Unit News Online - SUMMER 2018/19 by OnlineEdition

THE OFFICIAL MAGAZINE OF UNIT OWNERS ASSOCIATION QLD

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SUMMER 2018 - 19

A Tale of Two Towers Auditors

Managing probity plus price PAGE 14

Legal Musings

Open Letter

PAGE 22

PAGE 24

on body corporate accountsâ&#x20AC;¦

to the strata industry in Queensland

CONTENTS

SUMMER 2018-19

UNIT NEWS SUMMER 2018-19 Brisbane

(07) 3220 0959 or uoaq.org.au and request to communicate to a particular person. Ross Anderson, Bob Boundy, Paul Cassels

Gold Coast

Wayne Stevens, Mike Murray Greg Melloy, Roger Dearing

Published by Unit Owners Association Qld

7th Floor. 333 Adelaide St, Brisbane QLD 4000 help@uoaq.org.au (07) 3220 0959

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Members of the UOAQ are welcome to contact committee members of the association for any help on any body corporate matter.

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Editor

Jana Koutova editor@uoaq.org.au

Art Direction

Dan Hancock hi@danhancock.com.au Disclaimer Articles contributed to this newsletter are published as a service to members and do not necessarily reflect the opinion or policy of this Association. To contact the committee of the UOAQ for assistance with a body corporate matter please email help@uoaq.org.au

4 A Tale of Two Towers 8 Things you want to know about QLD Strata but did not know you need to ask 11 Construction costs are rising. Ignore them at your peril 14 Managing probity plus price 17 Does my strata insurance cover me for everything? 18 Strata insurance: testing the broader market 20 Who knew? Insights into The strata banking game 24 An open letter to the strata

industry in Queensland

26 Statistics on Community Titles Schemes in QLD

27 Under the 5-Year Rule, insurance valuations have a ‘use-by-date 28 Extensions of management rights

32 Nuisance for some, hazard for all 34 Enforcement of Adjudicators Orders

36 Hints for buying a unit or townhouse

38 Maintenance of Common Property

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“Being informed and educated, and being represented by an organisation with a strong voice is vital. I strongly recommend that all Queensland Body Corporates subscribe annually and benefit from the knowledge and services that the UOAQ provide to its members.” Helen S. Chairperson/Secretary COMMITTEES ARE VOLUNTEERS AND DESERVE SUPPORT. ASK US ABOUT JOINING AS A BUILDING MEMBER TODAY!

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Body Corporate and Community Title Lawyers

• General advice • Dispute resolution • Revision of by-laws • Levy recovery

• Scheme establishment • Contractual matters • Scheme re-structuring • Government consultancies

Bugden Legal’s team of talented lawyers is headed up by Gary Bugden OAM, Australia’s most experienced body corporate lawyer

p 07 3905 9260 a Level 13, 200 Mary Street, Brisbane Qld 4000 p GPO Box 2624, Brisbane Q 4001 e info@bugdenlegal.com.au Visit our website to sign up for free updates

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“Would our Committee have been able to achieve what we have over the past 12 months and cope with the work required to get us through? Were it not for the personal interest and dedication of UOAQ then the short answer to that question is … absolutely not! I strongly urge all Queensland unit owners to ensure that their Body Corporate Committee subscribes to an annual membership with the UOAQ - an organisation with a strong voice supportive of all owners in Queensland.” Garry D, Chairperson

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Shandit Pty Ltd are proudly corporate authorised representatives of Insurance Advisernet Australia Pty Ltd. Authorised representative number 424246

COVER STORY

A Tale of Two Towers

It is the best of times, it is the worst of times, it is the age of wisdom, it is the age of foolishnessâ&#x20AC;Ś it just depends on which tower you live in. The UOAQ has access to the audited financial statements of two different bodies corporate occupying adjacent towers. For the sake of sensitivity, we will call them T1 and T2.

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T1 admin

levies increased by 52% with Caretaker’s costs increasing by 12%.

The two towers have much in common • Built by the same developer, approximately 20 years ago • High-rise tower format: T1 with 25+ floors, T2 with 35+ floors • Large number of lots: T1 with 150+ lots, T2 with 190+ lots • Similar lot sizes, and lot profiles re number of bedrooms, bathrooms, carparks etc • Absolute water frontage • Relatively high-end finishes • Both regulated uander the Standard Module • Both shared the same Caretaker/Rental Pool Manager (RUM) inherited from the original owner. Both towers followed similar paths for many years T1 and T2 were registered in the 1990s, a time when very few lot owners questioned the standard business practices prevailing in Queensland’s strata world. For example:

T2 admin

levies increased by 9% with Caretakers costs decreasing by 54%.

There soon emerged a discernible gap between their respective Admin Levies on a PLPA basis…and the gap has continued to grow. How and Why? There appear to be two main answers: 1. The committee at T2 developed a culture of questioning the old ways and exploring new and better ways. 2. The body corporate at T2 was presented with a golden opportunity by their RUM, and they seized it with both hands. New Culture • The UOAQ has for many years recommended that rather than simply renewing service contracts from term to term without testing the market, all service providers should be required to compete for the new contract. This includes the BCMs.

• Automatic renewals of the incumbent body corporate managers’ contract ( BCM) • Automatic renewals of strata insurance with the same insurer sourced by the same BCM • Automatic extensions granted for any top-up requests from the RUM.

It is understandable that in their early years both T1 and T2 followed similar paths regarding the day-to-day management of their respective bodies corporate.

Relevantly, the incumbent BCM’s quote was much less than what the body corporate had been paying them for years. Making them compete does make them competitive.

The body corporate gained a significant on-going saving, and in the process let their incumbent BCM know that renewals should not be taken for granted.

Relevantly, their annual levies steadily increased at about the same rate. For many years, there was very little to distinguish T1 from T2 when comparing their Admin Levies on a ‘per lot per annum’ basis ( PLPA). (The PLPA basis allows ‘like for like’ comparisons when looking at different sized complexes.) About five years ago, their paths diverged T1 stuck to the traditional way of doing things, and their levies continued their upward trajectory. T2 adopted a different approach, which produced immediate reductions in their levies.

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The T2 committee put the BCM contract to tender, inviting quotes from a number of BCMs. The incumbent BCM, although not the cheapest, was eventually awarded the contract on a ‘value for money’ basis.

• The UOAQ also has recommended for many years that the BCM should be separated from the ancillary services often provided by BCMs: it is better to source these services directly from third-party, independent experts. This includes strata insurance.

Accordingly, the T2 committee engaged Strata Insurance Solutions (Insurance Brokers) to source quotes from a wide range of strata insurers.

SUMMER 2018 - 19 UNIT NEWS

COVER STORY

As may have been expected, the incumbent insurer was not competitive. It would be an understatement to say the committee was somewhat taken back by just how uncompetitive the incumbent insurer was: T2 saved $20,000 in the first year. The body corporate gained a significant saving, and in the process acquired a truly independent insurance broker they could trust to test the broad market each year for the ‘best value for money’ quote.

• BCM’s fees and the strata insurance quotes are just two examples of what a sharp, questioning committee can achieve by always looking for opportunities to achieve the very best for their lot owners.

The UOAQ understands this culture is alive and well at T2.

T2’s Golden Opportunity: Management Rights The Caretaker Fee is normally the largest single item paid out of the Administration Fund each year: usually around 35% of total payments. For many years, neither T1 nor T2 were an exception to this general rule. (T1 and T2 started with the same RUM. When this entity went into receivership, the T2 RUM continued in the job while the T1 contract was transferred to another RUM.) Like so many complexes, T2 had a long history of top-up requests from their RUM. Unlike so many complexes, T2 had an equally

long history of saying NO to these requests.

for the caretaking duties.

In 2016, with only three years of the caretaker’s contract remaining, T2 was advised that their mortgagee-controlled RUM wished to surrender the remainder of the contract. Negotiations were then entered into between the relevant parties. The upshot was that in 2016 a T2 EGM voted to:

This new arrangement means that T2 has been able to stem the growth in their Admin Levies. While so many things are getting more and more expensive, and much of this is beyond anyone’s control, it is useful to have a committee which looks very closely at those expenses which they can do something about.

• Accept the early surrender in return for a one-off settlement of approximately $230,000 • Enter into a fresh three-year contract with a new RUM selected through a tender process on the open market. Relevantly, the new arrangement has all the hallmarks of the seminal case on management rights ie Carmel by the Sea: • T2 agreed to provide the new RUM with a three-year licence to operate the rental pool for free • In return, the new RUM agreed to heavily discount the annual Caretaker Fee by about $125,000. This meant the $230,000 settlement fee would be recouped in the first two years of the 3-year contract, resulting in an even larger net reduction in the Admin Levy in the third year, and thereafter. It was also agreed the annual Caretaker Fee would be tied inversely to the level of the rental pool: the bigger the pool, the lower the fee. As the RUM builds up the rental pool thereby making more money, this allows the RUM to charge the body corporate even less

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A quick comparison of T1 and T2 shows: • T1’s Admin Levies have increased by 52% over the last five years, with their Caretaker’s Fees increasing by 13% • T2’s Admin Levies have gone up by 9% only, while their Caretaker’s Fees have dropped by 54%. The upshot is that you can put a $$$ value on a sharp committee. Flow-On Effect

One of the first questions asked of any real estate agent selling a unit concerns the annual levies. It is little wonder that when comparing similar units in similar towers, the one with significantly lower levies will prove more attractive to the purchaser…and this will be reflected in the sale price. As the levies come down, the value of the units goes up. *With apologies to Charles Dickens

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$2,551

$4,145

$3,058

$4,427

$3,252

$4,141

$3,230

$3,926

$3,178

$4,740

$3,202

$3,791

$3,282

$4,941

$3,245

$4,598

$3,201

$4,558

$3,166

$4,944

$3,170

$4,045

$3,138

$3,255

2012 2013 2014 2015 2016 2017

Administration Levy - $ / Lot / Year

Caretaker Cost - $ / Lot / Year (relative)

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SUMMER 2018 - 19 UNIT NEWS

FEATURE STORY

Things you want to know about Queensland strata but did not know you need to ask

igh density living is embraced by all levels of state government as a way forward. Statistically, we can see the steady increase in numbers. Year on year, as of September 2016, the number of schemes increased by 2.1% to 46,011, accommodating 442,609 individual lots (up 3.43%). Strata is governed by state legislation; in Queensland, it is the Body Corporate and Community Management Act 1997 (the Act) and its Regulations. The objectives of the Act are excellent, but the transposition of those objectives in the Act appears scarred by

UNIT NEWS SUMMER 2018 - 19

some industry stakeholders in the legislative process seeking to benefit disproportionately to the ultimate beneficiaries, unit owners.

While it is estimated that around 1 million people are involved in unit ownership in Queensland, the question is often asked whether strata living is for everybody. Many owners buying into strata are not aware of the reality of becoming part of a body corporate (and no, you cannot opt out of it - until you sell). Below is the UOAQ’s ‘Top list’ of hidden realities that owners buying into strata in

Queensland should be aware of. See how many will not surprise you.

1. 10 Or 25 Year Maintenance Contracts Only Developers Can Sell For Their Own Profit Yes, you heard it. ‘I, developer as original owner, will design (unaccountable, vague and not really demanding) a Management Rights (MR) contract which only I can sell. The proceeds are all mine to take away. The future liabilities of the contract will pitch

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owners against service providers into the future as owners pay for services from the company as I sell these MR under the kind of terms one would only expect someone to sign with themselves.’ Sweet, hey? Depending on the MR contract, a caretaker can purchase into a MR contract paying out in surprising amounts under a guaranteed contractual arrangement for up to 25 years, which the General Meeting may be requested to extend every year! This has led to some contracts in existence today expiring in 2040! Setting up this ‘tenure’ styled relationship more than occasionally disrupts the balance of power in the contractual counterpart relationship between the body corporate and the service contractor. In addition, the long-term nature is particularly noticeable when the costs go up (by CPI or 4 – 5%) and never down, as is a standard position in many MR contracts! As a result, simple maths and the magic of compound interest is costing unit owners millions of dollars and robs them of the ability to achieve market price for services during the life of the arrangement. Also, MR contracts are sold on average every three years. The formula: borrow from a bank, buy (have guaranteed salary for couple of years and profit from letting), request a top-up of the term of the MR contact (in the best case twice – 10 years more, yey!), sell for a profit. The top-up delivers capital from the present value of the 10 years longer contract. Without a sustained rejection by the General Meeting until the contract expires, this process maybe repeated with another MR contract counterpart, costs increasing all the while under the same terms. From the industry perspective too, the development of the market for MR contact cashflows into an investable asset class prevents many bona fide caretakers from entering the market to supply their services due to the high cost of entry. It is either that or they become employed by a MR company and the body corporate covers the cost of what they would have paid AND the premium to deliver the return to MR contact asset owners based on the original capital cost.

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2. The Near Impossiblity To Terminate Caretaking / Letting Agent Arrangements Non-performance of the contract does not necessarily mean that you can replace your maintenance person with somebody who you know will maintain your property. The contact is not struck in a normal commercial setting, but instead many aspects are regulated by the Act. The web of legislative requirements to waste the time, effort and money for owners via committee and general meetings to force compliance of the service provider ‘to do their job’ is simply not very practical. To top it off, the cash flows MR contracts require the body corporate to pay equip the service provider with the funding required to engage solicitors in their defence should the committee raise contravention issues. As a result, where disagreements arise over quality or scope of work to be performed (for example, such practical things like cleaning the BBQ area, pools and mowing the lawns) body corporates often learn the hard way that what they might have done in the commercial world in terms of servicing notices of performance or termination are simply prohibited by the Act. This forces the owners to engage solicitors on their behalf as well, and the rest is …. a very expensive and tedious exercise to define that, as real example, the bins have to be wheeled back in, even if the contract only says to wheel bins out. Really? Sadly, you can find such bizarre stories in abundance in the database of adjudications.

3. A Body Corporate ‘Penalty’ For Seeking Code Of Conduct Compliance The Act incorporates codes of conduct for committees, caretakers and letting agents, and body corporate managers. Great, we all know how to behave – or else – code contraventions usually come with punitive measures, right. Or not? If, finally, a body corporate votes for default of a code of conduct, as a punishment to dare to do so, the letting agent is given a ‘transfer notice’, but the letting agent has nine

months to sell it’s business before vacating the building (s.138, look it up!) In a final insult to injury, if the letting agent contract has less than seven years to run, the body corporate must extend the contract to a minimum of nine years. What a motivation for non-performance! Think about it: as a proven non-performer of my contract, I, the letting agent, am allowed 9 months to sell my business and am given a bonus of an extended contract as a reward for my bad behaviour. This means that if the contract was down to its last year or two this ‘bonus’ for breach of code of conduct may be worth hundreds of thousands of dollars; and the body corporate must continue to fund this by way of the caretaker’s salary.

