Luke – I must admit that I’m a little confused about the precise nature of the works you say is proposed by the Owner of the Heritage Listed Lot, like with part of that being on the first floor with 2/3 of its area being above the ground floor (?), but in the first instance (in NSW) all such works except those of a very minor nature require the prior consent of the Heritage Council, and following that the consent of the Local Council.
As a general response to your three (3) questions, given you haven’t supplied the requested details of your State/Territory when you registered….
1) In NSW an Owner can legally develop on Common Property provided they first obtain the written consent of the Owners Corporation (O/C) at a General Meeting. Depending upon the extent of the renovations, your O/C may have to commission a Strata Sub-Division (re-survey the property) and a Valuation to update the Strata Plan and to adjust the Unit Entitlement for the renovated Lot respectively.
2) There are a few possibilities, but it’s common for such Owners to make a payment to the Owners Corporation, and again the amount of that payment and the frequency of it (i.e. once-off or periodic) is usually determined not on the basis of any compensation, but rather on the basis of the O/C’s costs (e.g. for the survey, the valuation, and to draft and register the special by-law), plus the amount of any increase in the market value of their Lot consequent to the consented works and which is not in the O/C’s opinion properly reflected in any valuation, and the “value” (e.g. in terms of attractiveness at sale) of any special privilege such as their exclusive use.
3) As any Special By-Law (SBL) requiring the Lot Owner instead of the O/C to maintain the entirety of the consented works and granting special privileges (e.g. exclusive use) needs to be consented to in writing by that Lot Owner, then for that reason alone it’s essential in my opinion for the detail of that SBL to be agreed and the document Registered before any consented works commence.
If you post some further details including in which State/Territory your Plan is located, the wording of the proposed SBL, and some clarification concerning the nature/design of the proposed renovations then I’m sure you’ll receive some more targeted responses.