The ofďŹ cial newsletter of Unit Owners Association QLD
JULY 2013 MARCH
This way of life should be the garden of Eden unless costs are contained see follow up in next issue
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From the Editor
When Will Government and the Courts Hold Public Companies Accountable that mismanage the financial affairs of unit owners?
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Fined $50,000 for 231 counts of dishonestly converting trust money to its own use. The court heard Staymint staff booked tenants into units and after the guests checked out, changed the records to indicate the guest had stayed in a leaseback apartment – a unit for which the property manager guarantees the landlord a set return. Staymint and the Office of Fair Trading had agreed to a fine of $35,000. The Court calculated that the maximum penalties that could have been imposed was $25 Million, and slightly increased the fine to a total of $50,000, allowing a 6 month period to pay.
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At the Court Hearing against Staymint (a 100% owned subsidiary of public company Ariadne Ltd) the following was disclosed in respect of its property management of units at Carmel by the Sea:
corporate concerned about Working forand all sector stakeholders the level of remuneration paid to your resident unit manager? Does your body corporate wish to call tenders for the caretaker
duties? Unit Owners Association QLD
Staymint claimed that this was a result of staff wrongfully allocating rental proceeds of which the directors were not aware. The 13 month period that was investigated uncovered a total value of $141,466, and further investigations are ongoing to cover longer period beyond this period reviewed to further remedy the position. When will the government and courts impose punitive fines against public companies where financial wrongdoing is uncovered to provide a significant deterrant to stamp out the erosion of returns against owners?
Just another long weekend away Part 2 I was stopping in most of the towns which crossed my way. One of my first stops was in Moonie. There was not much there – a lonely roadhouse on the road intersection, and some old houses further afield. A few young, filthy men in dowdy, sloppy singlets and shorts were leaning against their tray-top cars which carried cages with pig-hunting dogs. The men were sweaty, and their faces and bodies were covered, like everything here, in a thick layer of red dust. “Are you travelling on your own?” - asked one of the boys. “No, with friends, but they are faster. You know, woman on a motorbike, cannot ride” - I joked about myself. They were telling me how happy they were here, in a place without rules and police, where they can do whatever they want, without the restrictions or better the ‘inconvenience’ of penalties. They wanted to fill me with fear, but I did not show any emotions, and I stayed calm.
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UnitNews July 2013
“It was about two weeks ago, when a couple on a motorbike was shot here. They found them a few days later in the trench along the road over there” - he pointed to the west in the direction of where I was actually going. “Bad luck, bad things happen, people die” - I said in a calm voice without showing any concerns or disquiet. Do you think I was scared? No, I was not scared. I was PETRIFIED! The next 200 km I spent following a car and hoping that the pig-hunters were not hunting me. I came to St George. People warned me that at this time of the year the town would be very crowded. And I have to admit – I saw two or three people on the road and a few open windows, which indicated the contrary to the appearance…. it was not a ghost-town.
Written by Gary Bugden*
Caretaker Breach Notices While it is tempting for a body corporate committee to issue, without legal advice, a default notice or remedial action notice when a caretaker fails to comply with a term of their agreement or a provision of the Code of Conduct, it can be very unwise. This is best explained by highlighting a number of very important things about these types of notices; in particular: • • • •
A breach of a caretaking agreement, even if not remedied, will not necessarily form the basis for termination of that agreement. The breach must be serious enough to warrant termination. The content of the notice is critical for its effectiveness and that content needs to be carefully identified and expressed accurately and completely. The way in which the notice is authorized and served is also critical for its effectiveness. If the notice is followed by a termination the body corporate can anticipate a substantial legal battle as the caretaker, most likely supported by their financier, fight to preserve their underlying valuable asset. This fight will focus sharply on the form and content of the notice.
The options When there is a breach of a caretaking agreement and negotiations with the caretaker have failed to resolve the matter there will usually be a number options to deal with the breach, including (but not limited to): 1. Issue a Code Contravention Notice1 with the option in the event of non-compliance to require the caretaker to transfer their management rights to another person, other than an “associate”2 and, possibly, with a further option to terminate and replace the letting agent authorization and service contract.3 2. Issue a Remedial Action Notice4 on one or more of the grounds set out in the relevant Module with an option to terminate the caretaking agreement if the notice is not complied with.5 3. Issue a default notice under any available grounds in the caretaking agreement itself, with an option to terminate the agreement if the notice is not complied with.6 Authorizations All of these options will need to be authorized by ordinary resolution of a general meeting and in most cases that resolution will need to be decided by secret ballot. In some cases there is a two stage process and each stage will need to be authorized by an ordinary resolution. The wording of the resolution will vary depending upon the option chosen and the stage in the process. In all cases the option will need to be carefully chosen and the appropriate resolution will need to be carefully drafted, both dependent on the nature of the particular breach. It is also important for a committee to ensure that it has strong support from owners before embarking on any process which potentially leads to the termination or compulsory transfer of management rights. Failure to do this may result in the required authorizations not being obtained or a waning of owner support as the termination or transfer process continues and becomes more expensive and drawn out.
