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Thomas O'Malley and Joanna Bannon examine the impact of the Act on various stakeholders.
The Multi-Unit Development Act, 2011 (the “MUD Act”) came into effect on 1 April 2011. It regulates the position of multi-unit developments, particularly in the context of the ownership of the common areas and management of the development. It is useful to consider how the MUD Act impacts on the various stakeholders in multi-unit developments, the Developer, the Bank funding the development, the Purchasers of units, the Purchasers Bank and the Owners Management Company (“OMC”)/Owners in a multi-unit development. We also examine concerns that failure to comply with the MUD Act constitutes a “blot” on title that may have impacts for the various stakeholders.
The Developer
The Act sets out significant obligations for developers, in terms of setting up the OMC and transferring legal and beneficial title to it. However, the absence of sanctions for non-compliance weakens the Act’s application. Developers who do not fulfil their obligations may be subject to an application pursuant to s 24 of the MUD Act, which provides purchasers and OMC members with a mechanism for compelling developers to transfer the common areas through a Circuit Court application. This route may be undesirable for applicants however due to the prospect of costs and inconvenience, and without sanctions it falls short of compelling developers to fulfil their obligations. Notwithstanding this, developers should be aware of the possibility of being ordered to pay the costs of the applicant. Where no units have been sold in a development prior to 1 April 2011 or in newly constructed developments (post 1 April 2011) the developer must set up an OMC and transfer the legal interest in the common areas to the OMC before the first unit is sold and carry the costs involved. This is where the impact of the MUD Act will be felt going forward.
The Developer’s Bank
The written consent of the developer’s bank is required at different stages in the transfer of the common areas, in relation to the transfer of both the legal and beneficial interest. This consent cannot be unreasonably withheld. The bank will continue to retain its security over the individual units whether or not the legal and beneficial interest in the common area is transferred. This is where the value in the bank’s security lies. Therefore the MUD Act does not adversely affect the bank funding the development.
The Purchaser
Purchaser’s solicitors should seek replies to MUD Act enquiries/managed property queries pre-contract so that they can make an informed decision. The main concerns are financial and risk related. Is there a good management structure in place? Up to date accounts, a sinking fund, expenditure budget, confirmation that no claims or large capital expenditure is planned and that insurance cover is in place. The sale of units in developments where no units were sold prior to the 1st April 2011 cannot be closed before the transfer of the legal interest in the common areas to the OMC and thus the impact of the MUD Act is going to be more effective going forward. In the case of existing developments, the Act does not prevent the sale of a property where the common areas have not been transferred to the OMC and failure to transfer does not constitute a blot to title. This is important for purchasers and banks lending to them.
The Purchaser’s Bank
The most recent Practice Note issued by the Law Society’s Conveyancing Committee on 7 June 2013 states that the fact that the common areas in an existing developments (pre 2011 developments) were not transferred “does not constitute a ‘blot’ on the title at the date of the certificate of title and does not require qualification of title”. This is a very helpful development and removes a lot of doubt about the purchase of units where the transfer of common areas has not taken place.
OMC/Owners in a Multi-Unit Development
The MUD Act provides that an OMC or any member therein can compel the transfer the common areas through a s 24 application in the Circuit Court. No doubt this route will be used in time to bring closure to situations where the title to common areas has not vested in the OMC.
Application of the Act- The Detail!
The application of the MUD Act is very broad. A “multi-unit development” is defined in s 1 of the MUD Act as a development where the facilities, amenities and services are shared. The scope of the MUD Act applies to both residential and commercial units, as well as to mixed-use developments. The provisions of the MUD Act apply to multi-unit developments containing not less than 5 units, but the Act also applies in a more limited way to developments with between 2 and 5 units where the development is residential. The provisions applying to these developments are listed in Schedule 1 of the MUD Act.
The key issue when dealing with a sale of a property in a multi-unit development is the identification of the stage of the development, i.e. whether it was a new, existing or substantially completed development as of 1 April 2011.
