When Maria signed the contract for her first home, she felt she was purchasing the unit of her dreams. But her property dream started to look like a nightmare when she discovered she had purchased a company share, with potentially disastrous consequences.
In this article, we’ll explain what a company share is, why it’s important to know if you’re buying one, and what to do if you are.
What’s your title?
To start at the beginning…when you buy a property, you get a certificate of title – it’s the document that defines what land and property you own and is the evidence of the transaction that transfers ownership. If you buy a house, you get a certificate of title showing that you own the land on which the house sits. If you buy an apartment or unit under a strata arrangement, where multiple properties are on the same piece of land, you receive your certificate of title showing that you own a share of the land.
But there are also two other arrangements, which many buyers have simply never heard of. They are company shares and stratum.
Maria’s unit was a company share. This means that what she was actually purchasing was shares in a company that owns the property. Company shares were popular between the 1940s and 1960s, as a way of having multiple ownerships within a single property boundary. The company owns the entire site and sells shares that represent each unit.
With company shares, the buyer doesn’t receive a certificate of title, because they are not actually purchasing any land. Company shares are governed by the Corporation Act, not the Transfer of Land Act.
(Stratum purchases are a hybrid – you own the title on the unit, but still buy company shares for common areas such as garage and grounds. And yes, it does confuse things further that strata and stratum are so similarly named, which is why conveyancers stress the difference, by saying ‘strat-OOM’).
What’s the issue?
Why are company shares problematic? Well, the reason is the way that mortgage lenders operate – they want a tangible asset that they can sell to recover their losses if the loan is not repaid. With a title, the mortgage lender has the power to possess the property if the borrower defaults.
Under a company share, the powers to possess are a lot weaker, giving mortgage lenders less security. Some will still lend on company shares, but typically at a lower loan to value ratio (LVR), and often not to first time buyers.
A commitment to buy – and no funds
Which brings us back to Maria. After she’d signed the contract, she was referred to Accord Conveyancing for a contract review. We immediately spotted the company share and advised her to speak to her mortgage lender as a matter of urgency.
Her lender was not prepared to lend to a first home buyer on a company share. The property wasn’t within their guidelines for security, and they withdrew their mortgage offer. So Maria had signed the contract to buy a property but had no funds to complete the purchase. She’d gone from dream purchase to nightmare scenario.
Luckily for Maria, she and we had acted quickly, and she was still within the ‘cooling off’ period of the contract. We were able to withdraw her from the purchase with a full release, meaning she was not out of pocket.
(The other piece of luck was that she had not purchased at auction – auction purchases have no cooling off period, so Maria’s only course of action would have been to rescind the contract, losing her 5% deposit and leaving her at risk of being sued by the owners).
Maria’s story had a happy ending – she found another unit, under a strata title, got her loan, purchased and received her certificate of title, and is now happily living in her first home.
What can we learn from Maria’s story?
- Get a conveyancing contract review BEFORE signing the contract. Maria was really lucky – we were able to use that cooling off period, but a review before signature is the safest approach.
- When buying older apartments or units, ask the question – is it a company share (or stratum)?
- A company share (or stratum) doesn’t mean you shouldn’t buy – but it’s essential to know what you are getting into and if you are borrowing, check the position with your mortgage lender before you commit.
- Many company shares have been converted to newer legislative structures. If not, owners may do the conversion, but be aware that it can cost $15-20k per unit, so find out if this cost will be passed on.
- Understand the contractual differences between private sale and auction – with an auction you don’t have that all important cooling off period, so it’s essential to have a contract review and finances 100% watertight.