What is Company Title: Unrealised Opportunity or Potential Pitfall [Question]

10 May 2021

Company title was the answer to the property law problem of airspace subdivision prior to the implementation of Conveyancing (Strata Titles) Act 1961. Company title was a system of ownership where the owner does not actually acquire an estate or interest in real estate. What is actually owned is a number of shares in a company. That company owns the building and land as a whole. Each owner of shares would be assigned certain rights of exclusive use for their apartment.

What are the problems?

The Conveyancing (Strata Titles) Act 1961, provided a legal framework that protects all parties through standard contracts and by-laws, material fact disclosures and specialised dispute resolution courts. Within the legal framework of company title these automatic protections do not automatically apply. The levels of dispute resolution rely ultimately on the nature of the dispute. Some may need to be judged at the NSW supreme court by the blunt legislation of the Corporations Act 2001.

It has been noted that in some instances the banks and other lending institutions can be reluctant to lend as much for company title units. This can catch out cash-strapped first home buyers.

Restrictive v Open Company Title

Company title corporations generally come in two forms. The first, generally act and breathe like a strata title scheme where owners are free to do as they please with their respective unit. The other, is somewhat more restrictive. These restrictions can include rental exclusions whereby an owner must live in the unit for a period. This is usually a year or two before they are able to lease it to a tenant.

Owners and tenants may need to be approved by the board of directors of the company title scheme. Changes to any company title require a consensus of over 50%. In a small block this can mean majority ownership of a few can vastly impact the quality of life for others in the building. This can be countered by the oppressive conduct clause in the Corporations Act. However, this is a blunt instrument and many disputes and issues can fall through the cracks.

The penalties for non-compliance with company title by-laws or non-payment of company contributions (the equivalent of strata fees). They can be as strict as the resumption of shares which could effectively evict the owner. Upon the transfer of shares, the process of securing all relative information including company financial documents, meeting minutes, and proposed changes can be difficult. Therefore prospective buyers may not be privy to all relevant information in helping them make the decision for them to buy and for how much.

Conversion to Strata Title

Of course, the silver lining is the possible conversion to strata title. This is the natural progression of all company titled buildings. This has overnight value uplift for all shareholders. However, this is not always a simple proposition to all the shareholders due to the nature of a typical company title owner. Firstly, they tend to be elderly having tenured the unit over decades living off a fixed income usually the pension. They have a reluctance toward unnecessary changes especially those that they may not be able to enjoy themselves. Conversion to strata title will mean an additional cost for the development application This includes adherence to a fire compliance certificate and a process that could take years to complete.

Lastly, some owners do enjoy having the power of control over others in a morbid sociopathic way. In which they would refuse to give away control and already have majority control to ensure it never happens.

What you can do

Treading carefully around every property purchase is imperative but a little extra around the company title unit is a must. As these units generally trade at a discount. There is a financial incentive to brush small barriers such as missing company documents, or easily accept restrictive by-laws without fully understanding the potential consequences. Remember, purchasing the right property can set you on the path to wealth creation. Whereas the wrong property can be a noose around your neck. When it comes to company title, be prepared to walk away if there is missing information, or a restrictive scheme. If the scheme is quite restrictive there is probably not a high chance that they would be open to a strata title conversion.

Alexander Gibson

Do you know how to distinguish a company title unit?

Are you ready to pull the trigger?

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