Inactive owners corporations – are they really? The importance of common property insurance before a sale

Where a vendor is selling a lot in a subdivision with common property:

• owners corporations with three or more lots must hold common property insurance, even if the owners corporation has never met or struck a fee;
• if the insurance is not in place before the contract is signed, the purchaser may avoid the sale at any time before completion;
• obtaining the insurance makes the owners corporation active, which triggers further disclosure under section 151 of the OC Act; and
• where there is no owners corporation manager to issue a certificate, the section 151 information can be included directly in the section 32 statement.

An owners corporation is inactive under section 32F of the SL Act only if, in the previous 15 months, it has not held an annual general meeting, fixed any fees, or held any insurance. Small subdivisions of three or four lots often have no manager, no meetings, and no insurance, so they look dormant.

A vendor may tell you the owners corporation is inactive and assume nothing more is needed. The obligation to insure the common property does not depend on whether the owners corporation has ever met, so taking the vendor's instructions at face value is where files come unstuck.

These steps address where the risk concentrates.

1. When you open the file, identify whether the owners corporation must hold common property insurance.

Check the number of lots and whether there is common property. An owners corporation of three or more lots with common property must hold reinstatement and replacement insurance for buildings on the common property under section 59 of the OC Act, and public liability insurance under section 60. Only two-lot owners corporations are exempt under sections 7 and 7A. Insurance is not required where there is no common property and the owners corporation has resolved by unanimous resolution that each lot owner insure their own lot under section 63, which usually requires a meeting.

2. Before the section 32 statement is signed, tell the vendor client in writing to obtain common property insurance.

Whilst the obligation for the vendor selling land to have the correct common property insurance in place stems from section 11 of the SL Act, good conveyancing practice is to attach the applicable insurance particulars to the section 32 statement, to ensure that section 11 of the SL Act is complied with, before the sale proceeds.

Accordingly, if the required common property insurance is not in place when the contract is signed, the purchaser may avoid the sale at any time before completion under section 11 of the SL Act. To close that risk, instruct the client in writing to put the section 59 and section 60 insurance in place, and confirm it is current before the section 32 statement is signed. Record the advice and the client's response on the file.

3. Once the insurance is in place, treat the owners corporation as active.

Obtaining the common property insurance means the owners corporation no longer meets the definition of inactive in section 32F of the SL Act, so the inactive disclosure shortcut no longer applies. The vendor must now disclose the further owners corporation details required by section 151 of the OC Act in the section 32 statement.

4. Where there is no owners corporation manager, include the section 151 information in the section 32 statement yourself.

Because there is no manager or authorised person to issue an owners corporation certificate, obtain the required details from the vendor client and set out the section 151(4)(a) information directly in the section 32 statement, relying on section 32F(1A) of the SL Act.