4. Assignment Of Management Modules This legislation empowers the original owner, developer with the decision as to the applicable module for a scheme where the thought process is one of seeking a ‘win’ from profits of the sale of a MR contract with a long MR contract at the best price. Furthermore, developers are known to place class 2 residential buildings under the regulation of the Accommodation Module with 25-year caretaker letting agent contracts when they should be under the Standard Module with 10-year contracts. If per chance a body corporate proves that they are under the wrong module, and the module is changed the body corporate still must keep the long 25-year contract and cannot change to the 10-year contract that they should have been under all along.

5. Limitations Of By-Laws “If a lot may be lawfully used for residential purposes, the by-laws cannot restrict the type of residential use.” This legislation effectively denies unit owners the right to determine how their building is used; either for permanent residential or transient accommodation - or both. Permanent residential buildings carrying community expectations of lifestyle, amenity, safety and health are effectively >

SUMMER 2018 - 19 UNIT NEWS

FEATURE STORY

> prohibited by this clause in the Act. Queensland is the only Australian state prohibiting unit buildings for the exclusive use of long term or permanent residents.

6. Dilluting Regulations Protecting Unit Owners Via Property Occupation Act 2014 The Property Occupation Act 2014 (POA) introduced under the guise of reducing red tape has further disadvantaged unit owners, and in fact endangers their safety. If someone is called a resident agent, they should reside in the building, correct? This is, in fact, the way the units are marketed to owners: 24-hour security, services to buildings, services to tenants or guests etc. However, the POA removed the requirement for a resident letting agent to live on-site. So, beware, your resident agent very may not reside in the building! But there is more. ..the same resident letting agent can now manage more than one building. Real world experience has shown that in many cases it is quite difficult, if not impossible, for a letting agent managing one building to perform in an efficient and cost-effective manner. Experience has also proven that corporate letting agents managing multiple buildings are far more expensive to the body corporate and letting unit owners for commissions and maintenance of rental units primarily due to the need to employ additional staff as the caretaker/letting agent distributes duties such as reception, cleaning, gardening and maintenance to different personnel. The idea that the resident caretaker / letting agent moves to a management role, at the expense of the unit

“While it is estimated that around 1 million people are involved in unit ownership in Queensland, the question is often asked whether strata living is for everybody.” 10

UNIT NEWS SUMMER 2018-19

owners, is repugnant to the original concept of resident caretakers, and introduces a further cost layer into the structure. The POA also removed the 12% cap for commission rate. Seemingly a good idea in a market economy, right. Perhaps until you, the owner, are presented with the letting form with the agent’s wish list under a comment: “I will not rent your unit until you sign”. You can, of course go outside, but where is the lucrative promise of the easily rented apartment since help resides on site for your tenants? Additionally, if there is no regulation of commission rates, there is no recourse to the Office of Fair Trading for unit owners to get protection under the law, so there is no effective law on the point.

7. Local Government – Utilities And “View Tax” Strata became a golden goose for local councils as well. Are you on 4th floor upwards? You are paying a “view tax”, not because you cost council more money, but because they can. Water supply? Sewerage? One inlet and one meter for council to read. All the rest (distribution in the building – pipes, calculation of water for units) is done at the expense of the body corporate. Nevertheless, every unit is charged a water supply charge on their water bill. “Fixed sewerage charge” is in the same mix. Strata buildings are a revenue gift which keeps on giving to local councils.

8. Body Corporate Managers – Caveat Emptor Body corporates usually sign a contract with body corporate managers and believe that they need to do all that the body corporate managers are telling them. They are all professionals, right? Wrong! Anyone can hang a shingle outside and call themselves a BCM – it is as easy as that! No professional licencing needed. Body corporate managers have a code of conduct to abide by, so they must follow the

law and look after the best interest of the owners, their clients? Wrong again! Sadly, the bad apples amongst them can tell you anything; but if the adjudicator recognizes their bad (unlawful) behaviour, you have no practical recourse and there is no regulator to impose a penalty as a deterrent to future unlawful behaviour. Don’t get us wrong as there are many good ones out there, but it is definitely an area where ‘Caveat emptor’ applies with amplified importance.

9. Banking Arrangements Not In Favour Of Body Corporate Of course, money in your bank earn you the best possible interest rate. Wrong! The business arrangements between body corporate managers and banks have funds of body corporates sitting in accounts which receive less than favourable interest rates. Who gets the ‘quo’ for the body corporates’ ‘quid’? Of course, you also might expect that your elected committee members are signatories on the body corporate’s bank accounts. These are owners’ money, right, and you should be able to talk to bank about it. Wrong again! In practice, most committees will be denied even a discussion with the bank since the only account signatories are the body corporate manager’s representatives as ‘owners’ of the account. So, what was your score? How many of these were you aware of? How many are you comfortable with? The one consistent loser from the Act is the unit owner. Currently, the ongoing Property Law review does not, unfortunately, address any of these areas. These issues have been around since the legislation was introduced and are not news to any of the powers who can actually change them. There is just not enough political will to protect the unit owner against vested interests. Until that day comes, we hope this article helps you to be better informed before you enter the world of strata in Queensland.

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QUICK QUICKSTORY NEWS

Who Knew?

Some Insights into Strata Insurance 2.9: Construction costs are rising. Ignore them at your peril Strata insurance is compulsory, expensive, and contains many risks. One of the big risks involves the Building Sum Insured (BSI). Getting it right is not easy .. getting it wrong can cost you lots of money. This applies to both over-insurance (premiums too high), and under-insurance (cover too low). Over-Insurance can be expensive Much has been written about the chronic over-insurance which occurred after the 2008-09 GFC. Many insurers continued to suggest substantial annual BSI increases even though construction costs flatlined. When annual costs were rising by only about 0% to 1% pa, some insurers were still suggesting annual increases of 5% to 8%, compounding from year to year. Many complexes suffered grievously from over-insurance eg one Sunshine Coast complex paid excess premiums of at least $100,000; another over-paid at least $50,000. This fiasco was both endemic and systemic across the state. It highlighted two ingrained problems: 1) Body corporate committees had accepted, in good faith, the annual increases suggested by their insurers, without checking their validity with an independent source. Even if they wanted to check, committees didn’t know whom to go to and so they did nothing. 2) Body corporate committees waited out the full 5 years before obtaining the next valuation required under the so-called 5-Year Rule. Committees thought ‘no

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later than 5 years’ also means ‘no sooner than 5 years’, and so they sat and waited, and waited, until their 5 years were up. Having been burnt once, many complexes now opt for more frequent valuations. This can be a sensible option, especially in the larger complexes. You spend a bit to save a lot. Unfortunately, some complexes are overreacting and blindly saying NO to any annual increases. This is not a sensible option: construction costs have been on the rise since 2014. A stagnant BSI will only lead to under-insurance. (A NewsFlash will issue about this soon.) Under-Insurance can be catastrophic What happened to construction costs immediately post-GFC was an inevitable market response to an aberrant situation. But, history tells us costs normally rise from year to year, and things have been back to normal since 2014: construction costs are on the up. And as costs go up, the BSI must follow.Ignoring reality is not smart. If you are under-insured, it will be the individual owners who must cover the shortfall in reconstruction costs. Yes, the likelihood of this happening is low, but the consequences of under-insurance can be bad… really bad. What to do between valuations? The UOAQ would be the last to suggest blind acceptance of the increases suggested by the insurers. But in normal circumstances these increases may be justified. You just need to check, before you sign the cheque. Where to check? The Australian Bureau of

Statistic’s [ABS] Construction Code Index is a good start. It reports on construction cost variations quarter by quarter. And it is easily accessible. Is this Index reliable? Yes: first of all, it is from the ABS and second, it is consistent with the industry-based indexes used by the quantity surveyors, valuers etc. For example, the ABS Index confirms a 6% rise in construction costs in QLD from March 2016 to September 2017. David Leary of Leary & Partners (Quantity Surveyors) has advised this 6% rise is consistent with” ... the indexes that are accepted throughout the building industry.” The UOAQ can help you access the ABS Construction Cost Index The UOAQ tracks the ABS data, from quarter to quarter. (A NewsFlash with a 5-year data table will issue soon.) The ABS data cannot replace the professional valuations prepared by experts like David Leary. But it can give you an idea of what your current BSI should be, presuming you have a reliable 5-year valuation to start with. The safest option, of course, is more frequent valuations by the experts. In the meantime, we are more than happy to guide our members through the ABS Construction Cost data. You can also talk to independent insurance brokers, like Tyrone Shandiman of Strata Insurance Solutions. Tyrone is more than happy to talk about the best-practices he follows to provide risk-free strata insurance to his clients.

SUMMER 2018 - 19 UNIT NEWS

SPONSORED CONTENT

Lift Maintenance Contracts

Maybe at some point in the future maintenance contracts will be written in plain English, but until then it would be advisable to obtain independent advice before signing any lift or escalator maintenance contract. Where to start and what to look for

tart by finding the start date of the contract term. This might seem simple but often the start date is not self evident and on the first page of the contract. Some contracts obscure the start date in amongst pages of promotional material extolling the virtues of that particular contractor. Sometimes the start date will be found within a contract clause on the second or third page. It is important not to confuse the start date of the contract term with any other dates that might be on the contract. Usually close to the start date there will be reference to the length of the contract term. This is where it becomes interesting. Lift contracts always include an automatic renewal or rollover clause. Sometimes this rollover text will be close by and sometimes it won’t. The text will be similar to “unless

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this contract is terminated in accordance with the terms and conditions of this contract, then the contract shall continue for equivalent periods”. Some contracts that are customer friendly will swap the words “equivalent periods” to “periods of twelve months”. The “equivalent period” or similar text is particularly onerous as it can lock owners into unfair conditions and excessive charges for many years. Once the start date and term of contract is known it’s possible to work out the contract expiry date. Lift contracts perpetually renew so now the next step is to locate the “Termination Clause”. The “Termination Clause” will sometimes include the rollover period and will include text similar to “either party to this contract may terminate this contract provided notice is given to the other party not less than 90 days prior to the end date of the first or any subsequent term”. In most cases it is best

to advise the contractor that the contract is to terminate at the end of the current term. At other times it is the best interests of the owner to allow the contract to rollover if the rollover period is only twelve months. And a word of caution, a recent contract change from one of the larger multinational lift companies downgrades the contract by excluding cover of major components when notice of termination is given. Why it is sometimes be in the best interests of the owner to let a contract rollover depends on the individual building. There can be a range of factors from the type of lift to the age of the lift. If the lift is approaching the point where it needs major repairs or modernisation it may be in the best interests of the owner to let the contract rollover for twelve months rather than get locked into another long term contract.

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Contract price adjustments Whether you prefer the word lift or elevator, when it comes to the maintenance contract, the devil is truly in the detail. Contract price adjustments are unavoidable Most people accept that long-term lift maintenance contracts require periodic price adjustments. As costs move, so should the contract price. The challenge is finding a process which is accurate, fair to both parties, and transparent.

Accuracy is really important The contracts are normally drafted by the lift companies principally for their own purposes. They prescribe the price adjustment formula, and they often determine what figures are then entered into this formula. If the formula itself is wrong, or if the figures entered into the formula are wrong, the resultant adjustment will always be wrong. The compounding effect of any false adjustments, over an extended period of time, can easily produce an ever increasing gap between what is being paid and what the current market price is. This gap normally works to the detriment of the clients.

The price adjustment formula Sometimes these clauses will detail the formula and at other times the details will be sketchy, particularly if it involves an inhouse “index” specific to that lift company. It doesn’t matter how detailed the formula is: if you can’t readily understand and calculate the adjustment yourself, the chances are the lift company won’t be able to explain it to you either. Obfuscation is built into these types of formulae. Don’t be fooled by finding an “index number” as these are equally meaningless. Index numbers are the product of a calculation and without knowing the elements that went into producing that number then any future numbers used to justify an increase could just as easily have been drawn from a hat. The only index numbers that should be included in contracts are those published by the Australian Bureau of Statistics e.g. CPI.

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Cost components The price adjustment formula found in most lift contracts is based mainly on increases in labour’s cost, rather than the cost of materials. There are three main risks with this: Quantifying labour’s cost: In the past, labour’s cost was normally based on changes in industrial awards. Significantly, these awards have now been largely superseded by Enterprise Bargaining Agreements (EBA). The difference is that while the details of industrial awards were well known, the detail of an EBA is generally not publicised. Net increase in labour’s cost: Cost to the lift company is a combination of Hourly Rate x Hours Required. Pay rates per hour have increased significantly in the lift industry along with considerable changes in lift industry work practices. Depending on who is asked, worker or employer, the answer will be the other side has won either by increased pay or concessions in work practices. In fact both sides have benefited, with wages increasing in exchange for cost savings. This trade-off between ‘increase in hourly rates’ versus ‘decrease in hours required’ is often not passed on to the client. Blanket increase across all components: In simple terms this is what often happens. The lift contractor agrees to a 4.5% increase in wages and then applies a 4.5% increase to the whole contract amount, not just the labour component.

Summary Price adjustment formulas which rely on obscure ‘in-house’ indexes etc. generally work to the detriment of the client: • It is difficult validating what is being paid under the EBA • Gross labour cost increases do not reflect reciprocal work practices

benefits to the lift company • Labour cost increases do not necessarily mean increased costs materials. This is a simplification of the risks with these formulae but suffice to say the customer needs to read and understand the contract before signing. Until recently these price adjustment clauses were clearly identified within the contract under a sub heading. Now the price adjustment method is often obscured in other clauses. Some even double dip using CPI plus any increases in their labour costs. Price adjustment can be fair and transparent, providing it is based on simple formulas relying on easily accessible and reliable figures e.g.: • Australian Bureau of Statistics Consumer Price Index tables such as the All Cities Weighted Index. The ABS website also has information on how to use this data in contracts; or • Fixed annual increases, of around 3%. Currently, these are more than fair for the contractor.

“The challenge is finding a process which is accurate, fair to both parties, and transparent. “ For further information

Tony Hazeldine of Lift Logic Pty Ltd Mobile 0418 715 546 email tony@liftlogic.com.au Website liftlogic.net.au

SUMMER 2018 - 19 UNIT NEWS

FEATURE STORY

Auditors Managing probity plus price

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“Making People Compete Helps Makes Them Competitive.”

[1] A recent EGM ordered by an Adjudicator highlighted the opportunities available to Bodies Corporate (BC) to better manage both the probity and price of having their financial statements audited each year… see WAVES [2016] QBCCMCmr 132i

Why Have Audits and Auditors In the First Place?

[2] QLD’s BCCM legislation requires 2 Statutory Motions, regarding auditing of the financial accounts, be voted on by the owners at each AGM:

1st Statutory Motion: Do we want an audit?