As far as the transfer of the common areas is concerned, the MUD Act distinguishes between the following three positions:
- New development – where no units have been sold prior to the 1 April 2011 within the multi-unit development – the developer is required to effect the transfer of the common areas to the OMC before the sale of the first residential unit (s 3). The Act places a number of requirements, which must be satisfied along with the transfer, and those will be dealt with later. The transfer of the common areas involves a transfer of the legal interest only to the OMC. The beneficial interest in the common areas remains with the Developer to facilitate the completion of the development and the Act provides that it passes to the OMC upon the completion of the development, by way of a statutory declaration (s 11).
- Existing development – where some units have been sold prior to the 1 April 2011 and less than 80% of the sales were closed before that date, and the ownership of the relevant parts of the common areas (which are parts that are necessary for the quiet and peaceful enjoyment of the unit e.g. common areas such as access corridors, stairwells, lifts, green areas etc.) was not transferred to the OMC – the Act required the developer to effect such a transfer within 6 months of the coming into operation of the Act, i.e. before 1 October 2011 (s 4). This obligation remains in force after the deadline and if no transfer took place pre 1 October 2011 there remains an obligation to effect such a transfer as soon as possible. S 4(2) provides that the beneficial interest remains with the developer until the development is completed. It can then be vested in the OMC by way of a Declaration under s 11 of the Act.
- Substantially completed development –where at least 80% of the units have been sold prior to the 1 April 2011 and the ownership of the relevant parts of the common areas were not transferred to the OMC – the Act requires the developer to effect such transfer within 6 months of the coming into operation of the Act, i.e. before 1 October 2011 without the reservation of any beneficial interest (s 5).
The Act provides that the beneficial interest of mortgagees, lenders and developers will be determined in respect of the common areas on completion of the development. In relation to developments which are not substantially completed, s 12 of the Act provides that the owners of 60% of the residential units in a multi-unit development, or a relevant part of the development can request the owner of every beneficial interest in the common areas concerned and the reversion in the residential units which is reserved to make a Statutory Declaration to the effect that the beneficial interest in the common areas stands transferred to the OMC, unless a good and sufficient cause can be shown (sufficient cause is defined in s 12(4) of the Act).
Where the beneficial interest is the subject of a mortgage or a charge a consent of each mortgagee, or owner of the charge in relation to the beneficial interest or reversion must be sought prior to the Declaration being made; and the Act states that such consent cannot be unreasonably withheld (s 12(2) & (3) of the Act).
Acting for the Vendor-Developer
In relation to new developments (as set out at No. 1 above) the developer must be advised that he will not be in a position to sell any of the units until the transfer of the legal interest in the common areas to the OMC takes place.
Additionally the developer is required to:
- establish, at his own cost, an Owners’ Management Company (if one has not already been established),
- provide a certificate from an architect, building surveyor or chartered engineer (persons defined as “specified persons” in S.I. No. 96/2011 - Multi-Unit Developments Act 2011 (Section 3) (Prescribed Persons) Regulations 2011) confirming compliance with the fire safety certificate,
- enter a contract in writing with the OMC. This agreement should cover issues such as completion of the development, respective obligations and responsibilities, compliance with statutory requirements as well as financial matters between the developer and the OMC, and dispute resolution (with mediation being the preferred method under the Act); and
- confirmation that the OMC had independent legal representation throughout the process of negotiations of the contract.
Additionally, the developers should provide an undertaking that a Declaration under Section 11 of the Act will be forthcoming upon the completion of the development.
Accordingly, when acting for a developer of a new multi-unit development a significant amount of work has to be carried out in order that the first sale may take place. This will involve the drafting and putting in place of the transfer of the common areas together with the supporting documentation. Additionally, the developer will have to carry the cost associated with the work required to comply with the Act, which includes not only developer’s own legal costs but also the costs of the OMC.
The position of existing and substantially completed developments (as set out at Nos. 2 & 3 above) is similar, in that in both instances the relevant parts of the common areas were required to be transferred to the OMC by 1 October 2011. Although there is no sanction for the failure to effect such a transfer, if the issue of the ownership of the common areas remains outstanding after that date, it should be dealt with as soon as possible. There is no provision in the act prohibiting, or restricting the sale of units where the common areas were not transferred, however, the obligation to do so remains.
