Communal land in residential developments is a common and useful way to expand space available to homeowners, giving them the benefits of land ownership without the same burden. It’s commonplace both in rural areas and increasingly in the urban setting where space is at a premium.
The arrangement has some legal difficulties.
Historically this method of ownership has been caught by the disclosure regime of the Securities Act, imposing obligations on developers to provide comprehensive detailed information to buyers. The requirements were often unexpected and always complex.
The downside of not complying was dramatic; the agreement was void.
Including these arrangements in the Securities Act disclosure regime has been criticised. It doesn’t really seem to fit with the intention of the security legislation. Generally, no profit is generated from the communal ownership and ownership of communal land is not described as a security or financial product in general parlance.
And so an exemption was created to reduce disclosure requirements in this situation, but that too was complex. It imposed significant costs and took time to complete.
Changes are afoot and from 1 December 2014, a transition regime will operate.
For 2 years developers will be able to use either the Securities Act regime or a new regime created by the Financial Markets Conduct Act 2013.
The FMCA is legislation aimed to promote informed participation in the financial markets. It deals with financial products such as equity securities and “managed investment products”.
Sometimes communal land arrangements involve these types of products.
Avoiding unnecessary compliance costs is a specified purpose of the legislation. The Act offers a simpler alternative to property developers wanting to complete a development using communal land, and willing to structure the ownership using a society.
Historically communal land has been owned or leased by either a company or a society. If in new developments the land is held by a company, FMCA will probably still apply. The buyer will be buying an equity interest as well as the land, and equity interests are specifically covered by the legislation.
A provision is included in the FMCA to allow exclusions by regulation. The FMCA is consulting developers and advisors regarding whether an intervention might be appropriate so that shares in a company that owns communal land and does not derive a profit might not be covered by the legislation.
In the meantime, the ownership of communal land by incorporated societies creates another useful option.
Membership of an incorporated society does not amount to an equity security. A development that requires the owner of the property to become a member of an incorporated society will only be caught by FMCA if the development amounts to a “managed investment product”.
It is probably going to be possible to structure your development so that you are not selling a “managed investment product”. If there is no income being generated by the use of the communal land and if the value of the interest in the communal land is not substantially dependent on the effort of others, then it is likely there will not be a need to comply with the disclosure regime.
• use a not-for-profit incorporated society to hold communal land
• make certain the value of the communal land is not dependant on the effort of others
• watch this space to see if ownership of communal land by a company will also be permitted