An audit is required unless the owners decide by special resolution not to have the statement of accounts audited.ii [3] (This is a rather perverse motion where YES means NO, and NO means YES) 2nd Statutory Motion: If so, which auditor? iii

[4] This must be decided by the owners by ordinary resolution. [5] (The WAVES Adjudicator confirmed that while this motion must be voted upon in the AGM, the owners are not compelled to choose an auditor. For example, they may prefer to vote down the motion and consider a motion to appoint an auditor at a subsequent general meeting.iv)

And it is not just any auditor!

[6] The auditor must have appropriate qualifications and experience in accountancy.

So … where do you find an appropriately qualified and experienced auditor?

[7] Normally, the Body Corporate Manager (BCM) offers to do it for you… and negotiates the auditor’s professional fees in the process. [8] The owners are pretty much presented with a fait accompli as to WHO and HOW MUCH. [9] This can become very repetitious, though. Most BCMs choose from their own small pool of favoured auditors, with the same name popping up, year after year after year… and repetition easily breeds complacency.

Do we have concerns about this practice?

[10] Of course. [11] Technically, the Body Corporate is responsible for the management of its financial affairs, including preparation of its annual financial statements. [12] Realistically, the BCM generally handles all of this on behalf of the owners, often with little input and oversight from the Committee.

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[13] Would it not make better sense then if the owners were to source their own auditor? [14] Would it also not make better sense to test the market at the same time… to ask the Harvey Norman Question “Is this your best price?”

Do you at least get a choice between one auditor and another?

[15] Not necessarily. [16] Generally, the auditor’s fee would be less than the BC’s Major Spending Limit (MSL), therefore no more than one quote is required. vi [17] But, some BCMs will provide a choice between 2 auditors, thereby attracting the requirements of the Motion with Alternatives provisions. vii

This is where WAVES comes into the picture.

[18] Their Committee had chosen to obtain two quotations through their BCM for the 2015 AGM, so a Motion with Alternatives was the appropriate way to present owners with the choice between them. [19] The motion did not comply with several of these requirements. It did not show a blank space after the motion for voting purposes. An explanatory note consistent with s.71(4) was not provided. [20] The motion did not even permit voters to vote against the motion in the event they were not happy with both proposed auditors. It was like Henry Ford’s ’Black, Black or Black’ option. [21] Ordinarily you’d assume these defects would have been acknowledged as a simple oversight, easily rectified by prompt issue of a correction notice to all owners well before the AGM [22] Not so. [23] The Committee, drawing heavily on the professional advice of their BCM, decided their hybrid version of a Motion with Alternatives was indeed valid, and they persisted with this right up to the AGM, and even beyond to the Adjudicator. [24] The Adjudicator seemed to have little difficulty in rejecting their invention… and ordered the BC to go back and have another crack at it at an EGM. >

And this is where we arrive at ‘Auditors: Managing Probity plus Price’.

[25] Prior to the EGM, an owner decided to source a quote from an independent, suitably qualified and experienced auditor, and > submitted it as an Owner’s Motion. viii

SUMMER 2018 - 19 UNIT NEWS

FEATURE STORY

The following table may help illustrate the picture.

[26] There was no suggestion of misconduct behind this initiative. It was just about ‘good governance’ and maximising the probity of the process…while testing the market re price. [27] Remarkably, this quote was substantially cheaper than those traditionally obtained on the owners’ behalf by their BCM. [28] Any 40%-50% variation like this is always significant, and of concern. [29] So, the Committee’s Treasurer, an accountant himself, then sourced quotes from two other independent auditors… with similar savings. [30] The result is a close tussle for the EGM between 3 very competitive quotes, all sourced independently of the BCM for the first time since the complex’s incorporation 11 years ago. A win for the owners on all counts!

(GST incl) BCM’s Auditor 1 BCM’s Auditor 2

2011

2012

2013

2014

2015

**1,661

1,793

1,710

1,760

1,650

1,870

AGM

AGM*

2016 EGM*

Committee’s Auditor 1

1,200

Committee’s Auditor 2

1,227

Owner’s Auditor 1

1,110

*For EOFY 2016 **bold = successful quote. 2016 EGM pending.

Our advice to any Body Corporate?

[31] Do yourself a favour… source the auditor yourself. [32] And even if, in the end, you decide to stick with the BCM’s auditor, there is every chance it will be cheaper than previously.

i http://www.austlii.edu.au/au/cases/qld/QBCCMCmr/2016/132.htm ii s.153(1) & definition of ‘statutory motion’ in the Schedule , Accommodation Module. [Standard Module s.155(1)] iii s.153(2) & definition of ‘statutory motion’ in the Schedule , Accommodation Module. [Standard Module s.155(2)]

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Making People Compete Helps Makes Them Competitive. iv v vi vii viii

WAVES [2016] QBCCMCmr 132 (31 March 2016), paragraph[14] s.154, Accommodation Module. [Standard Module s.156] s.150, Accommodation Module. [Standard Module s.152] ss.70 & 71, Accommodation Module. [Standard Module s.72 & 73] s.67, Accommodation Module. [Standard Module s.69]

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QUICK NEWS

Does my strata insurance cover me for everything?

The short answer is no. It is a common misconception that unit owners only need a strata insurance policy to cover their insurance needs.

he Body Corporate Management Act places responsibility on the Body Corporate to insure building & common areas to full replacement value. We always recommended owners take out their own insurance policy whether it be a “landlords” or “contents” insurance policy for residential properties or a “commercial policy” for commercial properties. Below we provide examples of items not covered by a strata policy: - Public liability cover under a strata policy is limited to claims made against the Body Corporate and often only covers common areas. Liability claims brought against an individual owner for a matter contained to a specific lot, is not usually a matter for the body corporate and therefore not covered by Strata Insurance. As an example, if a tenant within a unit was electrocuted due to a fault that had not been fixed by

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a lot owner, despite knowing about the problem, as the claim happened within a specific lot, the strata insurance policy would not likely respond. The policy would only respond to claims made against the Body Corporate and the owner would need to refer a claim to their contents or liability insurer.

- The Body Corporate does not have responsibility to insure carpets, curtains & floating floor boards as part of the building under the Body Corporate Management Act. This means responsibility to insure these items is placed on the lot owner through a separate contents insurance policy. Subsequently, loss of rent claims caused only by lot owners contents (such as carpets, curtains & floating floor boards) are also not covered under the loss of rent section of a strata policy. - Specific to Queensland legislation,

damage to fixed air-conditioning units servicing one lot are also not covered by a strata insurance policy and are the responsibility of the lot owner to insure.

Just like any other form of insurance, exclusions, terms and conditions will apply to all policies and it is important an owner understands what is and is not covered by an insurance policy. If you are unsure about your requirements to insure your property, contact Strata Insurance Solutions for advice about your insurance needs. This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Shandit Pty Ltd T/as Strata Insurance Solutions strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances. Shandit Pty Ltd T/ As Strata Insurance Solutions is a Corporate Authorised Representative (No. 404246) of Insurance Advisernet Australia AFSL No 240549, ABN 15 003 886 687.

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QUICK NEWS

Strata insurance: Testing the broader market

First, a nice, feel-good story… one where the owners finally backed a winner [1] A recent Adjudication contains an interesting backstory about the benefits of outsourcing strata insurance to an independent broker… see WAVES [2016] QBCCMCmr 132 i [2] It is true they’d messed up their 2015 Statutory Insurance Motion, by not including it at all, thereby earning themselves an EGM compliments of the Adjudicator. But at least they’d set themselves on the path to significant annual savings off their insurance premiums. [3] Dating from their registration about 10 years ago, WAVES’ strata insurance was normally handled by Archers, their Body Corporate Manager (BCM). [4] Also, the one insurer, CHU, had been able to supply the most competitive quote for every one of those years. [5] There is nothing unusual about any of this: it is a very common (and lucrative) practice for BCMs to provide this service. They are tasked to find the most competitive quote each year, and in return they take a commission, generally up to 20% of the base premium. And, even the same insurer being able to provide the most competitive quote year after year…this also is a quite familiar phenomena. [6] For the 2015 AGM however, the WAVES’ Committee decided to break the mould and go directly to an independent broker.ii This broker was known by the Treasurer, an accountant, to provide a very professional service.

[7] It is standard practice for independent brokers to approach a wide range of insurers for quotes. Brokers understand the market is constantly changing: so they know they have to constantly test the broader market if they want to get the best

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on offer at the time. [8] Unfortunately, this is not necessarily a standard practice with some BCMs. Some tend to favour just 2 or 3 insurers (including the insurer they are associated with as an Authorised Representative), and often simply approach these same few insurers, from one year to the next. It is also understood that some strata insurers will deal only with brokers…and not with BCMs. This means the insurers’ market is normally broader, and more competitive, than the one trawled by BCMs.

[9] The WAVES’ broker approached 8 insurers, including the incumbent insurer. [10] The broker reported back to the Committee with a range of responses from these insurers, including a recommended option. [11] The incumbent insurer was not so competitive this time: their quote was about 20% higher than the recommended, and lowest quote. [12] The 3 best quotes were properly included, as Alternatives, in the 2015 AGM Insurance Motion;iii the Committee supported the broker’s recommendation; the owners voted accordingly. [13] The 2014 premium was $34,031; the 2015 premium was $27,301; everyone was happy. Ok, this is nice for them…but what about us? [14] It is true that ‘One swallow does not a summer make’. The WAVES’ experience does not, in itself, prove a pattern. [15] But, WAVES is not Robinson Crusoe. [16] It is our experience that when Bodies Corporate are persuaded to deal directly with independent brokers, they are generally rewarded with significant savings. [17] For some time now, we have been recommending Bodies Corporate look seriously at using independent insurance brokers, preferably those who specialise

in strata insurance. [18] One particular broker we have been recommending is Strata Insurance Solutions (SIS). As their name suggests, strata insurance is their business. [19] Many Bodies Corporate have followed our recommendation: we in turn have followed these Bodies Corporate, to ensure our recommendation is justified. [20] The pattern to date confirms an average savings of around 18%. Ok, 18% sounds nice… but 18% of what? [21] The reality in strata insurance is that the ‘what’ is a lot of money. You only have to look at any complex’s annual budget to see that their strata insurance premium is one of the biggies. [22] Every complex is different of course, ranging from the very small to the very large… and the size of the overall premium for the complex varies accordingly. But regardless of the size of the complex, strata insurance normally involves a whole lot of $$$s per owner. [23] Strata insurance is also annual. On-going savings like 18% each year, year after year, can quickly add up to a significant amount. [24] This means real potential for keeping the levies down; and this, in turn, helps keep the value of the units up. Nothing can cruel the value of your unit more, than high levies. Do yourself a favour

Take your strata insurance to an independent broker: find out how much you can save. ii http://www.austlii.edu.au/au/cases/qld/ QBCCMCmr/2016/132.htm ii http://www.strathearn.com.au/ (recently changed name to Arthur J Gallagher http://www.ajg.com.au/) iii Refer WAVES [2016] QBCCMCmr 132 para. 1 of Reasons For Decision http://stratainsurancesolutions.com.au/

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Shared Water Bills – the solution we’ve ALL been waiting for!

In older buildings with only one water meter, the total bill is divided, not on water used in each unit, but by the size of the unit, the number of bedrooms, or by unit entitlement.

any of our readers will be familiar with being billed for water they haven’t actually used – and the feeling of resentment that comes with it. For too long Australian unit owners have had to share the cost of excessive water use by some of their neighbours. Pensioners are particularly vulnerable to out-of-control water bills.

And if you let your unit, as a landlord, because you had no way of measuring it, you’ve had to pay for the water your tenants used. An unquantifiable risk to your investment returns! In 2006, the founders of Australian owned company, Fair Water Meters first became aware of the issue of shared water bills and peoples’ frustration at being powerless to do anything about it. In 2009, the couple founded the company upon a commitment to find a cost-effective and equitable alternative to shared water bills in multi-unit residential and commercial complexes. Their vision: • To empower people to use water responsibly, to benefit the Australian environment and our planet. Their mission: • To facilitate the move to individual water metering of units, • using quality meters to bill according to measured use. • Keep pricing affordable to encourage maximum

uptake of sub meters in the market so that • resident owners and tenants are empowered to manage their water bills. It is largely due to a groundswell of public support (and dogged determination) that this vision is now being realised: In 2010, they identified a German-designed sub meter that is purpose-designed to be retrofitted in existing buildings without costly plumbing or building work. However, at that time, Australian water meter standards did not allow for a meter of that size, even though it had been used and trusted in units around the world for over 20 years. It took an expensive nation-wide petition, a visit to Canberra with over 12,000 signatures and years of waiting, before the amended legislation was finally published in September 2015 and testing could begin to obtain approval/ certification by the National Measurement Institute. Fair Water Meters now provide a complete end-to-end solution to the problem of shared water bills. They take care of it all: • Quality meters at fixed price including installation (no nasty surprises) • Team of professional, courteous plumbers • Monthly drive-by readings & bills mean ‘bill smoothing’ for owners and better cashflow for bodies corporate • Timely notification of leak

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detection to protect your property and your pocket! They even arrange repairs on request. Studies show that water consumption drops by between 20 and 35% where sub meters are installed. For each meter sold FWM donate $5 to ‘The Ocean Cleanup’. The complete solution for everyone - including our planet!

For further information

Website fairwatermeters.com.au Phone 1300 FAIR 01

SUMMER 2018 - 19 UNIT NEWS

FEATURE STORY

WHO KNEW? Insights into The Strata Banking Game

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3.3: Whose Bank Account Is It?

Many owners may not be aware that their funds are sitting in someone else’s bank account. Many owners pay their levies electronically via an on-line facility into a transaction account operated by their Body Corporate Manager (BCM) under the name of the Body Corporate. This transaction account is then used by the BCM to pay the bills on behalf of the owners. It is a very common ‘strata industry practice’. There are at least 2 major risks with these transaction accounts.

Risk 1: Poor Interest Earnings

Transaction accounts are often no more than electronic versions of what used to be called ‘cheque accounts’, earning virtually no interest. We already have alerted owners that it is common practice for many BCMs to park large sums of owners’ funds for extended periods in these transaction accounts. This practice can cost owners many thousands of $$$s in foregone interest each year. We wrote about it previously here.

Risk 2: Lack of Control

Some owners may be aware of recent media coverage about a former BCM charged with an alleged fraud of $750,000. We cannot, and do not, make any comment or inference either directly or indirectly about that matter. However, now is an opportune time to alert all owners to another ‘strata industry practice’, one which exposes their funds in the transaction accounts to an unnecessary risk of catastrophic loss. Specifically, this risk concerns the absence of control, by the owners, of the transaction account.

If you are not a signatory, you do not legally control the account. It is true that the account must have the name of the Body Corporate on it. But what really matters is the name of the signatory.