The termination process The termination process is even more critical, particularly if the caretaker has taken some steps to remedy a contravention or breach or if a financier involved. If the breach, or the extent to which the body corporate believes it has not been remedied, is insufficient to justify termination of the agreement, then termination can expose the body corporate to liability for substantial damages. The longer the remaining term of the caretaking agreement then, potentially, the higher the damages. When considering terminating a caretaking agreement a body corporate should remember that termination is a serious consequence when compared to say orders for specific performance or damages (which are other options which may be available to a body corporate) and a Court may not lightly allow a termination. There will always be an element of risk in terminating a caretaking agreement and a body corporate needs to carefully consider that risk before starting the process. The ensuing battle The body corporate must also keep in mind that the termination of a caretaking agreement is likely to be contested before QCAT or the Court, or possibly both. This is likely to be time consuming for the committee and expensive for the body corporate. Legal proceedings about the termination of management rights are expensive and owners need to be fully committed to see the legal process through. Failing that the termination attempt is likely to be unsuccessful and the body corporate (and the caretaker) will be left with a bill for substantial legal costs. The bright side The costs, the effort and the risks need to be carefully weighed up against the benefit (or otherwise) of not having a management rights regime in place. Clearly, there will be cases where a body corporate has a good chance to force a transfer or achieve a termination of management rights and in those cases the committee is duty bound to consider those options, while keeping in mind the interests of owners generally. In many cases success can lead to substantial savings for bodies corporate (as appears to have been demonstrated in the case of Carmel by the Sea community titles scheme) without diminishing the investment performance of units in a rental pool. This is where the right legal and commercial advice can add substantial value to the termination or transfer process, particularly in relation to controlling risk. * Gary Bugden is the author of numerous books and papers on strata and community titles and practices body corporate law in Brisbane. 1 Under section 139 of the Act. 2 See sections 140 to 143 of the Act. 3 See sections 145 and 146 of the Act. 4 Under section 131 of the Standard Module or corresponding provisions in other Modules. 5 See section 131(3) of the Standard Module and corresponding provisions in other Modules. 6 This being an alternative allowed by section 129(1)(c) of the Act.
July 2013 UnitNews
Strata Insurance – Who’s Representing You? It is common for unit complexes to default to their strata manager to organise insurance, because they perceive that placing their policy with anyone else, will be time consuming and leave them open to not having the right cover. If your strata manager deals directly with an insurance company you should take time fully to read the disclosure documents as it is very likely they are acting as a representative of the insurance company. This leaves many body corporate committees asking… Who is representing us? Here are some things you should consider if your strata manager arranges your insurance directly for you with an insurance company: - - -
Does your strata manager only have access to one or two insurers and if so how do you know you are getting the best value insurance? Is your strata manager qualified to give you advice about your insurance policies and provide you with information as to whether your cover is adequate? Is your strata manager working in a competitive market with access to a broader range of insurance policies that may offer broader coverage?
To overcome these concerns, many strata managers are now turning to insurance brokers and advisers to administer their insurance. Usually this approach would be more favourable for the consumer however, the emphasis on referral fees and shared commission arrangements with the strata manager, can result in automatic renewal of insurance policies and a lack of incentive for the insurance broker or adviser to negotiate the best possible deal. When it comes to finding the best insurance program, many body corporate committees are now contacting insurance brokers or advisers directly, because they recognise the importance of specialised advice and the need for up to date industry knowledge that an adviser can provide. This approach encourages advisers to proactively approach the individual insurance needs of a property, to source the most suitable insurance policy for them with more incentive to be competitive. As more body corporate committees take a direct approach, many wonder what to look for when seeking out the services of an insurance
broker or adviser, below are some things you should consider: - - - -
Find an adviser that specialises in strata insurance, as they will usually have a much better level of expertise than an adviser that deals in all types of insurance. Covers for strata insurance are more specific and you want to know that your adviser understands the product they are recommending to you. Ask your adviser which insurers they deal with. They should have at least 5 insurers available to them for strata insurance, so that when the need arises, they have access to a comprehensive number of insurers to support your insurance needs. When you receive your quote or policy, take time to review the Statement of Advice that your adviser provides you. The more in-depth advice you have been provided, generally is a good indication that the personal needs or objectives of your unit complex has been better considered. Enquire about what services are provided at the time of a claim, as it is no good switching your insurance from your strata manager directly to an adviser, only to find that you are now burdened with a great amount of work when you need to claim. Strata Managers may not offer the same claims service if you deal directly, so it is best you understand if there is any extra burden on the body corporate committee.
