Strata Reports Explained: What Buyers Should Look For

by Wadia Mansour – Solicitor

Key Takeaways

• The Capital Works Fund Matters: Assess the Capital Works Fund balance alongside the Administrative Fund, the capital works fund plan and anticipated expenditure. A low balance in a building requiring major works may be a significant warning sign.
• Look for Potential Special Levies: Unfunded capital repairs, such as roof replacement, concrete spalling repairs or balcony waterproofing, may lead to substantial special levies.
• Meeting Minutes Reveal Important Issues: Reviewing at least the previous two to three years of Annual General Meeting (AGM) and strata committee minutes may reveal building defects, disputes, planned works and upcoming expenses.
• Check the By-Laws Early: Rules concerning animals, short-term rental accommodation, parking and renovations vary between schemes and may affect how the property can be used.
• Review the Contract and Strata Records Together: A property solicitor or licensed conveyancer should review the strata inspection report together with the contract for sale, title documents, strata plan and registered by-laws before contracts are exchanged or a bid is made at auction.

When buying an apartment, townhouse or villa in Parramatta or Greater Western Sydney, you are not simply purchasing the space within the lot. You are acquiring property within a strata scheme and becoming a member of the owners corporation.

Although a modern kitchen or freshly painted interior may look pristine during an open home, the financial and physical condition of the wider building may tell a different story. A strata inspection report summarises information available in the owners corporation’s records, including financial statements, meeting minutes, insurance information, by-laws and documents relating to disclosed defects or disputes.

A strata inspection report is not ordinarily a physical building inspection, structural assessment, financial audit or independent certification of legal compliance. It is only as reliable as the records made available and the scope of the inspection.

Failing to review the report carefully may expose a purchaser to unexpected financial liabilities, restrictions on the use of the property or substantial future levies. The following matters should be considered before exchanging contracts or bidding at auction.

What Is a Strata Inspection Report?

A strata inspection report is usually prepared by an independent strata inspector following an inspection of the owners corporation’s records.

The inspection is commonly called a “section 182 inspection” because section 182 of the Strata Schemes Management Act 2015 (NSW) permits specified persons, and persons authorised by them, to inspect those records. A prospective purchaser will ordinarily require appropriate written authority from the current owner or another person entitled to inspect the records.

Depending on the records maintained by the owners corporation and the scope of the inspection, the report may include or refer to:

• Current quarterly contributions, commonly called strata levies, and the history of levy increases
• Financial statements and balances for the Administrative Fund and Capital Works Fund, formerly known as the Sinking Fund
• Minutes of AGMs and strata committee meetings
• The 10-year capital works fund plan
• Building defect reports, engineering reports and maintenance records
• Pending legal disputes, NSW Civil and Administrative Tribunal (NCAT) proceedings and insurance claims
• Building insurance policies and related documents
• Registered scheme by-laws

The absence of an issue from a strata inspection report does not necessarily establish that the issue does not exist. Some records may be incomplete, unavailable or held outside the materials inspected.

1. Financial Health and Levy Calculations

Most NSW strata schemes operate two primary funds:

1. ADMINISTRATIVE FUND

• Covers recurrent, day-to-day operating expenses
• Examples include cleaning, gardening, electricity, insurance and routine maintenance

2. CAPITAL WORKS FUND — FORMERLY THE SINKING FUND

• Covers major anticipated expenditure for common property and other assets for which the owners corporation is responsible
• Examples include roof replacement, external painting, lift replacement and significant common-property repairs

What to Look For:

• Adequate Capital Works Funding: Assess the fund balance against the capital works fund plan, recent expenditure, expected project timing and the condition and age of the building. A low balance is not automatically problematic, and a high balance may still be inadequate for identified works.
• Realistic Quarterly Levies: Unusually low levies may indicate underfunding of maintenance or future capital expenditure, potentially resulting in substantial levy increases or special levies.
• Levy Arrears Across the Scheme: High arrears may affect the owners corporation’s cash flow and its ability to pay contractors, maintain common property or meet insurance expenses.
• Arrears Affecting the Lot: Check whether contributions, interest, recovery costs or other amounts are recorded against the lot being purchased.
• Consistency With the Capital Works Fund Plan: Compare forecast expenditure with the scheme’s actual budget, available funds and proposed works.

The capital works fund plan should not be treated as a guarantee. Actual costs and the timing of works may differ significantly from the plan.

2. Special Levies: A Potential Financial Risk

When an owners corporation faces major repairs, litigation costs or other substantial expenditure and does not have sufficient funds, it may resolve to raise a special levy.

A special levy may require owners to pay a lump sum or a series of instalments. Depending on the works and the lot’s unit entitlement, the amount may range from thousands to tens of thousands of dollars or more.

What to Look For:

• Review AGM and strata committee minutes for references to proposed works, funding shortfalls, quotations, expert reports or potential special levies.
• Check whether the owners corporation has formally resolved to raise a special levy.
• Identify the total amount, the lot’s share and the due date of each instalment.
• Consider whether additional levies may be required if the proposed levy is based on preliminary quotations or an incomplete scope of works.
• Check the contract for sale to determine whether liability is allocated to the vendor or purchaser.

Under commonly used NSW sale conditions, responsibility may depend on whether the owners corporation resolved to impose the contribution before or after the contract date. However, special conditions may alter that position. The resolution date, payment dates, settlement date and precise wording of the contract must all be reviewed.