Being the signatory to any bank account means having access and control of the account and the money in it. Conversely, ‘not a signatory’ means no access, no control… and if any owner has any doubts about this, try asking the bank for access to your transaction account. In QLD, it is a common ‘strata industry practice’ that none of the owners are signatories to the

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transaction account, not even the Chairman, the Treasurer or other committee members. The Body Corporate Manager (BCM) is usually the sole signatory.

with access, control and ownership of their money. The Body Corporate can then set its own rules about how their Committee will deal with its money.

Q: What happens if the BCM misappropriates the money? A: You could lose the lot!

When funds are required by the BCM to pay the bills, an electronic request is made by the BCM to the signatory of the Body Corporate’s holding account. This request should detail how much is required, for whom, and for what. If satisfied with this request, the Body Corporate’s signatory then electronically transfers the money across to the BCM’s transaction account.

You may be able to recover your losses from either your own insurer or the BCM’s insurer… but it is difficult imagining the bank offering to make good on the losses.

Prevention Rather Than Cure

Most Bodies Corporate inherit this type of transaction account from the original developer. Then the practice just develops a life of its own, rolling on from one year to the next. It should be remembered that this ‘strata industry practice’ is just that, a practice…it is not a legal requirement. There is no statutory impediment to owners taking back control and ownership of their own money. If the owners wish to do so, they can. This doesn’t mean that the BCM has to stop operating the transaction account on behalf of the owners, using it to collect the incoming levies and pay the bills. This is a service most owners, especially the Committee members, would prefer to retain and pay for.

To ensure there are no unfortunate delays in this request/transfer process, many Bodies Corporate will allow their BCM to be one of the signatories on their Body Corporate holding account. This may compromise the integrity of the new process to some degree: however, the Body Corporate’s designated signatory eg the Treasurer, always has real-time access to the holding account. Concerns are often raised about the amount of work that may be required of the Body Corporate’s signatories. It is our experience that reference to their Administration Account history will inform owners that nearly all expenses, especially the large ones, are easily budgeted for in terms of both timing and amount eg energy, pool maintenance, lift maintenance, insurance, BCM’s fees, caretakers

“You may be able to recover your losses from either your own insurer or the BCM’s insurer…” It is more a question of ensuring there is just enough money in that transaction account to cover the bills when they fall due… but no more than that. Managing this balance can be quite easy and straightforward.

A Simple, Safe Solution

One very common solution involves the Body Corporate establishing an interest-bearing holding account in its own name. Then, the Body Corporate directs the BCM that all receipts flowing into the BCM’s transaction account must be electronically on-forwarded, without delay, into the Body Corporate’s own account. The signatories to the Body Corporate’s holding account are usually Committee members eg the Treasurer, the Chairman. This provides the owners, through their elected representatives,

fees, etc. Unexpected, one-off expenses are easily managed, as and when they arise. This budgeting process also allows the Committee to easily identify amounts surplus to foreseeable requirements, which then can be transferred in a timely manner from the Body Corporate’s holding account across to the investment portfolio.

UOAQ Service and Support

Helping set up this type of banking arrangement is one of the many services the UOAQ offers to its members, via an associated money-management service run by our Treasurer, under ASIC licence. There is no set-up fee, we cannot touch your money… we simply identify the best deals available and help you with the paperwork. Please contact the office for more information.

SUMMER 2018 - 19 UNIT NEWS

FEATURE STORY

Other Peoples’ Money

Some legal musings on body corporate accounts… by Ben Gray, CFA

e live in interesting times. The twenty-first century has so far witnessed an explosion of technological advancement through the adoption of the world-wide web by the global population. Sometimes, though, in the interests of scale and serviceability, technology can inadvertently move too fast for other aspects of society. And sometimes, this brings into question strict compliance with the legal norms that have served for the advancement of the very conditions that delivered the wonderful technology that exists today. It’s perhaps similar to the ethical dilemma that confronts science: ‘just because it can be done, does not mean that it should be done’. This article examines the rules applicable to body corporate accounts and the potential compliance issues that may exist in the industry today, brought on by the desire for scale and efficiency and fueled by technological advancement in the financial sector.

What’s the expectation with the payment of levies? We have become accustomed to online banking; making payments, paying bills, receiving funds and tracking investments. A well-earned level of trust has developed for the financial institutions that have managed these systems so far. And, as it ‘works’, the questions as to how and whether the arrangements comply with the applicable laws are rarely examined. So, what is the expectation that an owner may have for the payment of levies to bodies corporate? You might suggest that an owner paying levies should expect that the payment is made directly to the account owned by the body corporate so that funds are available for meeting the obligations of that body corporate. Furthermore, you might expect that some interest might be earned on that account for surplus funds of the body corporate and that any fees taken between the point of payment through to interest earned are fully disclosed. No need for intermediaries – just the body corporate and its bank.

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These might be reasonable expectations, particularly given the strict controls on the handling of ‘other peoples’ money that, for example, have existed in the legal profession (and the real estate profession) for a long period. Lawyers do not hold their clients’ money except in trust accounts which are under the scrutiny of the profession’s regulatory body and in accordance with applicable laws. While the same safeguards do not apply to the holding of body corporate funds by managers, body corporate law does regulate these things by an alternative regime, seemingly intended to keep body corporate funds intact. Section 151 of the Body Corporate and Community Management Act (Act) states:

“The account must be opened with the consent, and in the name, of the body corporate.” Taking the ordinary meaning of section 151 is to say that a body corporate should be the account holder and therefore the customer of the financial institution where the account is opened. Otherwise, the direct rights to those funds would be transferred to a third party (that is, the body corporate manager). Consequently, the body corporate would not have direct control over those funds in the eyes of the financial institution. The ordinary meaning of section 151 also suggests that the authority to ‘operate’ the account on behalf of the body corporate should be issued by the body corporate to the body corporate manager (as is typically the case under the manager’s contract). In this way, upon the change of the body corporate manager, the body corporate retains the control over the funds in its account and revokes the authority of the previous body corporate manager in favour of the incoming manager. Nothing in this paragraph seems to defy common sense or indeed the legislation. The Act also provides no express power for a body corporate manager to ‘open’ a body corporate account as account holder, but merely to ‘operate’ it.

This is not too different from the concept that a company owns a bank account but authorises an employee to operate on it (with appropriate safeguards). When the employee leaves, the authority is revoked but the account doesn’t change. This may also seem to be common sense in view of the lack of the safeguards that exist (as they do in other professions, such as lawyers to hold client funds on trust). So, section 151 also provides that: “(3) If the body corporate manager’s contract of engagement requires or authorises the body corporate manager or an associate of the body corporate manager to operate the account for the body corporate, the account must provide for it to be operated for the body corporate by any of the following— (a) the body corporate manager or associate; (b) the authorised members acting jointly. (4) If subsection (3) does not apply, the account must provide for it to be operated jointly for the body corporate by the authorised members. (5) If the body corporate gives the financial institution written notice in the approved form that the body corporate manager’s contract of engagement has ended— (a) the financial institution must not allow the person or the person’s associate to operate the account; and (b) the account is taken to provide for it to be operated for the body corporate by a person nominated by the body corporate and stated in the notice.” [underlining inserted] These subsections are consistent with the notion that the account holder and owner is the body corporate and it is the bank’s customer. Put another way, the body corporate is the legal and beneficial owner of the funds and has all the rights afforded to it as the account holder. The notion that a body corporate account may be opened and operated by a body corporate manager as account holder

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in the eyes of the financial institution appears to be fundamentally at odds with what the legislation requires. Particularly with respect to subsection 5 above, there appears to be no contemplation that a financial institution should have to transfer funds back to the body corporate at the end of a manager’s tenure, just prevent the outgoing manager from ‘operating’ the account any longer. But in practice this doesn’t always happen.

Assuming account arrangements are compliant: how can body corporate funds be dealt with? The provisions of the Act for the operation of the body corporate accounts are specific in their application so as to set apart general management of body corporate funds from other money obligations. Take, for instance, a general power of attorney for financial matters as regulated by the Power of Attorney Act 1998 (POAA). No reference is made to the POAA in the BCCMA. This is a crucial point for if the POAA does not apply (and absent other statutory power), a manager is robbed of any ‘power to invest’ similar to those provided for under section 84 of the POAA which imports those powers and constraints of the Trusts Act 1973 under sections, 21 and 24 respectively. This may arguably mean that certain dealings such as account selection on behalf of a body corporate is not permitted absent a specific instruction from the body corporate. With this separation and in the absence of any requirement for performing the role of a trustee managing a trust account, a manager seems unable to deal with the body corporate funds except in accordance with the Act, which does not contain an express power for the body corporate manager to invest body corporate funds. Accordingly, key questions to understand the management of a body corporate’s funds are: 1. Who is the owner of the account in the eyes of the financial institution? 2. Does the body corporate manager have authority to operate the account in practice in accordance with section 151 of the BCCMA? 3. Have all fees of all entities involved with handling body corporate funds from levy payment through to interest return been fully disclosed to the body corporate?

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If the answer to any of the above is no, or even unclear, then it is reasonable to suggest that a body corporate should consider its obligation to investigate further by requiring full disclosure to assess compliance with the Act. After all, the last thing a body corporate committee might want to face is an owners’ motion asking where their levies are paid, who authorised any investment of funds and why the body corporate has not complied with its statutory obligations under the BCCMA by being the account holder.

Statutory interpretation It’s time for an open and frank debate about this not only because the management of community funds is important, but also in the wider context of the culture of compliance with the Act. This is particularly timely given the legislative reviews which are ongoing. It is not a stretch to suggest that the legislation does not always mirror current practices. If the law wanted someone other than the body corporate to own the accounts into which levies are paid, surely it would have said so. This article is not to judge whether or not the industry may prefer to reactively be guided on the matter should this issue come before the Courts. However, should that happen, the Court will need to interpret what the Act means and perhaps not what was intended or which may have become common practice. Industry participants are perfectly able to interpret the law and manage their compliance. And to that end, there is at least one exponent of statutory interpretation who has profoundly stated the way in which the Courts have interpreted statute law: During the past decade or so, the High Court of Australia has unanimously endorsed other principles as necessary to the accurate reading of legislation. Amongst the most important of these principles have been: • that where the applicable law is expressed in legislation the correct starting point for analysis is the text of the legislation and not judicial statements of the common law or even judicial elaborations of the statute; • that the overall objective of statutory construction is to give effect to the

purpose of Parliament as expressed in the text of the statutory provisions; and • that in deriving meaning from the text, so as to fulfil the purpose of Parliament, it is a mistake to consider statutory words in isolation. The proper approach demands the derivation of the meaning of words from the legislative context in which those words appear. Specifically, it requires the interpreter to examine at the very least the sentence, often the paragraph, and preferably the immediately surrounding provisions (if not a wider review of the entire statutory context) to identify the meaning of the words in the context in which they are used. These and other explanations of the contemporary understanding of statutory interpretation have increasingly taken courts in Australia away from the previous ‘literal’, or so-called ‘objective’ or ‘plain meaning’, approach to interpretation. The notion that a word of the English language has a single, objective and scientific meaning that has only to be discovered has gradually given way to a more candid recognition of the choices that face those who interpret the written law and the way in which values and policy considerations can influence the making of those choices. That realisation presents the third element in contemporary statutory interpretation in Australia. Today, that task requires a combined exercise involving analysis of the text, context and purpose (or policy) of the statute in question. 1” Careful review of these points does not lead to the easy conclusion that there may be some room to move on the strictness of the banking obligation placed on bodies corporate under the Act.

Published: February 2017 1 Kirby, Michael --- “Statutory Interpretation: The Meaning of Mean” p2011[ MelbRLawRw 3; (2011) 35(1) Melbourne University Law Review 113

This article was originally written for Byroms lawyers.

SUMMER 2018 - 19 UNIT NEWS

FEATURE STORY

An Open Letter to the strata industry in Queensland from lot owners Concerning the reasonableness of actions by Bodies Corporate To the strata industry in Queensland,

In view of this, the UOAQ pens this open letter seeking to:

The Unit Owners Association of Queensland Inc. (“UOAQ”) represents thousands of unit owners whose homes and investments are governed by the Body Corporate and Community Management legislation. The substance of our work reflects the fact that members of the strata industry often overlook that it is for the ultimate and primary benefit of owners of lots that community title schemes exist in Queensland, not the third party service providers. Moreover, it is through the payment of levies and purchase monies that owners also serve as the ultimate and primary underwriters of the commerce and trade associated with the initial and ongoing functioning of community schemes. As you know, owners are also formally members of bodies corporate of community titles schemes in whose best interest representative committees of bodies corporate and third party service providers are obliged to act.

(1) bring awareness to central and ever present facts and circumstances that should be considered in every case to which a section 94 test of reasonableness is applied,

From time to time, owners believe it necessary to express a public view on the application of certain provisions of the law or dysfunctionality within the strata environment. On this occasion, we recognize section 94 of the Body Corporate and Community Management Act 1997 (the “Act”) that: “…the body corporate must act reasonably in anything that it does…”. Further, we acknowledge that this test of reasonableness is regarded as objective taking into account all facts and circumstances.

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(2) set out grounds for safe harbour of body corporate actions so that home owners and investors in community schemes can be assured that certain conduct of their bodies corporate will not be subject to claims from third parties on grounds of section 94 and (3) gain industry acknowledgement of factors that will in all cases be deemed unreasonable. The motivation for this open letter is to bring clarity and assurance to homeowners and investors in community title schemes in Queensland.

The Standing Elements There are certain factors that apply to all situations involving bodies corporate (the “Standing Elements”). These Standing Elements do not change regardless of the circumstances of the case. However, if Standing Elements are not taken into account, determinations on what is ‘reasonable’ may result in different outcomes the section 94 test of reasonableness applies. Accordingly, the UOAQ advocates that the Standing Elements should be taken into account in all determinations on what is reasonable. The

Standing Elements include the fact that: I. a fiduciary duty is owed by the body corporate to the owner members, II. the committee must discharge its legal duty to act in the best interests of owner members in accordance with the committee code of conduct, III. each body corporate manager and caretaking service contractor has a legal duty to act in the best interests of the body corporate by acting honestly, fairly and professionally, exercising reasonable skill, care and diligence in performing the terms of engagement, IV. financial underwriting role that member owners play in the strata industry and their right to strike bargains through the body corporate with service providers which represent value for money, V. the committee should demonstrate sufficient due diligence in the circumstances by applying an evidencedbased decision-making process, VI. the body corporate is free to demand performance of contractual rights from service providers since such service providers have agreed to perform its obligations. Applying these factors to a given circumstance will affect outcomes. For instance, an adjudication order is not well grounded if unreasonableness is found in the actions of the body corporate

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committee but the third party claimant is not acting in the best interests of the body corporate members. Alternatively, a committee’s actions should be weighed as more likely to be reasonable if they are in the best interests of the body corporate members and a claimant seeks an outcome which is not.