If you are part of a body corporate committee, it might be worthwhile to seek alternates when your insurance policies come due. Remember, it is not solely about the price, the extent of the cover and service is also very important, especially when you need to make a claim. Strata Insurance Solutions are specialised insurance advisers dealing directly with body corporate committees. In the past year, representatives at Strata Insurance Solutions have received over 1,000 quote requests across Australia for strata insurance of all sizes. We provide insurance solutions tailored to meet the needs of body corporate committees. If you are looking for an assessment of your strata insurance program, contact us today on 1300 554 165 for an obligation free review. Tyrone Shandiman Strata Insurance Specialist - Strata Insurance Solutions
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UnitNews July 2013
Quality Building Management Pty Ltd.
Reuse of Class 2 building as overnight stay motels Chief Executive Officer Your local council Address CC to your area councillor Dear Councillor (name) As unit owners in your local council area, we have recently become aware of the Victorian Watergate Decision and the comments thereon made by Teys Lawyers. Mr Teys makes several extremely concerning claims as to the status and liability of unit buildings being used for purposes other than the Building Code Australia classification. Our building is a Building Code Australia Class 2 apartment building being misused for short term holiday rental. Your Council is fully aware of this fact by Rate Notice annotation, and also because they have been given written notification on numerous occasions by this writer. The Disability Discrimination Act (DDA) Premises Standards guild lines state: “A Class 2 building is typically a block of residential flats or apartments. While the Premises Standards do not apply to the internal parts of sole occupancy units (SOU’s), they do require that any common areas available for use by all residents be accessible where the SOU’s are made available to the public for short-term rent. “ Our building does not comply with the access requirements of the DDA and therefore is breach of the DDA by being a building available to the public for short term rent. The Queensland Fire and Rescue Service and the Building Code Australia require that public buildings comply with BCA fire Specification E2.2a para. 4. (AS 1670). Our building is built to BCA fire Specification E2.2a para. 3. (AS 3786) that is a lower standard permitted only in buildings with long term occupants. Therefore, our building is being operated in breach of the Queensland Fire and Rescue standards for building available to the public for short term rent. In the Anti-Discrimination Tribunal Queensland STEPHEN KEIM expressed the Opinion re : HUGI and Redland Shire Council  QADT 17 (9 August 1996) “The provisions in the Building Act make it quite clear that the purpose of approvals under the Building Act is to ensure compliance with the detailed provisions of the Law and the Code to the extent that it is part of the Law. This is emphasised by s.6 of the Act which provides that the Law is to be administered by local governments; applies to the areas of all local governments; and, except as provided in the Building Act, is a complete code for the carrying out of building work.” “To the extent that the Code does require access for people with mobility access to be provided, the local government must, of course, enforce those requirements.” The failure of your council to exercise its responsibility and authority to enforce the correct use of our building as a long term residential apartment building exposes the body corporate to litigation for breach of the DDA and Fire Service regulations. The Body Corporate and Community Management Accommodation and Standard Module Regulations require that a body corporate must insure the common property and body corporate assets for full replacement value. The misuse of class 2 buildings for short term letting constitutes a material change of use under the Building Act 1975 section 115 and increases the insurance risk. In the event of accident, injury or death by misuse of the building, the insurance company may consider the insurance policy to be void, exposing the owners to unlimited claims for compensation. Your Council is therefore requested to enforce the correct use of our building as a place of long term residences, or give written advice that it will accept responsibility for all action against the Body Corporate for our building resulting from lack of insurance and breaches of the DDA or Queensland Fire Regulations including injury to, or death of, short term residents, or residents with a disability, who may be trapped in the event of fire in the building. Yours sincerely,
July 2013 UnitNews
Management Rights –Tendered Not Extended! In Body Corporate Land, there is growing angst between the two main parties to a Management Rights (MR) Contract. Each realises that their financial objectives are diverging and the TugO-War win/lose contest that ensues between owners extending or not extending the incumbent Caretaker’s contract is the biggest single factor accelerating building disharmony in strata living! What should be a mutually supportive relationship between owners and caretakers often becomes oppositional when attempts to apply a commercial approach to contract administration (review, pricing) are adopted. Buildings where owners have applied or attempted to apply a commercial approach to renewing or replacing their management rights contract have been faced with hostility arising from the divergent interests of owners and caretakers and, often, the caretaker’s wrongful assumption of an entitlement to extension The Caretaker – pays a sometimes multimillion sum (usually with high borrowings) for a contract with a defined remaining term. Under the legislation there can be no