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Multi-Unit Developments Act 2011 - Note for Banks and Receivers
The Multi-Unit Developments Act will be of immediate concern to both lenders who hold apartments schemes as security, and to receivers who have been appointed over such schemes. Of particular relevance are those sections of the Act which apply to existing estates where some but not all the units have been sold. The Act requires that the common areas be transferred to the owners' management company (OMC) by 30 September 2011.
The Act will come into force on 1 April 2011 (other than the two sections which are already in force).
The Act has significant implications for residential and mixed use developments where there are privately maintained common areas. In respect of new developments, the Act requires that the legal interest in the common areas, or at least relevant parts thereof, be transferred to a management company (referred to as an owners’ management company or an OMC) before the completion of the sale of the first residential unit in the scheme. The equitable interest remains with the developer pending substantial completion of the scheme and then vests in the OMC by way of declaration.
The developer must enter into a contract with the OMC for the completion of the development and compliance with all relevant statutory requirements.
A number of the definitions are fundamental to an understanding of the Act.
“Multi-Unit Development” is a development comprising a unit or units in respect of which it is intended that amenities, facilities and services are to be shared, and containing not less than five residential units. Notwithstanding this definition, some of the Act’s provisions apply in respect of schemes with less than five units.
“Unit” is not defined but “Residential Unit” means a unit which is designed for use and occupation as a house, apartment, flat or other dwelling which has self-contained facilities or is designed and used as a child-care facility (other than a child care facility which primarily shares amenities, services and facilities with commercial units in the development). A unit will be deemed to have self-contained facilities if it has bathroom and cooking facilities within it for the exclusive use of the occupants of that unit.
A “Commercial Unit” is a unit that is not a residential unit, and is intended for commercial use.
“Mixed Use Multi-Unit Development” is a Multi-Unit Development which has at least one commercial unit in it.
EXISITING UNFINISHED MULTI UNIT DEVELOPMENTS
There are two principal categories of Multi-Unit Developments which lenders and receivers will require to address, being schemes where development is ongoing and those which are substantially completed. The Act describes a substantially completed development as one where the sales of not less than 80% of the units have been closed by 1 April 2011.
1. Developments which are not substantially completed.
The developer is required to transfer the ownership of the common areas in all residential schemes to the OMC by 30 September 2011. That transfer is of the legal estate, and reserves the beneficial interest in the existing owner and the holder of a mortgage over such beneficial interest. Banks and other lenders on the security of apartment schemes and mixed developments with a residential element will wish to consider their existing security and whether it will be necessary to put in place any additional security following such transfer.
Lenders will require to ensure that the procedures put in place between the developer and the OMC, and in particular the form of the transfer, are appropriate, and will facilitate the sale of units in the development. They will need to consider the extent to which such arrangements might impact on their existing security, and any future enforcement thereof.
Where a receiver has been appointed over a developer, or a mortgagee is in possession, the receiver or mortgagee will need to ensure compliance with these provisions of the Act, by effecting the necessary transfer of the legal estate.
2. Substantially Completed Developments
Where the sales of not less than 80% of the units have been closed by 1 April 2011 the developer is required to transfer ownership of the common areas to the OMC by 30 September 2011. However in this instance, the developer cannot reserve the beneficial interest, and is required to pass the entire title to the OMC.
It will accordingly be necessary for developers, receivers appointed over developers, and mortgagees in possession, to put in place a structure before 30 September 2011 in respect of any unsold units in the scheme, such that those units do not vest in the OMC, and can subsequently be sold. The bank or other lender may require to take security over each such unit.
Even where no receiver has been appointed, and there has been no intervention by the lender, if the developer does not put in place the appropriate structures in relation to substantially completed developments, the lender will need to consider its position.
If the developer cannot be persuaded to take the appropriate steps, the lender should consider whether to appoint a receiver or to go into possession to ensure that the necessary structures are put in place prior to 30 September 2011. In contrast to the vesting procedure described in paragraph 4 below in relation to unfinished (or unsold) schemes, the Act does not make any provision for the consent of the lender to be obtained prior to the transfer of the common areas in a substantially completed development.
VESTING OF BENEFICIAL INTEREST
Where the developer has transferred to an OMC the legal estate in a development which was not substantially completed on 1 April 2011, he is required to make a declaration vesting the beneficial interest in the OMC as soon as all building works have been finished.
The effect of making that declaration is that the beneficial interest and the legal interest merge, and the OMC becomes beneficially entitled to the development, subject to the apartment leases.
The Act provides that the consent of any holder of a mortgage is required for the making of such a declaration, but that such consent cannot be unreasonably withheld. The Act envisages that the lender would take a charge over each unsold residential unit. Putting that charge in place may require that individual leases are granted in respect of each such unit.
EARLY TRANSFER OF BENEFICIAL INTEREST TO OMC
The Act allows the owners of at least 60% of the residential units in a Multi Unit Development (or distinct part thereof, such as one block in a larger scheme) to call on the developer to vest the beneficial interest in the common areas in the OMC. It is to be anticipated that where developers are no longer active on site, residents may exercise the powers under this provision.
Mortgage holders are entitled to insist that individual unsold apartments would be subject to a mortgage or charge when the beneficial interest in the development vests in the OMC. This again would trigger the necessity for a structure as referred to at 3(b) above.
RESTING ON CONTRACT
Structures have frequently been used in respect of development sites whereby the borrower did not take in title to the lands, but either “rested on contract” by not calling for a deed, or developed on foot of a licence agreement whereby title would pass directly to the ultimate purchasers of completed units. There are many variations of these structures, the object of which was frequently to save stamp duty. Often (but not always) the bank took a limited recourse mortgage from the original owner.
Each such structure will require separate consideration to assess the implications of the Act, in the context of the transfer of the bare legal estate to the OMC by 30 September 2011. Retaining the beneficial interest in the borrower may trigger a stamp duty liability.
EXISTING MANAGEMENT STRUCTURES
Receivers appointed over managed schemes often face numerous difficulties, especially where the administration and management of the scheme has not been maintained. Frequently there are considerable service charge arrears due to the existing OMC, and suppliers have not been paid. The OMC might be significantly insolvent.
The Act curtails the options available to a receiver. The possibility of setting up a new management structure to facilitate the sale of the remaining units may not be available, or may require the endorsement of the Circuit Court.
The Act also prohibits any exercise of preferential voting rights in OMCs in existing residential developments, and provides that one vote shall attach to each residential unit. Notwithstanding the articles of association of the OMC, subscribers or others seeking to exercise voting rights require an order of the Circuit Court in order to do so. The Circuit Court will only grant that right in very limited circumstances. Receivers who have nominees appointed as directors of OMCs could find that those directors are replaced at the next AGM.
The Act contains detailed provisions with regard to OMC’s and the running of Multi Unit Developments, including procedures for setting the level of service charges, maintaining sinking funds and making house rules. Restrictions are placed on OMCs carrying out repairs which were the responsibility of the developer. The members of the OMC are directly involved in each of these matters. The Act also deals with the holding of annual meetings and appointment of directors.
There is a prohibition on OMC’s entering into service contracts for periods in excess of 3 years.
The Circuit Court is given a wide jurisdiction to resolve disputes, and to intervene in the management of common areas and the structures in place to regulate the management and control thereof.
NOTE: This memorandum is intended for general guidance and information only. Each development has its own distinct characteristics, and separate advice should be obtained in respect of each scheme, and the specific issues that arise.
For more information, please contact Patrick Sweetman, Niall Horgan, Niamh Counihan or your usual contact in Matheson.