The Safe Harbour As a matter of public policy, consideration should be given to the fact that owners in community title schemes are either homeowners or investors. Accordingly, the integrity of home ownership and investment conditions should be safeguarded from unnecessary uncertainty. The UOAQ advocates for legislative and/or judicial safe harbour from impunity for want of reasonableness (a “Safe Harbour”). Only with a clearly defined Safe Harbour can the integrity of home ownership and investment in community title schemes be protected from inconsistent application of the objective test of reasonableness. Moreover, a Safe Harbour gives effect to the objects of the Act to: (a) provide an appropriate level of consumer protection for owners of lots included in community title schemes, (b) ensure that bodies corporate for community titles schemes have control of the common property and body corporate assets they are responsible for managing on behalf of owners of lots in the scheme and (c) balance the rights of individuals with the responsibility for self-management as an inherent aspect of community title schemes. Accordingly, the UOAQ advocates for a Safe Harbour in which it will in all cases be deemed reasonable action of a body corporate if action is taken: I. in a civil manner (including in writing), II. to exercise a contractual or other legal right or freedom, III. in the best interests of the member owners of the body corporate, IV. to mitigate the continued rise in levies to owner members,

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V. to protect the member owners from continued erosion of consumer rights or breaches of contract, and VI. to protect unit owners’ right to the peaceful enjoyment of their lot in a disharmony free community environment. It is largely self-evident that these factors should be reasonable in every case. In particular, a body corporate should not be prevented by the legislative test of reasonableness from insisting on a contractual right when a bargain is struck freely with a third party. In addition, the exponential nature of a compounded rise in any levy amount over time can never be considered correlated to the deliverance of the ‘value-for-money’ struck on the original date of a contract when it is widely accepted that economic conditions fluctuate and competition and efficiencies in supply of services increase over time. Accordingly, it will always be reasonable to ‘mitigate a continued rise’ in levies into perpetuity. The UOAQ does not assert that this list is exhaustive and would encourage industry participation to arrive at a definitive Safe Harbour of actions for bodies corporate. Fortifying home ownership and the investment environment is irrefutably best for the sustainability of the industry.

Deemed Unreasonable

The UOAQ also advocates that certain actions outside of the Safe Harbour be deemed unreasonable for the purposes of the section 94 test in every case to protect homeowners and investors. It follows from the Act that the following actions of a body corporate should be deemed unreasonable in all circumstances. That is, actions which: I. place the interests of third parties before those of the member owners of the body corporate, II. result in a continued rise in levies without maintaining value for money, III. are not in the best interests of member owners of the body corporate, and IV. do not protect the member owners from continued erosion of consumer rights or breaches of contract.

Final Note The reasonableness test of section 94 of the Act has the potential to bring uncertainty to owners in the strata community adversely affecting the long term prospects for community title home ownership and investment in Queensland. As the primary beneficiaries and ultimate underwriters of community title schemes in Queensland, lot owner concerns should be weighed heavily by the industry in the interests of sustainability; in particular, the institutions charged with governing the strata environment. Nothing advocated under this open letter is inconsistent with objectives of the applicable legislation in force, as enacted by the elected representatives of the people of Queensland. That any industry’s practical norms might stray over time from legislated objectives can be reasonably expected (especially where suppliers to that industry are not regulated). The question really becomes whether official and unofficial industry participants act to make the necessary corrections through enforcement, regulation and/or judicial action. The UOAQ invites all industry participants to contribute to the perspectives illuminated by this open letter in the same constructive manner and with the same well-meaning motivation with which it has been issued.

“The motivation for this open letter is to bring clarity and assurance to homeowners and investors in community title schemes in Queensland.” SUMMER 2018 - 19 UNIT NEWS

FEATURE STORY

Community Title Scheme Statistics as at end of March 2018. The latest available data as of September 2016, and their comparison with December 2015: Community Title Scheme Statistics as at end of September 2016

Mar-17 Mar-18 % Number of schemes: 46,630 47,994 2.93% Number of individual lots: 454,077 473,838 4.35% Number of schemes registered under each regulation module: Mar-17 Mar-18 % Standard 29,203 29,453 0.86% Small Schemes 9,676 9,880 2.11% Accommodation 3,791 4,005 5.64% Commercial 2,036 2,094 2.85% Specified Two-Lot 2,007 2,651 32.09% Further breakdown of community title scheme statistics: schemes % lots % Mar-17 Mar-18 Mar-17 Mar-18 6 lots and under 32,746 33,735 3.02% 105,799 108,362 2.42% 7 to 10 lots 5,671 5,757 1.52% 47,208 47,928 1.53% 11 to 20 lots 3,862 3,969 2.77% 55,965 57,589 2.90% 21 to 50 lots 2,753 2,836 3.01% 88,852 91,618 3.11% 51 to 100 lots 1,134 1,190 4.94% 79,720 83,529 4.78% over 100 lots 464 507 9.27% 76,533 84,812 10.82% TOTAL 46,630 47,994 2.93% 454,077 473,838 4.35%

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“During our 15-year membership of UOAQ we regarded this organisation as a never failing source of help and information.”

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This data was previously available only as “….an ‘Investigative Search of the Register’. Requests should include detailed information of the data required; requests are reviewed and approved on a case by case basis. A quote for the work required is returned and if accepted and fees paid, the work will be scheduled and returned within 2 weeks.

Fees associated for this work are payable in accordance with Section 12, Schedule 2 Land Title Regulation 2015 at $307.00 p/hr.” (cited from the official email of Titles Registry). After receiving the news, UOAQ requested Registrar to consider making such basic information accessible for public. Thank you to the Department of Natural Resources and Mines, Titles Registry office for approving this request and making it available for all. For updated data please go to Queensland Government data website. To access previous statistics, the second tab, ‘Activity Stream’, on the Titles registry activity webpage contains all updates for the last 2 years. We are currently communicating suggestions to include wider array of data, such as location. Please let us know your thoughts.

“Thank you UOAQ for your valuable hard work and keeping us informed.” JOIN THE GROWING NUMBER OF UNIT OWNERS WHO WANT TO STAY WELL INFORMED.

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FEATURE STORY

Who Knew?

Some Insights into Strata Insurance

2.3: Under the 5-Year Rule, insurance valuations have a ‘use-by-date’. So why not tell the owners what it is? The ‘5-Year Rule’ & what it means.

Generally, a new insurance valuation stating the full replacement value of your building must be obtained at least every 5 years… hence the so called 5-Year Rule.i Under this rule, insurance valuations have a mandated life cycle spanning Start date…. Shelf-life…. Use-by-date…. by which time, you are obliged to obtain a fresh valuation, if you haven’t already obtained one earlier. Then the life cycle of this fresh valuation starts all over again…and so on. Regular renewal of your insurance valuations is all about protecting your finances: protection, that is, from the risk of either under-insurance or over-insurance developing in the intervening period between valuations. We have written about it in our June 2015 magazine.

Q: How do you know when a fresh valuation is due? A: With some difficulty!

The BCCM legislation requires disclosure of the last insurance valuation, as follows: 1. The date when that last insurance valuation was done 2. The full replacement value of the building, as stated in that last valuation. This disclosure must be included in your annual general meeting (AGM) papers.ii Unfortunately, the legislation does not require disclosure of the 5-Year Rule itself, ie the obligation to obtain a fresh valuation at least 5 years from the date when that last valuation was done. Nor does it require calculation and disclosure of

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the due-by-date for the next valuation. You have to somehow work it out yourself. This leaves owners in a position where, unless they know about the 5-Year Rule from other sources, they could easily be forgiven for reading the disclosed date of their last valuation and then thinking ‘That’s really nice…but so what?’

There is a curious illogic in this statutory deficiency.

Why tease owners with only the first part of the formula, when it would be quite easy to require disclosure of the next, and most important, two parts:

‘…and we must obtain a fresh valuation within 5 years from that date’ ‘…and therefore, the due-by-date for that fresh valuation is such and such a date. Preferably, all three parts could be combined into one single, simple statement co-located with the annual Statutory ‘Review of Insurance’ Motion. This could easily be the industry standard.

What is the industry standard?

Seemingly, there is no industry standard. Notwithstanding the absence of statutory compulsion, it would be nice if it were common practice for our Body Corporate Managers (BCM) to voluntarily fill this disclosure gap by detailing the 5-Year Rule and specifying the use-by-date. Unfortunately, it is rare for us to see a clear statement in the AGM papers that the fresh valuation must be obtained by a specific due-by-date. The statutory deficiency, combined with this absence of any industry standard of

full disclosure, seems to be one of the main reasons for the number of complexes we encounter where the 5-Year Rule has not been complied with. For example: 1. Valuations not done at all 2. Valuations deliberately postponed till much later after the due-by-date 3. Valuations which are just simply overlooked for a year or two.

Where to from here?

We have raised our concerns about this statutory deficiency with the BCCM Commissioner’s Office, asking for it to be referred to the Attorney General for inclusion in the current Law Reform process. In the meantime, our advice to all owners is this: Provide a more informative disclosure to all owners in your own AGM papers about the insurance valuation requirements. There is no statutory impediment to your doing so. For example, the disclosure in your own 2016 AGM papers could then read: Last Valuation: Replacement Value: AND Next Valuation Required By:

(NB: Fresh valuations are required at least every 5 years.)

28 June 2012 $32,000,000 28 June 2017

Who knows…this could be the start of a new industry standard. i ii

BCCM (Accommodation Module) Regulation s.179 [also Standard Module s.181] Accommodation Module s.175(3)(a)-(b) [also Standard Module.177(3)(a)-(b)]

SUMMER 2018 - 19 UNIT NEWS

FEATURE STORY

“Lot Owners have the right to exercise their vote as they see fit …”

Extensions of management rights The modern Shakespearean saga… by Ben Gray, CFA

f Shakespeare were alive in Queensland today, he would no doubt be drawn to the seemingly mundane drama of management rights extensions.

To extend, or not to extend: that is the question: Whether there is greater peace of mind to suffer the ever increasing levies, costing an outrageous fortune, or to take arms against this sea of troubles, and by opposing end them? [Authors note: possibly not Shakespeare’s precise words!]

Consequently, a new trend is emerging. The owners (underwriters of the body corporate industry through their levies and purchase monies) are increasingly saying ‘no’ to extensions and their adverse impact on levies in a world otherwise dominated by the deflationary forces of automation and scalability.

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But the human drama extends beyond the feelings of owners. Management rights owners too are often under financial pressure to seek extensions to meet financial covenants with their financiers. In short, the interests of two key stakeholders in the industry are structurally pitted against each other and the human fallout naturally ensues. Thus, it is quite conceivable that two parties can in good faith stand for their financial survival on opposing sides of the issue. So, while it may not be accurate to decry that something is rotten in the state of Queensland, ignoring the issues can reasonably be expected to impact the long term prospects of the strata industry affecting the financial cost of strata ownership, its relative competitiveness as an investment asset sub-class (for both national and international investors) and liveability (caused by the emotional fallout). This article examines the general legal position and competing interests in the decision to extend a management rights contract and identifies the structural contributors to the problem.

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PAYMENTS OVER TIME

MONTHLY PAYMENT

11500 11000 10500 10000 9500 9000 8500 8000 7500 7000

The basic legal position It is common for bodies corporate to be approached by on site managers to extend the terms of management rights agreements. There are some specific principles that need to be kept in mind when this happens. Although there is no statutory right to an automatic extension, a body corporate making a decision should demonstrate that it acts reasonably in making that decision, having regard to its primary duty to administer the common property for the benefit of the owners of the lots included in the scheme. And as the approaches become more emotional, owners and bodies corporate need to maintain reasonableness also in their manner of conduct since the common property is the manager’s workplace by law. Under the standard module the maximum unexpired term for management rights is 10 years. For the commercial and accommodation modules, the maximum term is 25 years. Extension requests are capped at 5 year periods. As extensions are granted it may be the case that the total term of an agreement goes well beyond the initial term granted; in some cases, extensions may have extended the period for management rights in a building regulated by the accommodation module for up to 40 years.

Conferral of benefits, reasonableness, ‘value-for-money’ and the best interest duty When one considers that a management contract is in essence a long term cash flow in exchange performance obligations, the value of the extension decision becomes an important consideration for both sides. The manager needs the extension to maintain equity in his business and to keep his financiers satisfied and the owners need to keep costs under control. These are two sides of the same coin locked into competition by CPI (sometimes higher) annual increases under management rights contracts. It is important at this juncture to distinguish consideration of the financial cost of the extension to the body corporate from conferral of a benefit. A body corporate demanding value-for-money in its third party dealings and assessing costs associated therewith is not to be confused with the conferral of a benefit. The concepts are separate and the conferral of benefit prohibition does not preclude bodies corporate from due diligence to determine whether an extension decision represents a reasonable deal for it. In fact, it is probably compelled to do so by law. So, what is the monetary value of a decision to extend a contract for 5 years in 15 years’ time where the contract currently pays $7,000 per month with an annual CPI increase of 2.5% (that is, the middle of the Reserve Bank target band of between 2% and 3%)? The graphic below sets out the future value of the payment over time.

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YEAR

Accordingly, the $7,000 monthly management fee becomes the following: • • • • •

$10,138.09 in its 16th year; $10,391.54 in its 17th year; $10,651.33 in its 18th year; $10,917.61 in its 19th year; and $11,190.55 in its 20th year.

