By Aaron Gadiel, Partner

The ability to strata subdivide new apartment developments in key areas of Sydney is in doubt, following a new decision by the Land and Environment Court.

The court case and the legal issue

The Court’s chief judge, Justice Preston, handed down his decision in DM & Longbow v Willoughby City Council on 11 December 2017. This was an appeal against a July decision made by a commissioner.

The original proceedings related to a development application for a dual occupancy.  The local council had conceded that the proposed dual occupancy built form was acceptable and should be approved.  However, local council opposed the proposed strata subdivision of the dual occupancy.

Both the commissioner who originally heard the matter — and Justice Preston on appeal — ruled that the proposed strata subdivision was prohibited by law.  This meant that it could not be approved, irrespective of the merits of the strata subdivision.

The central issue was the interpretation of clause 4.1 of the Willoughby Local Environmental Plan 2012.  This clause is titled ‘minimum subdivision lot size’.  Its key provisions come from the ‘standard instrument’.

Almost all modern local environmental plans (LEPs) in NSW have ‘adopted’ clause 4.1 from the standard instrument.  This means that the Court’s decision has implications that extend far beyond the Willoughby council area.

Clause 4.1 says that the size of any lot resulting from a subdivision cannot be less than the minimum size shown on a LEP’s lot size map.  The formal definition of ‘subdivision’ includes a strata subdivision.  However, clause 4.1(4) says that the clause does not apply in relation to ‘the subdivision of individual lots in a strata plan or community title scheme’.

The standard instrument also provides for an additional clause —which local councils can choose to adopt.  This clause (known as clause 4.1AA) is titled ‘minimum subdivision lot size for community title schemes’.

Until relatively recently, a common view of these provisions was that:

• Clause 4.1 regulated minimum lots sizes, other than those created by a strata subdivision or community title subdivision.
• The additional optional ‘community title schemes’ clause allowed local councils to set a minimum lot size for community title lots.
• The standard instrument did not explicitly provide for any regulation of the minimum lot sizes for strata lots.
• Local councils could regulate the minimum lot size of strata lots by a customised-local provision if it was considered necessary. (Willoughby Local Environmental Plan 2012 has such a provision for commercial core land in the Chatswood central business district.  However, most local councils have not done this.)

Nonetheless, some local councils have, at times, taken the view that the exception in clause 4.1(4) only applies to existing strata title or community title schemes.  This would mean that — for a new strata title or community scheme — the standard minimum lot size applies. This view is based on a literal reading of the text of that provision.

In 2015 the Department of Planning and Environment recognised that some local councils were taking this view.  As a result, it released a proposed change to the ‘exception’ in clause 4.1(4) to ‘clarify’ minimum lot size in relation to a strata plan or community title scheme.  The proposed change would have made it impossible to argue that the minimum lot size regime (under clause 4.1) applied to new strata title or community title subdivisions.

However, the NSW Government did not proceed with this change (when it made other changes to the standard instrument in 2016).

This left the issue hanging.  Then, in two separate decisions in March and July this year, commissioners of the Land and Environment Court ruled that the standard minimum lot size imposed under clause 4.1 did apply to new strata subdivisions.  The first decision related to the Lane Cove’s LEP and the second decision related to Willoughby’s LEP.

The second decision was appealed.  In a strict sense, it was about the Willoughby LEP only.  However, the logic of the decision will be generally applicable to all ‘standard instrument’ LEPs — subject to any particular customised local provisions.

The chief judge has made it clear that the literal text of LEP must be applied.  This means that in Willoughby — and in some other areas — new strata plans cannot be approved if the proposed individual strata lots do not comply with the LEP’s minimum lot size requirements.

The implications

This decision has significant implications for apartment development (in some areas).

Problems will generally only arise in areas where:

• higher density development is permitted; and
• a minimum lot size (for subdivision) is also in place under the LEP’s minimum lot size map.

In some areas — where high density residential development is anticipated — no minimum lot size has been set under the relevant modern LEP.  The City of Sydney, Parramatta city centre and Crows Nest are good examples.

However, there are other, more problematic, examples:

• The entire Burwood town centre is subject to a 500 square metre minimum lot size.
• R4 ‘high density residential’ zoned land to the south and west of Bankstown town centre is subject to a 450 square metre minimum lot size.
• R4 ‘high density residential’ and B4 ‘mixed use’ zoned land near Liverpool town centre is subject to 1,000 square metre minimum lot size.

(These are examples only.  They have been identified through a small number of random checks.)

The potential practical issues that might arise from the Court’s interpretation were put to the Court.  Namely:

• The nature of strata development — including access to common property and facilities — means that the same area of individual lot space is not required in order to achieve a similar level of amenity.
• Greater flexibility is appropriate in the context of strata subdivision.
• A lot size of (in the Willoughby City Council case) at least 650 square metres would be very much out of the ordinary for strata development and practically impossible to achieve.
• There is no obvious planning benefit in requiring strata lots to have such large areas.

However, the Court said that it is not its role to apply its own preference for what might be the ‘fairer or more convenient’ operation of the minimum lot size clause.  In essence, the text of the law reflects a planning policy decision regarding where and how subdivision of land is to occur.  The Court said that it is not for the Court to re-interpret the law to change the ‘precise’ choice of language that has been used in the Willoughby LEP (and therefore, by extension, the standard instrument more generally).

It may amuse those who deal with the planning system on a daily basis to know that part of the Willoughby City Council’s submission to the chief judge was based on a quote from a 2005 decision of the Court of Appeal: ‘Any attempt to always find planning logic in planning instruments is generally a barren exercise’.

Solutions?

It is important to understand that the legal issue only arises in relation to the strata subdivision of apartments.

The new interpretation of clause 4.1 will not prevent the approval of the built form of new apartment, town house or dual occupancy developments.  However, it may undermine the commercial viability of such development by making it more difficult (and in some circumstances, impossible) to secure the strata subdivision of an approved building (to enable to individual sale of apartments/dwellings to purchasers).

For an individual applicant, the most obvious response to this problem is to make a ‘clause 4.6’ request to vary the minimum lot size.  However, in some zones, such a request cannot be made.  When it can be made, it is necessary to show consistency with the objectives of the minimum lot size development standard.

Another approach is to initially apply for a strata subdivision that groups several apartments together (to make up the minimum lot size).  However, this will not always be possible.  For example, the development footprint may not be large enough.

When it is possible to register a new strata plan with initially compliant lot sizes, it may then also be possible for those lots to be further subdivided below the minimum lot size.  However, a proponent may encounter procedural hurdles (and there will be traps for the unwary).

The best answer is for the government to proceed with the ‘clarification’ of clause 4.1 that was proposed in 2015, but dropped in 2016.  This does not require any approval by parliament.  The Planning Minister has the power to unilaterally resolve this problem.

The bottom line

In some areas, it may now be more difficult to readily secure the necessary planning approvals for a commercially viable apartment development.  Whether there is a problem will depend on the precise terms of the local planning controls.

There are potential solutions for individual proponents, but the process may be riskier and (in some circumstances) a positive outcome may not be assured.

The issue can be easily resolved across-the-board by Government action.  However, it is too early to say whether this is likely.