deals and public expression of interest campaigns.

As the market for collective sales is still developing, there is a spectrum of deal parameters that parties may adopt. This Insight explores some of the key issues to be considered when negotiating collective sale transactions and how they may be managed for the benefit of all parties.

State of play 

Aside from realising a significant uplift in sale price, some owners may be looking for avenues to realise the value of their investments at a time when maintenance costs of their ageing building are expected to snowball in the short or medium term.

There are an increasing number of instances where owners have cashed in, including eight owners of an apartment complex in the Sydney suburb of Epping who each received $3.75 million through a collective sale in circumstances where each apartment would have sold individually for approximately $1.2 million.[1]

Recently, the owners of two separate apartment complexes in Melbourne’s inner-south banded together to sell their complexes to developers, resulting in a significant value uplift for the owners.

Consent threshold requirements

In most Australian states, including Victoria, all members of an owners corporation must unanimously agree to sell their lots in order to enter into a collective sale agreement for all lots of an owners corporation. The requirement for unanimous approval can represent a hurdle to collective sale transactions.

The landscape differs in New South Wales, which since 2016 has only required approval from the owners of 75% of the principal lots in a strata scheme and an order from the Land and Environment Court for a strata renewal plan to be given effect. In 2019, the acquisition of the Seasons Harbour Plaza Sydney became the first court-ordered strata renewal collective sale under the reformed New South Wales legislation.

In Victoria, the introduction of a legislative scheme allowing collective sales without unanimous consent was considered by Consumer Affairs Victoria in 2016.[2] Despite recent amendments to the Victorian Subdivision Act, the requirement for unanimous agreement to sell all lots of an owners corporation remains,[3] and it seems any further proposal in relation to this issue is on hold.

International jurisdictions such as New Zealand, Singapore and the United Kingdom similarly allow collective sales of strata schemes through non-unanimous agreement.

The departure from the requirement for unanimous approval for collective sales is controversial. Some argue it can dilute the value of title and some commentators have even labelled it an exception to the concept of indefeasibility of title.[4]

However, the departure appears to be driven by evolving market conditions and public and planning policy. For example, NSW parliament considered that lowering the consent threshold requirement proactively deals with the issue of ageing apartment buildings,[5] which is set to rise exponentially over the coming years. Some speculate that a lower consent threshold will eventually be enacted in all Australian states and territories.[6]

Project management

Regardless of whether there is a statutory regime supporting the sale, vendors in a collective sale require a coordinated effort to ensure transaction efficacy and purchaser confidence, as both will ultimately be influential in driving the maximum price (or indeed, whether there will be a sale at all!). In our experience, vendors will be assisted by the establishment of a management committee to lead engagement with consultants and coordinate consultation with all vendors.

Depending on the circumstances, the management committee may have responsibilities such as instructing a selling agent and solicitor, developing a marketing and sales plan, negotiating the terms of sale (within parameters agreed by all vendors) and coordinating completion of the sale. This arrangement should be captured in a deed signed by all of the vendors before going to market.

Contract of sale

Parties to a collective sale should consider whether the transaction should be documented under a single contract or individual contracts of sale. A single contract has various project management efficiencies; the purchaser only needs to negotiate one contract, all vendors are bound by the same terms and complexities relating to interlinking completion of multiple contracts are mostly avoided.

In either case, key considerations in contractual negotiations include the liability of non-defaulting vendors in the event an individual vendor defaults and the process for early release of the deposit.

Purchaser remedy and vendor liability

A purchaser would prefer that settlement proceeds as intended but will need a remedy if things go awry. Conversely, most vendors will understandably want to ensure they are not liable for a default caused by any of the other vendors.

These positions can be further complicated due to the significant development potential of land subject to a collective sale and the fact that a purchaser might have substantially progressed development plans during the settlement period. Most vendors would not be willing to be exposed to a damages claim that far exceeds the proportion of the price that vendor is entitled to receive, particularly in circumstances where that vendor is not the reason for the default.

The purchaser’s primary objective may be to enforce performance of the contract and transfer of title. This can often be obtained with an order for specific performance, however the parties must reach agreement on remedies and liabilities if that order is not available.

Release of deposit

If agreeing to release the deposit, the purchaser will want comfort that the balance due at settlement will be sufficient to discharge all financial encumbrances on each property before releasing each vendor’s proportion of the deposit.

Conversely, the vendors may want a release of their respective proportion of the deposit as soon as possible in order to reinvest it or purchase alternative real estate in the same market, and to not be delayed by the tardiness or financial circumstances of other vendors. An individualised and balanced approach can address those otherwise competing concerns.

Accommodating purchaser goals

Developers may want to make a start on their development plans during the settlement period. For example, they may ask for the vendors’ cooperation to renegotiate existing tenancies, approve planning related applications and allow onsite preliminary investigations and advertising for development pre-sales. This should be accommodated without exposing the vendors to liability for increased council rates, land tax and the like.

Some properties may be subject to existing residential or commercial tenancies continuing beyond the settlement date which will need to be restructured or renegotiated in order to maximise the sale price by providing certainty that settlement can occur with vacant possession.

Accommodating vendor requirements

Vendors in a collective sale may have various individual objectives which may also drive the terms of the sale. For example, owner-occupiers may want an option to leaseback their properties after settlement in order to allow them time to source and relocate to alternative homes.

In summary

Collective sales offer lucrative opportunities for both apartment or adjoining property owners and developers, especially in the current property market where developable land is in short supply. Although these transactions present unique complexities, they can offer a mutually beneficial outcome if the key requirements of all stakeholders are addressed.