Density and development – Structuring mixed use residential projects

Mixed use development is part of the Queensland landscape in a range of contexts and densities. Legislation has developed in Queensland to provide flexibility for projects that integrate different uses and operating environments in one or more buildings, often with progressive development and staging and over more than one market cycle.

The seismic shift in thinking in Queensland came with new subdivision formats under the Land Title Act 1994 and the commencement of the Body Corporate and Community Management Act 1997 (BCCMA). Further changes made in 2005 (which we were specifically consulted on in an industry representative role and drafted in consultation with Government) reinforced and clarified connections between volumetric development and community titled formats.

The tools exist to facilitate mixed use projects, but achieving optimal results requires an understanding of how to best use them and how to deal with the limitations that still exist. In a series of articles beginning with this Update, we will look at tenure and governance for projects in various contexts, and address the interaction of legal structure with planning, delivery, operational and commercial objectives.

In this article we look at principles and issues for mixed use residential projects using a building management statement (BMS) overlay with community titles schemes (Schemes). This structure is common to mixed use residential projects where apartments, in one or more buildings, sit with other uses - retail, short term accommodation, hotel, or commercial.

The BMS structure is often seen as another “body corporate” overlay. The opportunity to tailor a structure to meet project objectives, mitigate risk and enhance outcomes for owners and occupiers can be lost with that perspective. Ensuring these arrangements are fit for purpose is also important in protecting asset values and market reputation.

There are a number of options for structuring a mixed use apartment project but in general a decision needs to be made at the outset about using Scheme formats exclusively or integrating them within a BMS framework. Tenure and governance can involve a range of subdivision formats and associated instruments – one or more BMS documents, one or more Schemes or combinations of all of these, tailored to project contexts, development and operating requirements.

The following table summarises options for a residential project involving other uses and whether staged or developed in in one or more buildings. Combinations of these options may be adopted depending on the size and complexity of the project.

There are a number of critical matters to be considered in structuring tenure and governance arrangements using a BMS framework with one or more residential Schemes. These matters feed into the project delivery and sale arrangements, especially for the sale of apartments off the plan, letting of retail and commercial areas and appropriate recognition of the operational requirements for different uses. Too often these factors are not considered or are not addressed adequately.

Understanding content requirements

The BMS offers tailored arrangements but content limitations under legislation must be observed. The BMS is a registered instrument. It identifies lots to which it applies and attracts indefeasibility. Covenants in a BMS benefit and burden the lots and bind and benefit successors in title where they run with the lots.

Achieving optimal leverage and development outcomes means understanding the scope of the covenants that will run with title, how legislative content restrictions operate and how development and operating arrangements can be accommodated. The BMS is an overarching governance framework for a project and has to be able to be implemented and administered for the lifecycle of the project.

Potential owners and occupiers of all components expect security of tenure and undertake due diligence on rights and obligations. Deficiencies in BMS arrangements will adversely impact marketability and value assessments for project assets. Fixing deficiencies retrospectively or in the middle of a sales campaign has potential consequences for disclosure and certainty of contractual enforcement. Accordingly, the ability to “design” BMS arrangements that are legally and commercially certain is crucial to both disposal and to operating phases of a project. Establishing BMS content with reference to off the plan sales disclosure while reserving development options is an essential part of framing the BMS.

An appropriate BMS framework

The BMS is not intended to replicate a body corporate structure.

A properly drawn BMS will avoid administrative duplication and secure appropriate reciprocal rights and obligations to allow the project to function cohesively but with required autonomy for each use. This is particularly important in terms of the different approaches to asset management, maintenance and operation that follow with different use types.

In significant projects, infrastructure will often require appropriate facility management arrangements beyond the scope of residential caretaking arrangements typically associated with stand-alone apartment product. Increasingly, energy supply and management and other services introduce regulatory overlays and providing best practice outcomes requires recognition in the BMS and other tenure structures. This is relevant, for example, for embedded electricity networks and supply arrangements but also communications infrastructure and other services. A BMS allows these matters to be implemented across project components, including at Scheme level, provided the impact of subdivision and management arrangements is properly accounted for. Provisions in the Land Title Act concerning BMS management group decisions binding bodies corporate (despite limitations on delegation under the BCCMA) also need to be considered in framing facility management arrangements and the role of the BMS management group.