Assuming that there are twelve payments for each of the sixteenth through twentieth years paid monthly (and using today’s cash rate as the interest free rate to discount these cash flows), the five-year extension decision becomes one involving approximately $470,000.00 at today’s value. This much is calculable. What is not calculable is the ability of the manager to continue to perform obligations under the management contract during these distant years and, crucially, the impact that competition might have had on the value of that cash flow obligation. Without the downward competition adjustment, these amounts do not factor in the increased competitive forces to take up these relatively lucrative, unregulated positions. In an alternative scenario where the initial $7,000 monthly payment is subjected to increased competitive forces such that it remains at $7,000, the present value of that cash flow falls to approximately $320,000.00 creating a difference of around $150,000 in present value to what the body corporate would have paid without the competitive forces assumption. On these bases, it is reasonable that the body corporate decision to grant any extension should not be taken lightly, particularly when the time remaining on the contract continues to be in the distant, unforeseeable future. The test of reasonableness demands that the body corporate take into account all circumstances, which would include the actual financial cost of the decision and whether this represents value-for-money in the discharge of the body corporate’s duty to maintain and administer the common property for the benefit of the owners. It is arguably not reasonable for the body corporate to enter an arrangement which cannot be adjusted for competitive forces due to its duration particularly in circumstances where the monetary obligation can only inflate. The issue does not rest there however as the manager also has a duty to the body corporate to act in the best interests of owners. Can a manager be taken to have discharged this duty by not subjecting arrangements to competitive forces for such a long period? Can the manager assure the body corporate that the financial obligation imposed in the years ahead will retain value-for-money in light of competitive forces? If the best economists world-wide are shy of making forecasts >

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FEATURE STORY

> over such long periods about the value

of goods and services, can a manager be expected to value his/her services over such period while discharging the legal obligation to act in the best interests of the body corporate? The answer to these questions is most likely ‘no’, which should also be a manager’s answer to a request for an extension of management rights consistent with discharging their best interest duty to the body corporate. So, while it should be an objective consideration whether a third party service provider market exists to service bodies corporate, the consideration of this factor does not extend to protecting individual service providers and their financiers from mis-valuation of business rights assets containing the fundamental impediment that extensions are not given as of right. Prudent valuation techniques would import this legal fact to discount the value of such rights packages. Managers caught in value diminishing rights contracts might be better off examining whether their financier fulfilled all obligations under lending provisions of applicable law rather than insisting on a body corporate to bail them out. It is relevant to note that there is no duty under law placed on bodies corporate to protect their service providers from misguided investment decisions and therefore no expectation can be had that bodies corporate should automatically grant extensions having long term effects of measurable and substantial financial cost. The strata industry exists primarily for the benefit of the body corporate and their member owners, for they are the ultimate underwriters and beneficiaries to whom duties are owed by law. Indeed, it is sometimes worth revisiting the objects of the Body Corporate and Community Management Act in this regard and the deliberate and repetitive import of the concept of ‘flexible… arrangements’ in both the primary and secondary objects. There is nothing flexible about long term fixed increases in payments under service contracts. Nor is there anything particularly “appropriate” about the level of

consumer protection where competitive forces are locked out of third party service arrangements with bodies corporate. On a relative value basis, it may not be long before higher levies driven by financially disadvantageous third party service arrangements reflect on property prices to de-value those investment assets which carry relatively higher costs and therefore lower income return components. The strata industry does not, however, need to let it get to that point.

Body corporate action in response to extension requests Not every extension requested should automatically be deemed unreasonable. That is not the thesis of this article. For instance, one determining issue for some bodies corporate seems to be a suspicion that the owner of the management rights business is in some way depriving the body corporate of a financial benefit that in some way the body corporate should financially benefit from the fact that the owner of the management rights is benefiting financially from the rights it has been given. If that is the sole motivation for refusing an extension request, then it’s easy to see a challenge arising to a body corporate’s refusal to extend. A body corporate cannot charge for extending an agreement, so it ought not to allow such thinking to colour a decision. To put reasoning on a surer footing, some bodies corporate might consider passing a resolution that it is aiming for self- management at the end of the initial management rights period and thus justify a refusal to extend on any occasion that such a request is made. In considering extension requests, bodies corporate must also pay particular attention to the timing of the meeting to consider a motion to extend and the way in which the motion has been drafted. Legal advice may be valuable here. Lot owners have the right to exercise their vote as they see fit. For a challenge on a body corporate refusal on an extension request to be successful it must be shown that the decision was an unreasonable decision of the body corporate,

tested objectively. So bodies corporate, as they should, remain in a strong position on the issue of extension requests, but are not altogether inviolate if it is shown that the decision is manifestly unreasonable.

Conclusion It is not a request for an extension as such which is unreasonable, but it becomes potentially unreasonable (and therefore unlawful) where there is no reasonable visibility on delivery of obligations against the value-for-money it presents to the body corporate. It is arguably reasonable for bodies corporate to keep their arrangements flexible as envisaged by the governing legislation and to therefore deny grants which are immune from competitive forces at fixed and rising costs over the long term. In the final analysis, it is perhaps no one’s fault other than the power of mathematics and the fundamentals of economics that makes the extension of already long term supply contracts for services likely to be unreasonable and in no one’s best interests. The long-term nature of the initial contractual term, the mistaken value placed on them by buyers and their financiers and the financial pressure that puts on incoming managers passes the buck at the owners’ expense. The industry is, however, ‘where it is’ and the great unwind of these arrangements will be as painful as the participants to the negotiations make it. What is certain though is the longer a manager leaves the unwind of their rights contract, the faster it will diminish in value and the more difficult will be the fall out. It is also certain that no right exists for an extension to be granted. Finally, before some readers recall Shakespeare to have also written: “The first thing we do, let’s kill all the lawyers”, consider that the law is only so audible as an ear can listen.

This article was originally written for Byroms lawyers.

Published: 21 October 2016. Disclaimer: This publication is for general information purposes only and is not intended to constitute legal advice. If you have a specific legal question, you should consult one of our lawyers.

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It’s time to budget for insurance premium increases A

ll signs are pointing upwards for insurance premiums this coming year, there are now simply too many indicators to ignore. Over the past two years, strata insurance premiums were at the bottom of a very soft market, which saw many clients benefit from premium reductions and expansion of policy terms and conditions. From January, Strata Insurance Solutions have seen premiums increase for most clients by 5%-10% on average. Clients affected most by rate increases are smaller strata properties with less than 15 units and properties that have had claims exceeding the premiums collected, with increases by as much as 25% in the most extreme cases. The insurance market in general has been soft recently, but the strata insurance market was particularly competitive with rates decreasing by as much as 20% only two years ago. The major reason for reduced premiums was increased competition with the introduction of a number of new underwriting agencies entering the market. Many insurers who participated in decreasing rates have now started to see losses come through their portfolio after years of unsustainable loss ratios, forcing insurers to act by increasing premiums and excesses. Other factors include declining interest rates, which affect insurers investment returns on capital held to pay out

claims and the falling Aussie dollar which increases the cost of claims for insurers. Strata Insurance Solutions have had discussions with many insurers who have given guidance that overall they are seeking rate increases of about 10%. How can you reduce the impact of increasing premiums? - Budget for increases – It is always better to be over budget then under budget. When budgeting for insurance premiums take a more conservative approach. A 10% increase is reasonable and for smaller properties consider a 15% increase. If you have an underperforming claims history you might want to contact your adviser for further guidance. - Avoid lodging small claims – Small claims can cost an insurer more to administer than the actual claim itself. We have seen instances where insurers have adversely increased premiums for clients that have had a number of small claims, even though premiums

collected were higher than the claims paid. A trend of water damage claims are particularly least favoured. - Risk Manage - “An ounce of prevention is worth a pound of cure.” – Benjamin Franklin. Review your claims history, if you have reoccurring claims, preventative action may improve your claims history and limit premium increases. Regular maintenance of your property may also reduce your risk of a claim. - Review your insurances – If your insurance policy is referred by your strata manager to an insurance broker, you may be paying up to 20% more than simply dealing directly with an insurance broker who has access to a comprehensive range of insurers. A review of your current insurance arrangements may assist in mitigating premium increases you experience. Large properties with a good claims history have not yet seen major changes, however insurers are indicating rate increases should take place in the latter half of this year.

This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Shandit Pty Ltd T/as Strata Insurance Solutions strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances. Shandit Pty Ltd T/As Strata Insurance Solutions is a Corporate Authorised Representative (No. 404246) of Insurance Advisernet Australia AFSL No 240549, ABN 15 003 886 687.

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QUICK NEWS

Nuisance for some, hazard for all

Submission on no smoking by-law as proposed in Final Recommendations – QUT Panel Recommendation 6 – Smoking

by-law prohibiting smoking in an outdoor area that is part of a lot (including balconies, courtyards, etc) or on common property (including common property subject to an exclusive use by-law) should be enforceable against lot owners and occupiers if: • the original owner includes the by-law in the schedule of by-laws attached to the first CMS for the scheme; or • the body corporate adopts the by-law by a resolution without dissent. Aside from this different threshold required to adopt the by-law, a no smoking by-law will be added to the CMS and enforceable in the same way as any other by-law for the scheme. Amending or removing a no smoking by-law will also require a resolution without dissent.

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For the removal of doubt, the adoption of this recommendation will require a change to the power of the body corporate to regulate activity so that prohibition on smoking in an outdoor area that is part of a lot or on common property where that smoke drifts to an adjacent lot is permissible and not unreasonable or oppressive.

UOAQ Submission UOAQ supports this recommendation with one exception. UOAQ opposes a requirement to pass such by-law with resolution without dissent. Currently the BCCM Act requires special resolution for creating new by-laws or amending existing ones. There is already a tri-factor required for such resolution:

(1) At least 75% votes cast in favour; and (2) No more than 25% of the total number of lots against; and (3) The total contribution schedule lot entitlements of no votes is not more than 25% of the total contribution schedule lot entitlements for all lots in the scheme. UOAQ believes that a ‘no-smoking’ by-law, regulating proven hazard to owners’ health, should be treated more favourably, but certainly no more harshly than any other by-law in the scheme. There is enough scientific evidence proving the harmful effects of second hand smoke to humans, either in the form of smoke drift or smoke seepage. Queensland has already adopted laws regulating exposure to second hand smoke to the public (e.g. smoke free zone on public transport stops,

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no smoking in cars with children present; blowing smoke into one’s face constitutes criminal assault etc.). Smoke drift and smoke seepage are problems which affects most unit owners. The QUT Panel in its Final Recommendation notes that “the overwhelming majority” of the submissions, in fact, 82%, were in support of giving the body corporate the authority to adopt and enforce a ‘no smoking’ by-law. It is also noted “there seems to be very little reason not to allow bodies corporate to pass and enforce a no smoking by-law if that by-law is supported by the body corporate.” Consequently, the recommendation to impose harsher conditions for such by law to be implemented then does not make sense. The evidence of smoking, second hand smoke drift and seepage being harmful / a hazard to the public is commonplace, well known and indisputable. There are many scientific studies supporting such position readily available. Considering all the above arguments, it seems unreasonable to give a body corporate the ability to pass a ‘no smoking’ by law but severely limit its ability to do so by placing the requirement of a vote without dissent. The OUT Panel appears to assign more

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authority to the developer than the subsequent owners of the building. It is more likely that the developer will consider broader market conditions and leave as little limitations to prospective owners as possible, since their interest is to realise the highest profit and they have no duty of care to prospective owners when it comes to preventing a health hazard created by smoke drift. Further, to require vote without dissent for passing a ‘no smoking’ by-law is to empower a single owner with a veto power on the body corporate thus prohibiting the body corporate to regulate the scheme in accordance with current BCCM Act. The Queensland Parliament has already voted on regulating hazards in community titles schemes. Section 164 (a) prohibits the occupier of a lot included in a CTS from use, or permit the use of, the lot of the common property in a way that causes a hazard.

167 Nuisances

The occupier of a lot included in a community titles scheme must not use, or permit the use of, the lot or the common property in a way that— (a) causes a nuisance or hazard; or (b) interferes unreasonably with the use or enjoyment of another lot included in the scheme; or

“UOAQ believes that a ‘no-smoking’ by-law, regulating proven hazard to owners’ health, should be treated more favourably, but certainly no more harshly than any other by-law in the scheme.” (c) interferes unreasonably with the use or enjoyment of the common property by a person who is lawfully on the common property (emphasis added). For the removal of doubt, UOAQ supports the right of a body corporate to create the ‘no smoking’ by law as per Recommendation 6 which should be passed by ordinary resolution of the body corporate.

SUMMER 2018 - 19 UNIT NEWS

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Enforcement of Adjudicators Orders

There’s oxygen at the summit … by Michael Byrom, Byroms lawyers

aving your hard fought adjudication order remain noncomplied with is like running out of oxygen on the last ridge to the Everest summit. In both scenarios, months of effort seemingly dissipates into Hypoxia. It is important for successful applicants to know that there is oxygen at the summit after all. Mechanisms exist in the Magistrates Court to enforce adjudication orders and they are perhaps more accessible than you might think.The Office of the Commissioner for the Body Corporate plays a key role in assisting to resolve disputes between a variety of individuals and entities including but not limited to bodies corporate, lot owners, letting/caretaking service contractors and body corporate managers. Adjudicator’s orders may require payment of money or the performance of an obligation. To commence enforcement proceedings a party must register the order in the Magistrates Court by filing the following: 1. A copy of an adjudicator’s order, certified by the commissioner as a copy of the adjudicator’s order; and 2. A sworn statement by the party who the order is in favour of stating either: • that the amount payable under an order remains outstanding; or • that an obligation imposed

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under an order has not been performed.

Once the Order is registered, it can be enforced like a judgment of the court. Enforcing a judgment for payment of money Among the commonly used enforcement processes are filing a warrant for seizure and sale and filing an application for bankruptcy. We briefly examine these below. Warrant for Seizure and Sale: If the judgment debtor has real or personal property, a warrant for seizure and sale authorises an enforcement office to seize such property and sell it at public auction. Any proceeds from sale of the property will then be used to pay the money owing to the judgment creditor. Bankruptcy: A body corporate may issue a bankruptcy notice demanding payment of the judgment debt from the judgment debtor within 21 days. If the judgment debtor fails to satisfy the bankruptcy notice, a Court may make a sequestration order declaring the judgment debtor bankrupt. A trustee will be provided to control of all of the judgment debtors divisible property and they are responsible for managing the judgment debtors financial affairs and sell assets to offset debts owing. Enforcing a judgment for performance of an obligation

“It is important for successful applicants to know that there is oxygen at the summit after all.” A court may make an order to appoint or authorise an administrator to perform obligations imposed on a person/entity in accordance with an adjudicator’s order. Anything done by an administrator under the authority of the court is taken to have been done by the person/entity the adjudicator’s order was made against. Conclusion The applicable legislation has provided for successful applicants to use the enforcement infrastructure of the courts to prevent suffering noncompliance with adjudication orders. Whether as standard practice or in reaction to unsatisfactory compliance with your adjudication order, we recommend that you seek legal advice to determine the best enforcement option for you. That way, summiting the obstacle may not be as difficult as you think. This article was originally written for Byroms lawyers.

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Reasonableness Noun.

1. Sound judgment, sensible, moderate, in accordance with reason, not absurd (the Concise Oxford Dictionary). The concept of acting reasonably underlies much body of law. It may have started in the common law but is enshrined in several statutes.

by Ben Gray, CFA

he issue of reasonableness plays a key role in the day to day life of a body corporate. The duty to act reasonably is contained in section 94(2) of the Body Corporate and Community Management Act 1997 (BCCMA). The High Court recently considered the issue of reasonableness in the decision of Ainsworth v Albrecht, a long and costly dispute that now provides some further guidance on the issue of how a body corporate might ensure that it acts reasonably.