A special levy that has only been discussed, but not formally resolved upon before the contract date, may ultimately become the purchaser’s responsibility.

3. Building Defects and Recurring Maintenance

Building defects and common-property failures can be expensive to rectify and may adversely affect insurance, lending, occupancy and resale value. A strata inspection report may provide a documentary history of maintenance issues and the owners corporation’s response.

However, the report does not replace a physical building inspection or specialist engineering assessment.

Common Warning Signs in Minutes and Reports:

• Water Ingress and Waterproofing Failure: References to leaking balconies, basement flooding, roof leaks, failed membranes or repeated internal water damage
• Concrete Spalling and Reinforcement Corrosion: Cracking or flaking concrete caused by corrosion of embedded steel reinforcement
• External Cladding Issues: Concerns about the composition, fire performance, approval or replacement of external cladding
• Fire-Safety Non-Compliance: Overdue annual fire safety statements, defective essential fire-safety measures, or unresolved council notices or orders
• Recurring Repairs: Repeated expenditure on the same problem without a permanent solution
• Incomplete Rectification Work: Defects identified by consultants where the recommended work has not been completed or adequately funded

Note for Newer Buildings:

Identify the building’s completion date and investigate any potential statutory warranty claims under the Home Building Act 1989 (NSW).

The general statutory warranty periods are:

• Six years for a breach resulting in a statutory “major defect”
• Two years for other breaches

These periods are subject to detailed statutory rules. An expensive or serious defect is not necessarily a “major defect” for the purposes of the legislation.

Check whether the owners corporation has:

• Obtained expert defect reports
• Notified the builder or developer
• Commenced negotiations or proceedings
• Preserved relevant limitation and warranty rights
• Budgeted for expert, legal and rectification costs
• Considered any applicable building bond, inspection or insurance arrangements

Delay may prejudice the owners corporation’s ability to recover rectification costs from the builder, developer or other responsible parties.

4. Pending Legal Disputes and Tribunal Matters

Legal proceedings involving an owners corporation can involve significant costs, affect insurance and delay building work. Proceedings against a builder or developer may also represent necessary action to preserve the scheme’s rights.

What to Look For:

• Proceedings between the owners corporation and the original builder, developer, certifier or consultants concerning building defects
• Disputes with lot owners concerning unpaid levies, unauthorised renovations or alleged breaches of by-laws
• Applications filed with, and orders made by, NCAT
• Court proceedings, mediation or settlement negotiations
• Legal costs already incurred and anticipated future costs
• Any litigation funding arrangement or related special levy
• Limitation issues and the solvency of the party against whom recovery is sought

Where proceedings have settled, review the settlement terms where available, including whether the amount recovered is sufficient to complete the required rectification work.

5. Scheme By-Laws: Ensuring Alignment With Your Intended Use

Every NSW strata scheme has registered by-laws regulating the use and enjoyment of lots and common property. Some schemes use model by-laws, while others have tailored rules.

The registered by-laws should be reviewed together with the strata plan and title documents.

Essential By-Law Checks:

• Animals: Check whether prior written approval is required and what conditions may be imposed. NSW strata legislation prevents a by-law from unreasonably prohibiting the keeping of an animal, although reasonable approval requirements and conditions may remain enforceable. Assistance animals are subject to additional protections.
• Flooring and Renovations: Check whether approval is required before installing timber, laminate or hybrid flooring or undertaking other renovations. Depending on the work and its effect on common property, approval may be required from the owners corporation rather than merely the strata committee. Acoustic standards or expert reports may also be required.
• Short-Term Rental Accommodation: An owners corporation may adopt a by-law prohibiting short-term rental accommodation where the lot is not the host’s principal place of residence. It cannot use such a by-law to prohibit short-term rental accommodation where the lot is the host’s principal place of residence. Planning controls and other statutory restrictions may also apply.
• Parking: Check restrictions on visitor parking, commercial vehicles, electric vehicle charging, vehicle size and use of allocated spaces.
• Exclusive-Use Arrangements: Verify whether any courtyard, storage area or car space forms part of the lot or is common property subject to an exclusive-use or special-privilege by-law. Check who is responsible for repair, maintenance and associated costs.
• Use of Common Facilities: Review restrictions concerning pools, gyms, lifts, waste disposal, moving arrangements and shared outdoor areas.

Informal or long-standing use of an area does not necessarily create an enforceable exclusive right.

Final Thoughts

An apartment or townhouse purchase should not rely solely on visual impressions or marketing material. A thorough review of the strata records may identify financial risks, proposed expenditure, building defects, disputes and restrictions affecting the use of the property.

However, a strata inspection report is only one part of the due-diligence process. It should be considered together with:

• The contract for sale
• The title and strata plan
• Registered by-laws
• The capital works fund plan and current financial statements
• Physical building and pest inspections
• Specialist engineering, fire-safety or waterproofing reports where required
• Council and planning records where relevant

Particular attention should be given to proposed works, unresolved defects, levy arrears, potential special levies, litigation and any inconsistency between the capital works fund plan and the scheme’s actual financial position.

Led by Wadia Mansour since 2001, the conveyancing and property law team at CK Lawyers regularly assists buyers across Parramatta and Greater Western Sydney. We carefully review Contracts for Sale alongside strata reports to identify hidden liabilities, negotiate protective contract terms, and safeguard your property investment.

Buying a strata property in Western Sydney? Contact the property legal team at CK Lawyers today for a detailed contract and strata report review before you make your move.

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