The proposed PNG strata title scheme – what will change?

In brief 7 min read

In a development that is especially relevant to property developers and financial institutions, draft legislation to introduce a Papua New Guinea strata title scheme was released.

Key takeaways

• The Papua New Guinea Department of Lands and Physical Planning (the DLPP) released for public review and comment the following draft Bills for the establishment and management of a strata title scheme:
  • Strata Title Bill 2020;
  • Strata Title (Management) Bill 2020; and
  • Land Registration (Strata Title) Bill 2020.
• The Bills will be of particular interest to property developers, superannuation funds, banks and other financial institutions because they will:
  • give certainty of title to stakeholders investing in a strata title scheme; and
  • allow for the registration of dealings on the strata titles, giving banks and financial institutions the ability to register mortgages, or other encumbrances, over individual strata titles in a building.
• While the draft Bills contain the substantive provisions necessary to establish a strata scheme, there are a number of matters they don't yet deal with.

Background

In 2005 the PNG Government embarked on the National Land Development Program, with the staging of a National Land Summit in Lae, Morobe Province; followed, in 2006, by the establishment of a National Land Development Task Force formed to implement the recommendations from the Summit.

Summit recommendations focused on:

• improving the system of land administration;
• improving the system of land dispute settlement processes; and
• developing a framework for maximising the development potential of land held under customary tenure.¹

In 2006, the Taskforce issued the National Land Development Task Force Report, containing 54 recommendations, 47 of which were aimed at the DLPP. We understand the introduction of a strata title scheme is a result of DLPP’s attempts to implement some of the recommendations of the National Land Development Taskforce Report.

The proposed laws

The current formal system of land registration is based on the Torrens system of land registration. The Torrens system was initially introduced in PNG under land legislation adopted from the Australian Capital Territory. In keeping with this historical feature of the PNG Land Registration Act (Chapter 191) (the Land Registration Act), both the Strata Title Bill 2020 and the Strata (Titles) Management Bill 2020 are based on the Unit Titles Act 2001 and the Unit Titles (Management) Act 2011 currently in force in the Australian Capital Territory.

All three Bills must be read together to understand the part each will play in the establishment of the proposed strata title scheme.

Establishing strata title – Strata Title Bill 2020

The Strata Title Bill 2020 contains the requirements and procedures for preparing and registering a strata title application, as well as a number of new terms, including:

• Owner – for a unit, the registered proprietor of the lease of the unit, or for the common property, the owners' corporation;
• Parcel – a description of land either proposed (in a strata title application) to be subdivided, or the whole of the land subdivided and shown on a registered strata plan;
• Strata title application – an application for the subdivision of a parcel meeting the requirements in section 18 of the draft Bill;
• Strata plan – a diagram showing the subdivision, the schedule of unit entitlements, schedules of rent and lease provisions, and where the application provides for a staged subdivision ie the development statement;
• Units – part of a parcel on a strata plan as a unit (what would normally be apartments in a building);
• Unit subsidiaries – part of a parcel identified as a unit subsidiary annexed to a unit in the strata title application or strata plan. This might include carpark spaces, laundry or recreation areas; and
• Common property – all parts of a parcel identified as common property in a strata title application or strata plan.

The draft Bill prescribes the requirements for the preparation of a strata title application, the process for approval of the strata title application (including endorsement of the strata title plan for registration) and the effect of strata title plan registration.

Importantly, upon registration of the strata title plan the owners' corporation is established. The members of the owners' corporation for a strata plan are the owners of the units. The owners' corporation has the legal status of a corporation and may sue, and be sued, in its corporate name.

The draft Bill contains a general reference to the DLPP as the body responsible for approving a strata title application, and we expect that the DLPP will advise in due course whether the Land Board is the appropriate body within it to review and approve such an application.

Management – Strata Title (Management) Bill 2020

The Strata Title (Management) Bill 2020 provides for the management of strata schemes.

