Many property developers set up an over-riding vote in their favour within the documentation that regulates management and maintenance of the common parts of a development, to retain flexibility during the development process. A recent Lands Tribunal case considered the competence of such a right of veto.
In this article, we're going to explore the "golden vote" held by developers during the construction phase of property development. But first, it's important to understand a key factor of this landscape – the Development Management Scheme (DMS).
What is the DMS?
The DMS is a scheme of rules for the management of land introduced by Section 71 of the Title Conditions (Scotland) Act 2003. It's usually brought into effect as part of a deed of conditions registered against the title to the development site, before any plots are sold to homeowners.
Deeds of conditions are designed to regulate the use, management, and maintenance of the development and in particular the common parts. While DMS rules are not considered to be real burdens they are similar and do run with the land, binding successors in title.
The DMS also sets up a corporate entity called the "owners' association", which automatically includes homeowners as members and has the capacity to hold title to areas of land which are to be maintained in common. The scheme provides a management structure through the owners' association and a manager. Homeowners have a say (via voting rights) in how the common parts are managed and pay a share of the associated costs.
Reasons to use the DMS
The DMS is now widely used in housing developments following:
(i) The case of PMP Plus Ltd v The Keeper of the Registers of Scotland. This case decided that the transfer of a share in the common parts (by the developer to each plot purchaser) was invalid if the description of the land was based on a definition that relied on an uncertain future event to identify the extent of that land. Until this decision, the usual approach for developers was to transfer a share of whatever would be left as common parts at completion of the development; and
(ii) A move away from the restrictive practice of transferring shares in the common parts to homeowners based on a set development layout plan which, subsequently and inevitably, was required to change as development progressed. For example, to amend the route of a road or layout of open space. The fact that shares in those common parts had already been conveyed to homeowners could lead to a corrective conveyancing mess.
What is the "golden vote"?
The "golden vote" is held by a developer for decisions made on management and maintenance of the common parts of the development. Many homeowners within housing developments may not even realise this vote exists.
It enables an over-riding vote or right of veto on owners' decisions, often imposed when applying DMS rules. Developers want such a right of veto for as long as they hold title to part of the development site to retain flexibility during development and to ensure the development is set up as they want it to be.
A recent case heard by the Lands Tribunal queried the competence of such a right of veto. Fortunately for many existing developments and for housebuilders generally, the Tribunal concluded that such a right was competent. Please note that other interesting points were raised concerning the DMS in the case, but it's the golden vote aspect that we explore below.
Lands Tribunal case
In the case, homeowners within a development site at Kingsmeadows, Peebles, affected by the DMS sought discharge of (amongst other rules) the golden vote held by the developer, Granton Homes Limited.
There is a relatively complex planning history here, but the homeowners were essentially unhappy that Granton's updated development plans were, in their opinion, going to necessitate removal of more mature trees within the development than was envisaged when they purchased their units there.
They therefore wanted Granton's right of veto discharged so that the owners' association, set up as part of the DMS, would be in a position to vote down redevelopment of the scale and design proposed since purchase.
The relevant rule of the DMS read:
"For so long as Granton owns any unit in the development or any part of the development, the final decision on any matter affecting the development will remain with Granton."
Lands Tribunal case outcome
The Tribunal refused to discharge the rule. It stated that the rules of the DMS run with the land and therefore the subjective intentions of the parties (set out by the homeowners) are less likely to be given significant weight.
The Tribunal pointed out that the golden vote was envisaged to be temporary and was required to ensure that Granton retained flexibility in progressing with their development. Once the development was complete, Granton's intention would be to transfer the residual common parts of the development to the owners' association and move on. At that point, the rule would no longer apply.
It did, however, suggest that there may be circumstances which would merit a golden vote clause having a time limit to avoid abuse. Housebuilders should bear this in mind.
It should be noted that the Scottish Law Commission Report, in respect of the 2003 Act, made no criticism of golden vote mechanisms. It said it was a matter for the market to decide if such an arrangement is attractive to purchasers. The Tribunal agreed.
The Tribunal did not consider it justifiable to remove Granton's right of veto as that would turn the tables between the parties – the homeowners could veto any development proposal which involved loss of trees under the amenity conditions.
The Tribunal did however flag that the unvaried statutory DMS tends to assume a completed project and as such, requires amendment when put in place to regulate the development phase as well as the completed units long term.
In practice the DMS is usually varied or added to fairly extensively and the ability for housebuilders to do so is essential, given that invariably they will be a continuing presence on site with ongoing construction for some time after the first homeowners purchase their units.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