mandated future extension of the contract at the time of purchase. The Caretaker’s due diligence should have ensured that the purchase price reflected fair value for the contract with whatever term remains and take into consideration the level of remuneration as well as any terms and conditions that impact on the value proposition. The purchase cost should be fully recovered by the expiry of the contract term and funded via owner levies. Bank borrowing would align with an expectation that the contract price would be written off progressively over the remaining years of the contract, without any extension. The Owners - Have no say in the terms and conditions of the Caretaker’s Contract that is drawn up by the developer and sold to the Caretaker usually before the construction completion and occupation of the building. This completely excludes future owners from any say in the level of service the contract specifies and enables the developer to maximise their sale price by minimising the level of service future owners will receive under the contract. There is no opportunity for owners, as they progressively buy entitlements and occupy the building, to vary the inherited contractual arrangement between the Developer and the Caretaker – it comes with the purchase of their unit as a take it or leave it option. Developers tend to use standard contracts with minimal difference in specifications 6
UnitNews July 2013
and terms from one building to another. The Widening Financial Conflict – Caretakers put pressure on owners to grant extensions to their contract to reinstate it back to its peak value, recognising that as the term of the contract decreases its value is eroded. A five year extension on a large MR contract could easily represent enrichment to the Caretaker of $0.5M+. Extensions of this magnitude, when granted, generally result in the Caretaker selling their MR Contract while at its peak value. Owners seek a reliable, long term incumbent but this promise of a quick profit for Caretakers results in a constant and regular churn of MR contracts. The usual term of holding a MR contract is approx 3 years. Meanwhile this process results in the cost of MR contracts steadily and significantly increasing so that caretakers end up harassing owners into paying ever higher levies, often for reduced services as the caretaker attempts to cut costs. Background to the Unworkability and Unfairness of the above Scenario. 1. A MR contract is usually the largest single expense representing approximately 30+% of total administration costs of the building. 2. The Body Corporate Committee (BCC) is accountable under the legislation to seeking out fair value for larger expenditures on behalf of the owners, and under the Code of Conduct has an obligation to act in the best interest of the owners they represent. (There is no such obligation of a BC to a Caretaker!). 3. Once a few years of the term of the MR contract has reduced, usually the Caretaker will seek to prematurely top up back to the maximum term under the appropriate module, which in recent years is predominantly the Accommodation module, regardless of whether this module actually fits the profile of the occupancy of the building. There is also a tendency to convert from standard to accommodation module to benefit the Caretaker by maximising the contract term, thereby increasing the value of its asset. This acts against the interests of owners by locking them into a longer, more expensive contract that has to be funded through higher levies. 4. By prematurely extending or converting a MR contract, normal checks and balances are circumvented in favour of the Caretaker due to:
Feature News (a) Unless there is less than 1 year remaining on the unexpired MR contract, a new contract commencing greater than 1 year in the future is void (S121). No other party tendering against the Caretaker topping up its contract from 7 years back to 10 years can be considered. (How many small businesses would be likely to consider tendering for a contact that commences in 7 year’s time?). Caretakers ensure frequent top ups to avoid having their contract tendered on the open market to enhance their asset at the expense of owners. (b) The quality of the developer drawn MR contract is usually bland and ambiguous with minimal performance specification. This mitigates against a BCC’s ability to hold the Caretaker accountable, as they have to rely upon a weak contract with inadequate work performance specifications. (How many committee members can align themselves with this problem that is unsolvable?). (c) The same inadequate contact is what is extended, with little or no scope for renegotiating or amending the terms and conditions to improve the impact on owners.
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(d) The more diligent and expert the BCC members, the more likely it is that they will become frustrated by their inability to require normal commercial performance in maintaining their building due to the matters outlined in (b) and (c) above. This often results in quality BCC members giving up and retiring from committee when they recognise that they are powerless to remedy the flawed contract their building has inherited. The inherent risk is that buildings become denied access to talented BCC members. (e) Meanwhile rank and file owners complain about the inadequacies of performance which is often wrongly directed against the BCC, rather than the flawed arrangements that they have all previously unilaterally accepted hidden away in the documentation they failed to fully consider at the time of their own purchase. (f)
When quality BCC members remove themselves from committee, the Caretaker is able to work behind the scenes to manoeuvre the election of committee members who are likely to comply with the requests of the Caretaker, most likely without understanding that the increase in caretaker value results in a corresponding decrease in owner value.
