Strata Windup Overview
Winding up strata can be an excellent way for a developer who may want to develop on the strata's property to leverage the value of all strata units. As a way to maximize the value of a multi-unit residential property ("strata" in BC), strata windups are a great choice. However, windup processes can be complicated. In these cases, real estate law, condo law ("strata property law"), and reorganization laws intersect.
According to new legislation passed in 2016, strata corporations in British Columbia (BC) can voluntarily wind up their strata plans and file a court application. A majority of strata owners must approve the resolution for it to be valid. In the current BC real estate market, this may be a compelling option, especially for older, stratified developments (multifamily or commercial) that will incur substantial structural and building envelope repair expenses. The process of winding up and selling strata-titled properties to developers can be extraordinarily complex for strata corporations. In light of recent experience, a windup process that is not compliant with applicable legislation might fail to get approval from a court, resulting in significant delays that might result in the developer walking away from the deal entirely.
What you need to know
New changes have recently been made to the Strata Property Act ("SPA"), which has simplified the process of dissolving a strata corporation and selling a strata-titled property in its entirety. Strata corporations no longer required unanimous consent for voluntary dissolution due to these amendments. At least 80% of owners must approve a windup resolution for the strata to move forward. If the zoning is changed or the neighborhood's density is increased, it can make the property more attractive to developers who are willing to pay for both the land and the building. In addition, owners are likely to incur significant special levies if the building requires extensive maintenance. It is a highly technical process that involves numerous steps, and the SPA specifies that the court is responsible for overseeing it. In deciding whether to confirm a windup vote, the court will consider the interests of all parties involved, including the interests of owners who support the windup and owners who oppose it. Basically, the court will prevent significant unfairness or confusion from occurring to owners and any other stakeholders.
What Owners Need to Know
After a strata corporation has wound up, owners are often curious about the proceeds. This question is relevant regardless of whether the strata corporation was incorporated before or after 1974 (but before 2000). When the sale proceeds are divided between owners, a Schedule of Interest on Destruction or a similar schedule such as the Schedule of Unit Entitlement, which was filed with the Land Title Office when the strata plan was filed, will be used. The details of the final sale contract will be determined by what the strata corporation negotiates for the owners collectively. Even if a windup is being contemplated by the strata corporation, owners may sell their units independently.
The owners of condominiums should be aware that when determining how much of the sale proceeds should be allocated to them, this factor is not taken into account even if they recently had renovations or upgrades done to their buildings (i.e., better location, better views, etc.). No consideration will be given to the characteristics of a particular unit. Strata plans originally submitted to the Land Title Office before the Schedule of Unit Entitlement or Schedule of Interest on Destruction are only considered if the Schedule of Unit Entitlement or Schedule of Interest on Destruction was filed with the Land Title Office before the original strata plan.
Following a deal, developers may allow owners to live in their units under certain terms and conditions. If the unit is rented, investors should be aware that a term of the purchase and sale agreement often requires the tenant to leave before the closing. A strata corporation usually winds up within one to two years, depending on a variety of factors, including whether there are any dissenting unit owners or if the proponent can obtain the consent of at least 80% of the unit owners. Ultimately, how quickly the owners can agree on how and when to sell the property will determine how long the strata corporation windup process will take. After the windup process is completed, the remaining amount in the contingency fund will be distributed to owners according to the distribution of sale proceeds outlined in the Schedule of Unit Entitlement or Schedule of Interest on Destruction, whichever method was used at the time the strata plan was filed. Owners should notify the strata council or real estate agent of any issues or questions they may have regarding the strata corporation windup process.
What Strata Council Needs to Know
If a strata corporation wants to determine the value of its property, it should consult an appraiser. The values of strata corporations are heavily influenced by two key factors: the location and the zoning of the property. If the strata property should be sold, an appraisal is the first step in the windup process. The strata corporation should hire a real estate agent and lawyer early in the process if it wishes to proceed. A smooth and successful windup is more likely when you receive good legal advice and real estate advice early on. There is no substitute for prevention. A majority resolution must be passed by the strata corporation to hire an appraiser, lawyer, or realtor. Strata corporations must gain the support of 3/4 of the board of directors in order to pay more than $2,000 in professional fees.
The strata council represents the strata corporation during the windup process and plays an essential role in keeping owners informed. Owners may need to be informed about the procedure for the sale and windup and ensure that professional assistance is provided as necessary. There is a possibility that owners who oppose the wind up of a strata corporation will have to present evidence to a judge if the matter goes to court. In order to provide the necessary evidence, strata councils should document their discussions and correspondence. As a strata council, it is important to remember that the building and the land are common property that the strata corporation must maintain and repair. Even if looming repairs are the reason for winding up, the strata corporation must maintain and repair the common property.
Why We Should Talk Soon
Having advised dozens of Strata councils, concerned owners and qualified market interests since the changes to the Strata Act in 2016, Steve Da Cruz is firmly established in south western BC when it comes to providing clarity on process, pros and cons, and how to maximize outcomes while ensuring deal security in a Strata Windup. Steve is extremely well-versed, knowledgeable and can speak plainly for everyone to understand this incredibly complex transaction and process.
Moving into 2022, escalating interest rates have triggered many Stratas to revisit the marketing process and buyers to digest the undertaking under compressed timelines. Now that Covid appears to be on the wane, the insurance issues that were swept aside have returned and owners need solid advice now more than ever.
Please don't hesitate to request a no-obligation zoom call to discuss the options available to you. Strata Windups can offer incredible opportunities for both homeowners and developers alike, but only if they are handled with exacting care, professional advisory and expert analysis.