Effect of the Multi-Unit Developments Act 2011 on existing developments

Conveyancing 04/11/2011

The committee has received a number of queries as to the effect of the act on sales of existing apartments and houses that are covered by the act (‘units’) and is satisfied that the position of the owners has been strengthened by the new legislation.

Sections 4 and 5 of the act require the developer to transfer the ownership of relevant parts of the common areas in a multi-unit development to the owners’ management company (OMC), within six months of 1 April 2011, save where the common areas have already been transferred.

Neither of these sections nor any other section of the act provides for any sanction for non-compliance with these sections. The fact that the deadline of 30 September 2011 may have passed without the transfers having taken place does not remove the obligation to transfer, which must remain a continuing obligation.

The benefit of the obligations rests with the OMC. An OMC would appear to have two means of ensuring the transfer of the common areas: (1) by seeking an order for the performance of the provisions in the contract that would normally have been entered into between the developer and the OMC at an early stage in the development, whereby the developer would have contracted to transfer the common areas to the OMC on completion of the development or when all the units had been sold; and (2) by invoking the provisions of the act. 

The first of these courses will not be available where the development has not been completed or where some of the units remain unsold and, in the current financial climate, there must be many developments where some of the units have not been sold.

Under section 24 of the act, an OMC may apply to the Circuit Court for an order to enforce the obligation on the developer to transfer the common areas to it. Unfortunately, it is possible that the OMC may still be under the control of the developer, either because it holds a majority of the membership or it controls the board of directors. In residential-only developments, section 15 of the act, which imposes a ‘one unit, one vote’ rule for OMCs, empowers members of OMCs to take voting control of developments where more than 50% of the units have been sold. Where the unit owners do not have control of the OMC, an individual unit owner can, as a member of the OMC, make the necessary application. Even if such a unit owner has never been given membership of the OMC, the court may, under section 25(1)(f), permit them to bring the application. Such proceedings are likely to be expensive and represent a heavy burden on the unit owner if they have to be brought by an individual. In an ideal world, other unit owners might be expected to join in such applications, but experience suggests that this is not always achievable. The court has, of course, power to award costs against the developer, but the unit owner may well be asked to provide initial funding for the action.

If, as is commonly the case, the OMC has been struck off the Register of Companies, usually for failing to make returns, section 30 of the act makes special provision for applications to the Registrar of Companies for restoration of such companies to the register. An alternative, which also covers the position where the developer has also been struck off, is for the unit owners to form a new OMC and apply to the High Court under section 26 of the Trustee Act 1893 to have the common areas vested in the new OMC. This procedure was approved by the High Court (Laffoy J) in the case of In the Matter of Heidelstone Company Ltd ([2006] IEHC 408), in which it was decided that, where all the units had been sold, the developer held the common areas in trust for the owners of the apartments and the townhouses in the development.

There may well be a case for coupling, with the application for the transfer of the common areas, a claim for damages for breach of the statutory duty imposed by section 4 and 5, which may have the effect of persuading the developer to devote attention to the underlying need to effect the transfer.

It is being suggested that the effect of the legislation is to render residential units in multi-unit development unsaleable where the common areas have not been transferred. The basis for this view is not obvious. This would be true in the case of units coming within section 3 – that is, those where no residential units were sold prior to 1 April 2011 and where there is a statutory restriction on selling such units before the transfer of the common areas to the OMC has taken place. Prior to the introduction of the act, the titles to both new and second-hand residential units in multi-unit developments were regarded as good and marketable on the basis that there was an enforceable contract to transfer the common areas to the OMC at the appropriate stage of the development, and many thousands of such sales were completed.

The 2011 act does nothing to detract from or weaken the position of a unit owner in a development governed by sections 4 and 5. Indeed, as mentioned above, the sections provide the OMC and individual unit owners with additional statutory rights to ensure that the common areas are transferred to OMCs and, indeed, that the transfers should be effected earlier than would have been the position under the contracts to transfer the common areas. There is no suggestion that transfer of common areas should be delayed just because the position of unit owners will not be weakened by failure to do so. There remains a statutory obligation to transfer the common areas, and the transfer should be implemented as soon as practicable.

The committee has also been asked whether it is necessary to establish a new OMC for existing developments. It appears clear that sections 15 and 16 apply to existing OMCs, so there would not appear to be any need to set up a new OMC. The relevant provisions of the act will apply automatically to such existing OMCs.