Question: Our plan of subdivision gives all five lots equal entitlements. A valuation shows that some lots cost far more to rebuild than the others. Can the lot entitlements be changed?
We are a five-unit, self-managed townhouse owners corporation. Four of our units have a similar single-level design. The fifth is a two-story unit which is approximately 20% larger. We recently received a formal valuation for all lots. Not surprisingly, the two-story unit has a higher rebuild valuation than the others, and we are currently insured for the sum of the two valuations, on the basis that we are required to insure for the rebuilding of the total property.
Our plan of subdivision specifies that each of the five lot holders has equal entitlements and liabilities. If this were strictly applied, it appears the owner of the two-story residence would not be able to rebuild to the existing standard, and our valuation consultant supports this view. It appears that all residences were originally intended to be two stories. Objections persuaded the authorities to restrict development to one two-story residence, and the plan of subdivision was never updated. Can the owners corporation amend this situation? What options exist?
Answer: An owners corporation must insure every lot for its full rebuilding cost, regardless of how lot entitlements and liabilities are apportioned.
Under section 59 of the Owners Corporations Act 2006 (the Act), an owners corporation must take out reinstatement and replacement insurance for all buildings on the common property. This insurance must cover, among other things, the cost required to replace, repair or rebuild the property to a condition substantially the same, but not better or more extensive than its condition when new.
If the owners corporation becomes aware that the current insurance sum does not adequately cover the replacement cost of one of the lots, then it must adjust the policy amount to ensure proper coverage. Although section 55 of the Act allows a lot owner to take out their own insurance policy, this does not remove or reduce the owners corporation’s statutory obligation to comply with its own insurance duties.
Under section 23(3) of the Act, the annual fees set for insurance must be based on lot liability. Under section 23A, an owners corporation can also levy fees to cover the cost of the premium for reinstatement and replacement insurance based on lot entitlement. Here, the liabilities and entitlements are the same.
Section 27F of the Subdivision Act 1988 requires that a plan of subdivision specify the lot entitlement and lot liability. From 1 December 2021, liability is primarily determined on floor area and/or use of common utilities, and lot entitlement is based on market value. It appears that the current plan may not reflect these requirements.
Lot liability or entitlement can be altered by a unanimous resolution to better reflect the differences in size and market value of the double-storey townhouse. If a unanimous resolution cannot be achieved, an application may be made to VCAT, which has the power under section 32(k) of the Subdivision Act to order changes to lot entitlements/liabilities if certain criteria are met.
Under section 65(3) of the Act, the owners corporation must present the valuer’s report at the next general meeting after it is received. This may be an appropriate opportunity to raise the issues outlined above.
This post appears in the September 2026 edition of The VIC Strata Magazine.
Fabienne Loncar Chambers Russell Lawyers E: floncar@chambersrussell.com.au P: 03 8639 9804