Owners' corporations

The draft Bill contains provisions for the establishment of owners’ corporations, their membership, and the functions and duties of the owners' corporation. The draft Bill also contains provisions relating to rules of an owners' corporation, the requirements to amend those rules and consequences for failing to adhere to the rules. A number of standard rules are provided in Schedule 3. While an owners' corporation may amend or add to the standard rules, it cannot make rules that are inconsistent with them.

Financial management

The draft Bill contains a number of financial management provisions, including for the establishment of administration and sinking funds to be administered by an owners' corporation. The administration fund is used for the general administration of the owners' corporation, and the sinking fund is used for capital expenditure of the strata building. The financial management provisions oblige the owners' corporation to approve annual budgets for each fund, set the estimated annual contributions that each member must contribute and outlines how the funds may be used.

The draft Bill also contains the owners' corporation's minimum building insurance obligations.

Registration – Land Registration (Strata Title) (Amendment) Bill 2020

The Land Registration (Strata Title) (Amendment) Bill (the Draft Amendment) is, as indicated by the title, an amendment to the Land Registration Act.

The Draft Amendment provides for the registration of a strata plan by the Registrar of Titles, and the documents required at lodgement of the strata plan with the Office of the Registrar of Titles.

Upon registration of a strata title plan:

• an owners’ corporation is established;
• the parcel to which the strata plan relates is subdivided, as specified in diagrams provided as part of the strata plan;
• any state lease over the relevant parcel ends, and the former holder of the state lease becomes the holder of a lease of each unit in the strata plan, on the same terms as the cancelled state lease and ending on the same date that the cancelled lease would have ended;
• the owners’ corporation becomes the holder of a lease of the common property; and
• where the previous state lease was subject to any mortgage, or was subject to or the beneficiary of an easement, the lease applicable to each unit is similarly encumbered.

A strata title application may only be made in relation to land the subject of a state lease where the remaining term of the state lease is at least 50 years.

Other issues

While the draft Bills contain the substantive provisions necessary to establish a strata scheme, there are a number of matters the draft Bills do not yet deal with. These include the following.

IPA certification

The DLPP should consult with the Investment Promotion Authority to determine whether an owners' corporation will require foreign certification and the method of determining whether an owners’ corporation is a foreign enterprise.

State leases

The Land Act 1996 empowers the Minister for Lands to grant different classes of state leases, including agricultural leases, business and residential leases, mission leases or special purpose leases. The DLPP should consider including a provision to limit or amend the types of state leases under which a strata title application can be made, particularly in mixed use apartment complexes (where eg upper stories might be reserved for residential use, while lower stories are reserved for commercial use, such as offices or shops), as different classifications of state leases attract different rental amounts.

Existing informal ‘strata’ structure

The draft Bills do not expressly include provisions transitioning existing or informal 'strata' buildings to the new strata title scheme. We recommend that the DLPP consider amending the draft Bills to make it clear that buildings operated under existing informal arrangements continue to operate under the informal strata structure but any proposed or redeveloped apartment complexes must be operated under the new strata scheme arrangement.

Disclosure regime

Unlike the strata legislation in the Australian Capital Territory (or other Australian jurisdictions), the draft Bills do not include a disclosure regime requiring minimum disclosure requirements be satisfied when a strata unit is bought and sold. We recommend that the DLPP consider amending the draft Bills to incorporate a disclosure regime.

Freehold and 'VCLR' land

A strata title application may only be made in relation to land the subject of a state lease. Freehold land and registered customary land² are not subject to state leases. Care must be taken to ensure that upon registration of a strata plan over a parcel, the extinguishment of that parcel's underlying lease is not mistaken for a means to convert freehold or registered customary land to state lease land. We recommend that the DLPP consider amending the draft Bills to make it clear that their provisions do not apply to freehold land or registered customary land.

Next steps

We will continue to keep you informed on the progress of these draft Bills.