S 24 of the Act provides for a mechanism whereby an application seeking an order to compel the developer to transfer the common areas can be made to the Circuit Court. This application can be brought by persons set out in s 25 of the Act including the OMC, any member of the OMC, trustee or personal representative of such a member, as well as any other person as the court sees fit upon an application to the Court for permission to make the application under s 24. Accordingly, a potential purchaser may take this course of action in order to compel the transfer of the common areas to the OMC.
Where the beneficial interest, or the reversion remains with the developer and is held as security, the developer’s lending institution should be consulted before it is transferred to the OMC, or merged with the legal interest already held by the OMC.
There are further responsibilities placed upon the developer by the Act, inter alia:
- The obligation to complete the development together with a duty to comply with Planning and Development Acts and Building Control Acts (s 7).
- The obligation to provide an indemnity to the OMC in respect of all claims made against the company in respect of any acts or omissions by the developer in the process of completion of the development (s 31).
- Upon completion of the development, a developer is required to gather and furnish to the OMC the documents set out in Schedule 3 of the Act (s 31(2)).
- The developer can be held responsible to discharge service charge in respect of all the unsold units (s 18(11) of the Act) in a development.
Acting for the Purchaser
Requisition 37 together with MUD Act Enquiries should be sought pre-contract. It is important to establish the position of the given development in relation to the transfer of the common areas and the stage of completion of the development as of 1 April 2011.
The purchaser should be advised that in certain situations where the transaction involves a newly constructed unit, the sale cannot be completed until the common areas are transferred to the OMC as per section 3 of the Act.
A distinction is drawn between conventional and non-conventional housing, with conventional housing being housing whose common areas are intended to be taken over by the local authority in due course.
This distinction is relevant in relation to the effect of s 3 of the Act. The issue was addressed by the Conveyancing Committee in a practice note published in June 2014, who confirms that s 3 will not apply to conventional housing. This is based on the definition of OMC in the Act, whereby an OMC is a company established for the purposes of becoming the owner of the common areas of a multi-unit development and charged with the management, maintenance and repair of such areas. In relation to conventional developments, there cannot be an OMC within the definition of the Act because there are no common areas which the OMC would manage, maintain and repair. There is an exception to this rule, which applies in cases where, some years ago, some local authorities inserted conditions in grants of planning permission for conventional housing developments which required OMCs to be formed to maintain common areas, despite the fact that these common areas would traditionally have been taken in charge by the local authority. In cases where the exception applies, the situation will probably only be solved by the residents of such estates availing of the provisions of s 180 to have the common areas taken in charge notwithstanding the conditions in the planning permissions.
In case of existing developments, where units have been sold prior to 1 April 2011 and where the common areas were not transferred to the OMC the developer is in breach of the provisions of the Act, as the deadline of 1 October 2011 has long since passed. However, as previously mentioned, there is no sanction for the developer for failure to transfer the common areas within the specified time.
The Act does not prohibit the sale of the remaining units in the existing or substantially completed developments.
There is a remedy available for the purchaser, namely an application under s 24 (discussed above). It is likely that the purchaser will be successful in obtaining Court’s permission to make such an application, having sufficient interest in doing so. However, the purchaser should be advised of the cost of such application, which they will have to carry pending a determination. Practically the OMC should make this application and the cost will be shared by the owners in the scheme.
Conclusion
The significance of the MUD Act is that it impacts on all parties involved in the sale of multi-unit developments. Failure to comply with the MUD Act is not a blot on title. The impact of the MUD Act will only be seen in time and its real impact is in relation to new developments where the transfer to the OMC must take place before the sale of the first unit. The lack of development in recent times has mitigated against its impact.
For further information on this issue contact Thomas O'Malley.
Remember that this article is for information purposes only and does not constitute legal advice. Case law is fact specific and readers should understand that similar outcomes cannot be assumed. Specific advice should always be taken in given situations.