The dispute The case concerned the body corporate for Viridian Noosa Residences (body corporate). A lot owner sought consent from the body corporate to amalgamate two balconies forming part of his lot, which would require the grant of exclusive use of the common property airspace between the existing two balconies. The lot owner’s request (which required approval by resolution without dissent) was not agreed to by the body corporate, resulting in the owner filing an application to the commissioner’s office on the basis that the body corporate’s decision was unreasonable. The dispute travelled from the body corporate’s original decision through to the High Court, with different views about the whole issue expressed along the way. It appears that the Court thinks that all the lawyers and all the king’s men made it rather more difficult than should have been the case:

“...the competing submissions and supporting material did not make the question of unreasonableness difficult to resolve...” (Nettle J.) A brief synopsis helps to unravel the issues, but the synopsis below skirts some of the observations made by the Court about the series of errors made in the decision-making process by the Commissioner’s Office and the Court of Appeal: The High Court held that:

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TRIBUNAL/COURT

DECISION

Office of the Commissioner for the Body Corporate

After considering evidence on issues such as noise, privacy and architectural integrity and the impact of value to other owners’ lots because of the lot owner’s proposal the Adjudicator found in favour of the lot owner stating “on balance I am not satisfied that the Body Corporate acted reasonably in deciding not to pass the motion”.

QCAT

On appeal the tribunal held that the Adjudicator substituted her own opinion as to determining whether the body corporate’s decision was reasonable and failed to properly consider whether the body corporate’s decision was in fact unreasonably held in accordance with section 94(2) of the BCCMA. QCAT found for the body corporate.

Court of Appeal

The Court of Appeal held that the Adjudicator was correct in the approach of considering the matter based on the material before the Adjudicator. It was also considered that the issue of reasonableness left room for reasonable differences of opinion. The Court of Appeal found for the lot owner.

High Court

The High Court held that the function of the Adjudicator is not to seek to strike a reasonable balance between competing parties positions but rather to focus on whether the decision of the body corporate was unreasonable. Thus, the approach considering whether a decision is reasonable “on balance” is incorrect. The High Court went on to hold that reasonableness under the BCCMA is not an approach of what is fair and reasonable when considering some standard of sympathy or altruism applicable between lot owners. Instead it was held that unreasonableness is to be determined in the context in which a lot owner exercises their right to vote, having regard to that lot owners’ interest in the scheme.

“Nothing in the BCCM Act suggests that a lot owner may be required by an adjudicator to assist another lot owner to enhance that lot owner’s interest, or be regarded as acting unreasonably in declining to do so, at least where the enhancement of the proponent’s interest is reasonably viewed as adverse to the interests of the opponent”. The appeal was allowed and the decision of the Court of Appeal was set aside. The balconies stand today as a monument to judicial views about when lot owners can make a decision that is a reasonable one, even if in the eyes of others, it is not. It ought to be remembered too that this case is not about section 94 of the BCCMA per se. The matter in dispute is whether the opposition of lot owners to the proposal was unreasonable, bearing in mind that the application to the adjudicator brought about the question of what orders could be made. Schedule 5 of BCCMA includes Item 10 which deals with resolutions without dissent. The test to succeed on a failed motion is whether the opposition to it is unreasonable in the circumstances (our emphasis). The strata community cannot expect this to be the last instalment in disputes arising from the application of the test of

reasonableness. Body corporates pine for more certainty on the issue and owners and third parties may wish that their ‘fair go’ approach to adjudication should often fall under the cover of reasonableness. While some representative bodies have gone some way to framing the way forward for the industry to clarify this central principle of strata law in Queensland, (such as the Open Letter on Reasonableness recently issued by the Unit Owners Association of Queensland Inc. here), the success of such initiatives will require industry participation. It is difficult to argue with the proposition that the more clarity there can be around “reasonableness” as a legal concept under the BCCMA, the better for all stakeholders. So, to that extent, this case has assisted, but it won’t be the final word. Perhaps consulting a dictionary and using common sense might save some time money and anxiety.

This article was contributed by Byroms lawyers

SUMMER 2018 - 19 UNIT NEWS

FEATURE STORY

Hints for buying a unit or townhouse

hen you buy a unit or townhouse you become part of a body corporate, which is governed by the Body Corporate and Community Titles Act 1997, and the Accommodation, Standard or Small Schemes Regulation Module which is applicable to the scheme. All owners are members of the Body Corporate and share the ownership of common areas such as pools, lifts and stairways. They share the financial responsibility for the maintenance of common property along with other anticipated long term costs such as painting. Contributions are usually paid quarterly in accordance with the contribution schedule. Before signing a contract the buyer should receive and sign a “Disclosure Statement”. The statement lists the name of the secretary and/or body corporate manager, current annual contributions, lot entitlement, insurance details, improvements to common property that the owner is responsible for, the regulation module applying to the scheme and body corporate assets on register over $1,000.00.

“Before signing a contract the buyer should receive and sign a Disclosure Statement.” 36

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It is recommended that you carry out the following:

a. Obtain a “Body Corporate Information Certificate” from the secretary or manager of the body corporate. The certificate sets out annual contributions, number of instalments, dates for payment, discount if any, penalty if any and any contributions unpaid. b. Obtain a copy of the Community Management Statement from the Dept of Natural Resources. This document describes the scheme and any future development, it also includes the Interest Schedule, Contribution Schedule, By Laws and allocation of Exclusive use areas. c. Check the Contribution Schedule entitlement of the lot you are purchasing and that of others to compare differences in contributions. d. Conduct a search of the body corporate records. e. Obtain copy of the minutes of the Annual General Meeting, financial statements and the current budgets. f. Obtain a Certificate of Insurance

Ensure that the body corporate has in place:

• Adequate insurance to cover common property, assets and placement of fixtures and fittings. • Public liability insurance at least $10,000,000.00 • Office bearers liability insurance for committee is recommended • 10 year sinking fund forecast to cover the current financial year and an anticipated amount to cover capital expenditure over the next 9 years. • Adequate funds in the sinking fund to cover anticipated capital maintenance. (this reduces the need for a special levy). • Separate accounting records for administrative and sinking funds even if the funds are held in the one bank account. • Roll of lots and entitlements (details of original owner, current owner, contribution and interest schedule, lot entitlements & mortgagee in possession) • Register of assets (body corporate assets valued over $1,000.00) • Register of authorisations affecting common property (occupation authority given to service contractor or letting agent & improvements to common property made by an owner for their own benefit) • Register of engagement and authorisation (ensure that contracts with body corporate / building managers and service contractors are legal and current) • Register of allocations under exclusive use by law

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Check out the following building Issues:

• Is the building used for transient short term accommodation – permanent residents in residential buildings used for transient accommodation can suffer stress, anxiety and social alienation being unable to escape the environment in the building. • Find out what Building Code of Australia (BCA) classification the building is – class 2 or class 3. If it is class 2 it should be a residential building, but check and see how it is being used, or get a written statement from the real estate agent if you are buying off the plan. If it is a class 3 building you know it will be a holiday letting building. • Check the Development Approval (DA) conditions that apply to the building and the Council Zoning. There have been some purchasers caught by Council zonings banning permanent residents. DA conditions will determine uses that have to be complied with for the life of the building. • Ask what caretaking contract has been sold to the Resident Unit Manager (RUM)/ caretaker – Be wary of 25 year contracts (10 years with a 15 year extension) you will be stuck with an annual inflation clause of at least CPI and possibly 5% or greater. Owners will also have no control over who is appointed as a new caretaker. • Read the by-laws carefully. • What is the unit owner turnover rate – high turnover can indicate an unhappy building or other problems that have not been disclosed. • If purchasing off the plan or in a new building ask about the developer and the builder – Are other purchasers happy? Have prices for their last project deflated or inflated? • Check ownership of air space above the building or land below the lowest basement level.

• Have a building inspection completed: o Check the soil the building is being built in o Check the plumbing standards o Check the 100 year flood levels o Is the basement likely to flood? o Are the electrical power rooms high and dry? o Are other services well designed and disaster proof? o Are the fire services in compliance with BCA and State regulations? o Is the building sealed for water leaks – roof membrane of the best quality and flexible paint to the other external surfaces? o Does the sound proofing – up down and sideways comply with the BCA and Australian standards? o How long are the warranty periods for the construction, water proofing, plant and equipment, carpets, painting and elevators? o Is the garage venting system running 24/7 or does it have CO2 monitors to turn it on only when needed? o Is the basement below the water table requiring pumps to run to keep it dry? o What is the fail safe system in the event of power failure? Is the bulk water storage on the roof or in the basement? o What happens when the electricity supply fails – does the building run out of water? o Who owns the hot water boilers and storage tanks - Is it the energy supply company or unit owners? Where is the hot water plant located? If it is on the roof pumps will be required to pump the hot water to the units. o Is the building energy efficient? Does it have solar electricity and solar hot water boosting? o Is each unit separately metered for electricity, gas, cold water, hot water, air conditioning?

General: You can ensure that quality fitting and fixtures (unless otherwise stated in the contract) such as curtains, blinds, light shades etc. remain and are not changed from what was there when you inspected prior to signing the contract by taking photos. Also if buying a furnished unit or

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townhouse it is recommend that you have the brand and capacity of fridges etc. written into the contract. Make sure your solicitor forwards a Form 8 notifying the body corporate of change of ownership. These notes are for discussion purposes only and are not offered as and should not be taken as advice in any form. To obtain a more detailed understanding of the law, seek advice from a competent legal practitioner

SUMMER 2018 - 19 UNIT NEWS

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Maintenance of Common Property by Michael Byrom, Byroms lawyers

Bringing clarity to the muddied waters ...

he responsibility for repairs and maintenance within a body corporate is widely disputed. Whilst the legislation seems to be quite clear, there are distinctions between those things that a lot owner must do and those that fall under a body corporate’s obligation. A body corporate is responsible for maintenance of common property. The Body Corporate and Community Management Act 1997 (BCCMA), section 152, states that:

“the body corporate for a community titles scheme must administer, manage and control the common property and body corporate assets reasonably and for the benefit of lot owners.” Each body corporate scheme is also recorded through its Community Management Statement under one of five regulation modules, all of which state:

“the body corporate must maintain common property in good condition, including, to the extent that common property is structural in nature, in a structurally sound condition.” The relevant plan types in strata living are the building format plan and the standard format plan. Regardless of which plan applies to your scheme, the body corporate must maintain utility infrastructure such as any pipes, cables, wires, sewers and/or drains that supply a utility services to lots or common property in the scheme. However, if the

UNIT NEWS SUMMER 2018-19

scheme was created under a building format plan, the body corporate’s obligation extends to doors, windows and associated fittings separating a lot from common property as well as railings, parapets and balustrades on the boundary or a lot and common property.

Of course, there are exceptions to these statutory obligations. A body corporate is not responsible for maintaining utility infrastructure which may be situated on common property but only services an individual lot – this could include hot water systems, washing machines, clothes dryers and air-conditioning units. A particularly contentious issue is water damage. One such example arose in the matter of Les Colonnades [2015] OBCCMCmr 173 (9 April 2015). The dispute covered water damage from faulty or failing roofing membranes. The lot owner claimed that the body corporate had failed to maintain the roofing membranes, causing damage to the balcony situated on his lot. The dispute involved determining whether the body corporate was responsible for the cost of repairs to the balcony, and, if so to what extent. The adjudicator decided that the lot owner had failed to maintain his tiled balcony, which may have caused damage to the underlying waterproofing membranes. The adjudicator agreed with the body corporate’s submissions that the tiles on the balcony where the responsibility of the lot owner, and that the body

corporate was not liable for the cost of maintaining them. Whilst the waterproofing membranes contained underneath the titles were the body corporate’s responsibility, the associated repairs to the balcony were not. Understanding the concepts:

To reduce the risk of dispute it helps if lot owners and bodies corporate have a clear understanding of rights and responsibilities. The table below may help to explain these: Boundaries

For a Building Format Plan: measured from the centre of walls, floors and ceilings. For a Standard Format Plan: will be in the ground and defined by surveyor’s marks.

Building Management Statement (BMS)

A document used to govern how shared facilities are accessed, maintained and funded. A BMS is used where you have a mixture of commercial, residential and retail lots in the one building.

Common property

Common property is all land in a Community Title Scheme (CTS) that is not included in a lot.

Exclusive use area

An exclusive use area is an area of the common property which has been allocated for use by a particular lot owner exclusively. These allocations must be recorded either on title or within the Community Management Statement. Once recorded, this effectively becomes an extension to the relevant lot and others may not use this area. The lot owner is responsible for any maintenance of the allocated exclusive use area.

Single Lot

A lot is a lot under the Land Titles Act, and generally refers to the area that one person owns within the CTS. This area is the responsibility of the particular lot owner. That owner must maintain the lot

Maintain

Take action to preserve in good order, retain in similar condition.

Private yard

A private yard is one that is registered on title as belonging to the lot owner, and typically are small paved courtyard areas. The responsibility for maintenance of a private yard lies with the lot owner.

Replace/Repair/ Improve

Adjudicators have used the words “replace”, “repair” and “improve” synonymously with the meaning of “maintain”.

Shared area

Shared areas form part of the common property. These may include stairways, lifts and foyers, gardens, pool areas and gyms.

Works of a capital nature

Works requiring a lump sum payment for replacement of substantial items or fixtures; expenditure that is not of a recurring nature.

A thorough technical understanding is key to apportioning responsibility between the body corporate and individual lot owners in each case. Parties that are unsure of their respective responsibilities will go some way to resolving potential disputes by investigating physical facts on what is and is not common property infrastructure. Any legal advice that may be needed is better served on technical facts that are settled.

This article was originally written for Byroms lawyers.

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Lift Maintenance Pricing

SPONSORED CONTENT

by Tony Hazeldine, Lift Logic

Can a maintenance price be too low? It depends on the outlook of the lift owner. If, for example, the original owner/developer of a strata complex has only a short-term outlook then any reduction in establishment costs is a bonus. The developer can move on and leave it to the body corporate to sort out. If the lift owner is the body corporate and in it for the long haul, then the price can be too low. The long-term owner needs maximum operational life to delay expensive repairs or modernization costs.

Low prices paid to the lift company may still create profit ... but at the owners’ cost It is simple: do just enough to keep the level of reliability to a tolerable level so the customer doesn’t complain about failures during the early stages of the life-cycle of the lift - and stretch component replacement out to when inevitable component failure stops the lift all together. If the need for modernisation is then brought forward because of inadequate maintenance, all the better. More work for the lift company.If motor vehicles were maintained on the same basis, the roads would be littered with cars stopped with trivial problems due to blocked air and fuel filters. Some would even be mechanical write offs because of broken fan belts “cooking” the motor or a broken timing belt smashing the valves into the pistons. Lift companies are not Robinson Crusoe In recent times the multinational lift companies have focused on increasing their market share, which requires close attention to price reductions to get their foot into the door. Not much different from how Coles and Woolworths operate: a lot of hype about quality and service but fundamentally it is mainly about attracting customers on price and looking for “ways” to retain margin. The following is an unfinished true story … with no happy ending in sight for anyone A holiday-rental hi-rise complex with three lifts had one lift shut down for seven months because of a dispute between the owners and the lift maintenance company [“X”]. About seven years ago, X was awarded the maintenance contract from another lift

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maintenance company [“Y”].