In this scenario a BCC is likely to put undue reliance on the caretaker and agree to unwarranted demands because they lack the clear sighted direction required for smooth operation in the face of regularly changing caretakers. (See the case study of Carmel-by-the-Sea attached. An outstanding, dedicated and unusual commitment by this BCC over a 10 year period has finally achieved a valuable, landmark outcome for owners!).
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(h) There is a hugh difference in the financial stakes where the financial survival of some Caretakers is dependent upon owners being prepared to pay higher levies to fund contract extensions. In such a case, owners are being asked to rescue a caretaker from financial difficulties that are a direct result of them paying too much to buy a diminishing-term, diminishing value contract, which is what they purchased. (i) A recent initiative of developers is to sell title to the office premises to the Caretaker rather than to allow it to remain on common property, thus entrenching the rights of the Caretaker
July 2013 UnitNews
Feature News Leary & Partners Caretaker Duties, Valuations and Tenders
Caretaker Duties Valuations and Tenders Are you a member of a body corporate and Are you a member of a body concerned about the level of remunera-tion corporate and concerned about paid to your resident unit manager? the level of remuneration paid to your resident manager?wish to call tenders Does your bodyunit corporate for theyour caretaker duties? Does body corporate wish
to call tenders has for the caretakernumerous valuations Our company prepared duties? of Caretaker Duties for buildings from Port Our company has preparedWe have experience Douglas to Coolangatta. numerous valuations with large hotel styleofcom-plexes of three Caretakerunits Duties for buildings hundred right down to small boutique from Port Douglas to than fifty units for both developments of less Coolangatta. Weahave valuations and calling of tenders. experience with large hotel style complexes of three hundred units right down For a fixed fee quotation or toto discuss small boutique developments these specialist valuation services of less than fifty units for both call us on 1800 808 991 or valuations and a calling of email firstname.lastname@example.org tenders. For a fixed fee quotation or to discuss these specialist valuation services call us on 07 3858 8222 or email email@example.com
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UnitNews July 2013
above and beyond its contract. It is difficult to see how owners get any benefits from such an arrangement.
In cases where the Caretaking contract will not expire for an extended time, an interim step may be to re-negotiate it. This is akin to the committee negotiating with one or both hands tied behind its back because any request for additional or improved duties is likely to be met with a demand for increased payment on a contract that is likely to already be over priced. Unless the contract is about to expire, the Caretaker can thumb its nose at any requests. Only an open market tender can establish a fair contract market value for all parties based on market pricing of a common and precise job specification.
A fairer Outcome for both Parties. The summary below outlines from the Case Study of Carmel-ByThe-Sea (CBTS) attached details of a course of action by which the extraordinary efforts of the BCC regained control of its building and undertook owner accretive policies for its owners as well as other comments. (a) Caretaker’s are entitled to retain whatever contract term and option periods they currently have in accordance with due diligence carried out at the time of their purchase. (b) No additional extensions should be granted as this precludes fairer ongoing arrangements. (c) In the last 2 years of the incumbent Caretaker’s contract, draw up a relevant building performance specification that aligns with the requirements and expectations of current owners, unrestrained by any current contract. (d) Put to open market tender the job performance specification and include conferring the property management rights to the letting pool. While it can’t be mandated that investors must use this offered service, the extent to which higher property management income is generated by a higher number of investors migrating to the successful tenderer, the lower the tendered cost, which in the case of Carmel was NIL (previously it had been $242,000). (e) Invite the incumbent Caretaker to tender on the same basis as open market tenderers. Incumbents would be advantaged by having the best building knowledge but their level of remuneration level would be dictated by the market and thus fairer to both parties. In the case of Carmel, the incumbent Caretaker was not competitive despite offering to reduce its expiring remuneration from approximately $242,000 to $82,000 p.a. (f) Award the new contract at around the commencement of the last year of the incumbent caretaker’s contract, providing up to a full year for transition, induction, holidays etc before the successful tenderer takes up the new contract. This gains importance in the event that a new caretaker is appointed. (g) There is a direct nexus between the level of remuneration of Caretakers and the number of years of Sinking Fund reserves which is a financial measure of retained value for Owners. In particular review the table of research data supporting this proposition at the end of the Carmel Case Study, which is sourced from the audited financial statements of almost 100 different buildings, giving examples of good and poor financial performance (which conversely highlights the impact of Caretaker remuneration) as well as Carmel’s financial performance before and after the appointment of its new NIL remunerated Caretaker
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