While assessment of building costs, maintenance programs and forecast capital expenditure requirements can and should inform the BMS and its administration, replication of the Scheme contribution structure under a BMS will not be appropriate or necessary in many cases. Commercial and other non-residential owners may not fund capital expenditure from recurrent periodic contributions built up over time. Requiring them to do so may create conflict and adversely impact return metrics, values and complicate cost recovery in leases. In TOD developments, operating transport infrastructure usually requires specific controls and requirements that would not be consistent with a “residential” contribution regime.

Cost allocations at BMS levels may flow through to underlying Schemes and the BMS cost regime will be a key part of determining statutory disclosure to residential buyers. Poorly thought out BMS arrangements can be the source of changes to disclosed material that may trigger termination grounds under off the plan apartment sales.

Decision making and the management group structure also needs careful consideration. The management group under a BMS does not have to regulate or decide matters about every aspect of the project. The scope for management group decision making should be limited to the core reciprocal rights arrangements and respect autonomy for internal management for different uses, including the role of the body corporate for a residential Scheme. Decision making can be more flexibly dealt with than under a Scheme structure where voting entitlements and processes are prescribed more narrowly. For example, decisions on certain matters may be preserved to a particular owner as may be the case where operating transport infrastructure and crown land is involved or where a particular facility, although shared, is critical to a particular owner (e.g. a loading dock or parking area).

The management group can also be a vehicle for binding bodies corporate to decisions about matters where they would otherwise not be empowered to delegate functions under the BCCMA (as a result of provisions in the Land Title Act). This is, for example, relevant to establishing and preserving facility management arrangements; a level of delegation to a facilities manager may of mitigate issues that can arise where infrastructure requirements are beyond the scope of the body corporate committee or onsite manager to handle or where requiring multiple bodies corporate to concur about a service requirement for infrastructure is inefficient. Facilities management rights may themselves become an asset of the project.

Understanding the operation of term limitation provisions for body corporate contracts in this context is however important as bodies corporate will still be a party to facility management arrangements as owners established through the agency of the BMS management group. Such arrangements are also required to be the subject of disclosure and planning for these arrangements at the outset is relevant to ensuring disclosure to buyers is accurate. Even if precise contract terms are not fixed or known when the BMS is initially drafted, the scope for these arrangements can be anticipated both contractually and form a cost view point.

Dispute resolution is potentially more flexible under a BMS. Using a layered arrangement of Schemes brings with it the BCCMA framework for dispute resolution. While disputes as defined under the BCCMA do not extend to all types of commercial matters, a BMS offers the ability to prescribe alternative or multiple dispute mechanisms which may be more suitable to the relationships between different owners in a mixed use project.

Tenure and Planning Road Map

The BMS must work within the requirements of titling legislation and must compliment planning approvals. The BMS can be a mechanism that provides security for planning objectives and outcomes to meet assessing authority requirements. This can range from securing access and essential infrastructure and facility rights for a use to mitigating perceived amenity impacts. The BMS should be developed as part of the architectural and planning concept and in conjunction with the approvals process.

In significant mixed use projects the interaction between public and private open space and other publicly accessible areas is often critical to approvals and satisfying assessing authority requirements. The BMS can assist in addressing these matters and providing a balanced solution that preserves commercial objectives. For example, public cross links and access through sites can be preserved through an internal BMS covenant matching approval conditions requiring access to be maintained and preventing any owner limiting access to designated areas. The combination of a planning approval condition and BMS term may be a better solution (from an assessing authority view point) than a public thoroughfare easement because that type of easement by legislation requires maintenance responsibility to be borne by the Council.

In other scenarios, the design and subdivision requirements of the project may impact dedications and require consideration of the interaction of BMS provisions with other instruments including covenants and easements. In circumstances where transport land is involved (as defined under the Transport Infrastructure Act 1994 – which includes busways, rail corridor land and other transport related land and facilities) a BMS can be registered over freehold and crown land. Integration of private and public facilities may involve acceptance of volumetrically defined areas to fit with optimal design and operating requirements. This can raise issues for assessing authorities who often have preconceived ideas about the format and configuration of dedicated areas and infrastructure, and in some cases, about the use of infrastructure as a shared service as opposed to requiring separate infrastructure to be provided for each use.