X won the contract because its bid was lower than Y’s. In fact, it was too low… lower even than the cost of the labour and material needed to properly maintain the lifts over the life of the 6-year contract. Cheap price resulted in cheap, band-aid service, over the next 6 years. And this is where it starts to get really ugly. When the maintenance was re-tendered six years later, Y submitted a price that was a third lower than the already too-low price that X had tendered back in 2009. Not to be outdone, X price-matched Y and retained the contract. People stick with the contractor they know rather than take a chance on the unknown, and this body corporate did just that. The body corporate did ask a lot of questions of X before awarding them the new contract, but they didn’t know enough about lifts to understand: (1) The band-aid maintenance over the previous 6 years by X had seriously compromised the life span of the 3 lifts: any one of the three lifts could fail anytime soon; and (2) The new contract price was simply not commercially viable. What had been a loss-leader back in 2009 was now a doorway to disaster. Six months into the new contract X switched off one of the lifts, claiming the safety gear was not operational. The owners quite rightly insisted that it was the responsibility of X to inspect and lubricate the safety gear, and insisted that any rectification work was the responsibility of X. X responded with a quote for repair, claiming the problem was due to an external cause (corrosion) and therefore not covered under the contract. The repair price quoted (for one lift) was a jaw-dropping 30% higher than the annual maintenance charge for all three lifts. Not surprisingly, the owners were somewhat annoyed by this turn of events and engaged a solicitor to write to the lift company. X refused to budge and was adamant that unless the body corporate agreed to pay for the repair then the lift would stay off, hinting that the other two lifts still in service had the same problem. The owners continued to argue with X, and the building put up with disruption during

the September school holidays, Gold Coast 600, Schoolies and the Christmas / New Year holiday period. Towards the end of January, increased pressure was applied to X, resulting in contract termination. The body corporate then engaged another lift company [“Z”] to repair the safety gear and to provide short-term maintenance and breakdown service. The safety gear on all three lifts was lubricated, made operational and tested by Z. Within three days, all three lifts were operating, at a third of the price quoted by X to repair just one lift. Things still aren’t finished. The body corporate must now obtain two quotes for a new long-term maintenance contract, and hold an EGM to approve the new contract. The fallout from the early termination of X is unknown. A sensible approach by X would be to pull their head in and walk away. However, some lift companies have a habit of thinking they are always right and the customer is there for the lift company’s benefit. The Moral Of this Story Is ... If a price is too low, then the contractor will look for every opportunity to claw back margin. Lift maintenance contracts are drafted by the lift maintenance companies: they are onesided and favour the lift company. The contract usually gives the lift company the overriding right to decide fact, and they tend to err on the side of their profit margin. The body corporate should read and understand the contract before signing, and make sure that any non-standard extras or “promises by a sales person” are written into the contract.If there any doubts, and there should be for most bodies corporate, consult an independent lift consultant. A few extra $$$s now, could save you a fistfull of $$$s later.

For further information

Tony Hazeldine of Lift Logic Pty Ltd Mobile 0418 715 546 email tony@liftlogic.com.au Website liftlogic.net.au

SUMMER 2018 - 19 UNIT NEWS

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To Market, To Market …

here is certain inevitability about the life cycle of body corporate managers (BCM) and their contracts.

You inherit a BCM from the original owner (developer) generally for the maximum term of three years. Then, before you know it, many years have passed and the inherited BCM is still there. Nothing much changes. It’s like having a pair of comfortable old slippers around the house. The actual people from the BCM may come and go but generally with little fanfare or disruption. And even if a new ‘face’ from the BCM irritates, you can always arrange for a replacement. The BCM’s contract has a real ‘cookie- cutter’

UNIT NEWS SUMMER 2018-19

charm offering the same old industrystandard terms and conditions from one renewal to the next. And because they are so standard and seemingly so innocuous, you don’t really pay much attention to them anyway, other than the minimum fee quoted for administration fees, which is only a portion of the total charged.

So, you may keep a watchful eye on any discordant increase in the BCM’s administration fees. But what the heck… the annual increases are generally no more than about 5% and no cause for alarm.

But what if your BCM’s fees have been bloated from the start?

What if the developer offered the original 3-year BCM contract to a favourite BCM without going to competitive tender and without regard to value for money? The value of the administration fees set out in that 3-year contract are of little consequence to the developer, because these fees are going to be paid by the real owners, not the developer. And also, what if the BCM’s set-up fees were not paid directly by the developer, but instead were added onto the already bloated fees included in the original 3-year contract. Double whammy! In principle, there is nothing wrong with this practice. The BCM’s set-up costs have to be paid for sooner or later. Either they are paid upfront to the BCM by the developer and are reflected in the sale

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“If the body corporate does not go to open market at the very first opportunity to establish the real cost of their BCM’s services, there is every likelihood they will be paying too much.” contract is the same as previous except for a slight increase in the fees, and it is just so easy to transition from one contract to the next. If the body corporate does not go to open market at the very first opportunity to establish the real cost of their BCM’s services, there is every likelihood they will be paying too much. And the longer the body corporate leaves it by renewing the same old contract with the same old BCM year after year, the longer they will be paying too much.

It’s a bit like putting lipstick on a pig

There is nothing the body corporate can do about this during the life of the first BCM contract. A contract is a contract and the owners are stuck with it until end of term.

The real danger lies in doing nothing at the end of the first 3 year contract. At the end of first term when your BCM seeks a renewal, the relationship is already established and everyone is feeling comfortable with each other. The new

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Let’s look at some data, sourced for three recent tender contracts:

No matter how much lipstick you apply, no matter how many times you do it, at the end of the day all you’ve got is a pig with lipstick.

Tender 1: Incumbent tendered $15,170

Going to market

Tender 2: Incumbent tendered $26,300 pa

The UOAQ has been associated with a professional BCM tender service for several years now, long enough to identify a pattern with a certain type of BCM ie the incumbent ‘big factory’ BCM who was inherited from the developer. price of each unit to the first real owners, or they are secreted amongst the professional fees paid by the real owners to the BCM over the next three years.

resentment by the body corporate for what they regard as excessive fees in the past.) The successful tenderer is nearly always an owner-operated BCM, where the client manager is rarely more than one step removed from the owner of the practice. 4. The successful tender is often not the cheapest. It is more about a high service level than value for money.

Let’s look at some trends: 1. If the incumbent BCM is invited to tender, and does tender, it is always be less than what that BCM has been charging up to date. Always! Even if the body corporate wishes to retain their BCM, it will now be at competitive rates determined by the market, not the original developer. 2. The reduced tender from the incumbent BCM is never the lowest tender received. Never! It seems the ‘big factory’ BCMs consistently cost more than the smaller owner-operated BCMs, even when forced to compete in the open market. 3. The incumbent BCM is rarely successful. (There appears to be a residual

pa which was less than previous, yet still $4,500 more than lowest tender of $9,950. compared to previous of $35,400, yet still $2,000 more than lowest tender of $24,200. (These savings are consistent with all other tender projects involving this particular incumbent BCM.)

Tender 3: Incumbent tendered $21,600 pa compared to previous of $26,500, yet still $8,400 more than lowest of $13,200. All three long-term incumbents were unsuccessful.

There is another trend. Each body corporate has commented on how good their new BCM is, and how much they regret not going to open market sooner. Would have saved them a lot of money, and avoided a lot of grief over the years. There are many good BCMs out there who provide value for money. We can help you find them.

SUMMER 2018 - 19 UNIT NEWS

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Is your scheme needlessly registered for GST? The UOAQ is continuing to carry out in depth investigations into the financial waste that some schemes continue to accept without question, probably without knowing! This will cover – (a) Whether your scheme is needlessly registered for GST; (b) If so, what are the financial disadvantages; and (c) What can be done to overcome this? The usual threshold for registration for GST is having a turnover of $75,000+. However, the Australian Taxation Office (ATO) in May 2016 issued an Interpretative Decision (ATO ID 2016/1) where it has lifted the minimum threshold from $75,000 to $150,000 for ‘non-profit’ bodies. The ATO clarifies that its definition of ‘non-profit’ bodies may be extended to include body corporate entities where it is clear that there will be no distributions to owners. This definition may very readily apply to most bodies corporate (BCs). The UOAQ has been collecting financial statements from over 150 bodies corporates which it uses to provide financial evaluations of individual schemes against this benchmarked data. A brief review of this data confirms that there are many schemes that appear to be needlessly registered for GST. The disadvantages of needless registration for GST: 1. As GST is collected on the net of income less expenditure. if a BC is running at a net surplus for any financial year, then it is needlessly paying GST

UNIT NEWS SUMMER 2018-19

on behalf of its owners on this surplus. 2. This results in Business Activity Statements (BAS) being prepared and lodged on its behalf, usually quarterly. These are usually prepared by the Body Corporate Manager (BCM) for additional fees which can often be in the order of $800-$1,200 per annum. 3. The net cashflow upon which interest may be earned is reduced by both the payment of the GST itself, and the BAS preparation fees. [Above investigation, carried out for a scheme of less than 25 lots, found out that the GST registration is not necessary. Consequently, the de-registration resulted in total annual financial benefits of approximately $1,200]. The first issue to assess is whether the scheme’s current GST registration necessary. The UOAQ provides such assessment free of charge for all our Building Members. All that is required is to provide a copy of the last (audited) financial accounts of the BC for appraisal (e.g. those distributed to owners for the latest AGM of the scheme). For BCs who are not already Building Members (BM), see details below of the benefits of this service which has a money back guarantee to ensure that the range of financial benefits provided exceeds the cost of Membership. Since this service was first introduced over 5 years ago, there has

not be a single instance of the ‘money back’ guarantee ever being invoked due to the large excess of financial benefits provided over the cost of membership.

Range of Financial Benefits under Building Membership of UOAQ. 1. Usually lower cost and more extensive insurance cover with savings of up to 20% of annual insurance premiums. 2. Access to independent professionals providing expertise in building services such as lifts, valuations and reports. 3. Earning Interest on working account funds where usually NIL interest otherwise applies to the usual arrangements set up for the BC. 4. Provides open market tender services for Body Corporate Managers with usual savings substantially in excess of the fee for this separate service. 5. Provides mentoring services to BC Committees wanting such input. In order to demonstrate the significant excess of the financial benefits over the cost of Building Membership (BM), see attached table which is actual data for a range of 6 unidentified different sized Bodies Corporate, (from around 10 lots up to around 300 lots) which have participated in the range of services provided, the average benefits per BC being just under $20,000 each, for an average annual BM cost of $643.

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We Cannot Sell Unless You Give Us a Top-Up

Pleas for Top-Ups … One of the Many Lies in Stra-Ta-Land We Cannot Sell – Unless You Grant Us a Top-Up We have all heard the old jokes about the 3 greatest lies in the world and their many variations all tailored to suit the audience of the day. In our Stra-Ta-Land, one of the most frequently heard ‘lies’ is the caretakers’ plaintive claim that “We cannot sell our Caretaker’s Agreement ... unless you grant us a top-up”. In fairness, calling them ‘lies’ may be a bit harsh. “Shameless half-truths” is closer to the mark. The first part of the caretakers’ claim is certainly true ... as is the last part. But, it really is the muted ‘Gorilla in the Middle’ which gives lie to the caretaker’s claim. What the caretaker is really saying is this: “I cannot sell my Caretaker’s Agreement for a lot more than it is currently worth unless you give me a 5-year top-up.” Conversely: “I will sell my Caretaker’s Agreement for a lot more than it is currently worth once you give me a 5-year top-up.” And the operative word here is ’give’. The lot owners gift the top-up to the caretaker; then the caretaker sells the gift for a big bunch of $$$s and moves on. The reality is the caretaker can always sell what is remaining of the original contract for what it is currently worth…this is what a free market is all about. It is just that the ‘remainder’ is normally worth less than the

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‘original’, and caretakers do not want to accept this.

Depreciation Is a Cost, Not a Fountain of Eternal Youth Most people understand the concept of ‘depreciation’: they understand it is a real cost, not just a nominal tax dodge. Most people accept that when you buy an asset with a life expectancy of say, 25 years, its value is going to depreciate with the passage of time. And this applies just as much to contracts with a set term as it does to items of plant with an expected working life, e.g. a truck. Strata caretakers do not live by these rules. Their reality requires regular, automatic refreshments of their long-term agreement back to its original term, at no cost to the caretaker. Theirs is an artificial reality. Imagine buying a truck with a 25-year life expectancy, then going back to the dealer 5 years later and asking for a complete restoration of the truck back to its original condition, for free. This may seem bizarre to those uninitiated in the subtleties of Queensland’s strata practices, but this is what caretakers in Queensland have been getting away with for years… and up to recently, most bodies corporate obliged the caretakers and their premature top-up requests without care or question. Not anymore. More and more owners are discovering that the only people who benefit from premature top-ups are the caretakers… not the owners. There is nothing surprising here; all gifts, by their very nature, flow in one direction. What is particularly irksome here is that the gift to the current caretaker by the current owners really impacts on the future owners, whoever they may be years down the track. The current caretaker takes the gift and moves on… the future owners pay.

All you have to do is say ‘No Top-Ups’ and keep on saying it until you can eventually decide for yourselves what is best for your complex… and then the benefits will start flowing to you, the owners. Put simply, as an owner you are free to say ‘no’ after considering each request. This is not a position taken against caretakers, as the UOAQ is often accused of. The well performing caretakers are a benefit to owners. This is a position taken against long term contracts and the consequences for owners, especially: - ever-increasing costs (where a contract compounds by at least CPI every year); - an inability to achieve updated terms for the current needs of the scheme (particularly where the terms were drafted 25+ years ago, sometimes even before the building was finished, mostly with non descriptive and vague duties which are a source of constant dispute between owners and caretakers). The proposal to extend is generally accompanied by the statement that extending is the normal course of action. There is increasing experience of schemes rejecting extensions in order that they can proceed to self-management on expiry. We are seeking schemes that have not granted extensions to advise us of this outcome. With the permission of the scheme, we can list these on our website to publicize this positive action for the benefit of owners which could favourably impact on the market value of lots in the scheme. Please contact us at knowledge@uoaq.org.au.

The UOAQ has already helped many complexes along this journey. It can also help you. More and more owners are discovering the substantial financial benefits available to their complex when they allow their caretaker’s agreement to run its course and expire. Generally, these savings translate into reduced levies by at least $1,000+; i.e. per unit, every unit…per year, every year.

SUMMER 2018 - 19 UNIT NEWS

Help us, Help .

Knowledge. Support. A voice. For individuals …

“As a UOAQ member I feel empowered. And I support the association that supports me!” Rina, UOAQ Individual member, QLD

For committees …

“For only $10 per owner my committee gets access to industry experts and help in their volunteer role. Building membership offers great value for the whole scheme. I urge each owner to support their committee to join - the benefits will surprise you” Barry, UOAQ Building member, QLD

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