Subdivisional requirements and future development

Preconditions apply to registration of a BMS. At least one volumetric lot and one standard format balance lot must be in existence at registration. As such the BMS is inextricably linked to the subdivision sequence for a project. Allocating balance lots (containing surface, airspace and subsurface areas not incorporated in other volumetric lots) can be a critical part of controlling development and operating rights and arrangements.

The BMS must be drafted with a clear understanding of the subdivision pattern and the timing for establishment of tenures, particularly Schemes for residential components and any secondary BMS for a particular building (if applicable). If this is not adequately accommodated there may be flow on effects for establishing Schemes and for sales of interests in the project. For example, a BMS may anticipate the creation of a development lot to be subsequently included in a Scheme as a stage of development. In turn, this needs to be reflected in forecasts for development in the community management statement for the Scheme. There are different timing points at which this could occur (on Scheme establishment or subsequently) which could affect development rights in that Scheme and cost contributions of owners and disclosure in the pre-sales phase.

Each lot to which a BMS applies must be a lot entirely or partly contained in, or entirely or partly containing, 1 or more buildings. However, a BMS may also apply to lots that don’t meet this criteria if the lot is the subject of a building development approval – being a development approval or compliance permit, under the Sustainable Planning Act 2009, for development relating to a proposed building or buildings. Vacant lots for future development or lots within Buildings can be brought within the BMS framework and a coherent future development regime can be embedded in the document. Where a large project involves future re-development of already improved land but approvals are not finalised for that redevelopment, those lots may still be made the subject of the BMS so as to preserve rights that may be required for the future development – for example, future access or shared services and facility rights.

In a staged project, future development provisions in a BMS will marry with planning approvals and subdivision sequencing. It is important from a pre-sales disclosure view point that future development provisions at BMS level are reflected and linked appropriately to the forecasts of development in any community management statement for a relevant Scheme. Disconnects in that regard may affect a developer’s rights to control staged development or create inconsistencies that trigger further disclosure unnecessarily.

The BMS may provide certainty required to allow for accelerated title creation (and disposal) for use segments in a project which can have significant commercial implications. For example, we have been involved in major mixed use projects where title is created and transferred before construction and contemporaneous development rights secured - site integrity is maintained for assessing authority requirements.

The BMS can be used to preserve areas for shared and future uses, to change conditions of access and availability during development - for example, to allow interim use of an area for or during construction, to allow multi-use of a facility such as allocating parking rights to different time periods, to transition use arrangements as development is completed, including parking and other facilities access and to allow for progressive delivery of stages within buildings or across buildings. Contributions to costs for facilities and areas can be staggered accordingly and to mitigate cost imposts on owners in bodies corporates pending development completion.

Rights to introduce or change uses in a project can also be enhanced by using a BMS to regulate types of development and stages of development. The BCCMA provisions that require notification of use changes in forecast development do not apply to lots under a BMS that are not part of a Scheme. This allows for a more flexible relationship between proposed uses, disclosure of use intents in pre-sales and changes to planning approvals over time.

A properly considered tenure and governance framework will work with and form part of project planning, delivery and disposal arrangements and support asset values and operation for the lifecycle of the Project. We work with developers and consultant teams to provide this framework and manage implementation under it.

Norton Rose Fulbright have been involved with volumetric and Scheme formats since they were introduced in Queensland legislation and have consulted to Government and for industry on legislative changes and policy for 20 years. A hallmark of our project work is the establishment of robust yet flexible project arrangements that tie concept, planning, construction, design, disposal and operation together coherently.

Our project book includes some of the most innovative and dynamic developments in Queensland’s urban fabric, both competed and currently being constructed. We bring that knowledge and expertise to every project we work on. For more information about the issues in this article or any other aspect of mixed use and Scheme development in Queensland please contact Matthew Derrick. For enquiries about similar development issues for Projects in other Australian States you can contact our other listed Partners.