Does Australia’s Strata Sector Lack Accountability?

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Friday, July 8th, 2016
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Of all of the negative stories about strata managers, those involving clients of Jason Christopher Hext of Strata Management probably create the most cause to be angry.

Having been found guilty of embezzling $67,000 worth of client funds from seven strata plans, he was originally sentenced to 12 months’ imprisonment. Last year, his sentence was in fact increased to 18 months by the Parramatta District Court but commuted to a home detention arrangement.

Whilst cases of outright fraud such as this are by far the exception, fortunately, concerns within the strata community more generally about what are often seen as inadequate levels of accountability on the part of strata managers appears to be growing.

Arguably, the most common area of concern surrounds commissions which managers receive in respect of their role in arranging owners corporation insurance. First, there are issues associated with the disclosure. In one case in Victoria, for example, a submission of a 100-unit owners corporation to a review of owners corporation management regulatory arrangements in Victoria described a situation whereby their manager had categorically failed to disclose commissions received for at least five years.

In Queensland, meanwhile, insurance consumer advocate Margaret Shaw talks of management agreements which state the body corporate manager may receive commissions of anywhere between five and 20 per cent – sometimes up to 25 per cent. The actual amount, Shaw says, is rarely indeed disclosed.

More fundamentally, Owners Corporation Network executive officer Karen Styles says, any receipt of insurance commissions provides a disincentive for managers to approach insurers who do not provide commissions – a phenomenon she said had been borne out across many industries. Moreover, thanks to GST and stamp duty, the ‘grossed up’ cost of the commissions exceeds that which would have been paid under a fee for service model to a manger or insurance broker.

Furthermore, Styles suggests that in most cases, insurance brokers will be in a better position than OC managers to arrange  insurance as they typically visited the property in question and generally had the licence and expertise necessary to provide advice. Many OC managers, Styles says, do not always visit the sites in question and typically are not likely to possess the licence or insurance expertise required to provide financial advice.

Outside of commissions, Styles says there are other areas where accountability is often lacking. In many cases, separate bank accounts for individual owners corporations were non-existent – the manager in question instead running the finances of multiple owners corporations from individual bank accounts, making it difficult for owners to see where OC money is going. Moreover, enforcement efforts on the part of regulators are often not as proactive as they should be and could well be beefed up, she said.

Greg Honeyman, director of strata specialist outfit MBCM Ballarat disagrees. Honeyman agrees that there remain challenges within the industry and that all who operate as an owners corporation manager should be required to be licensed, adequately educated, and to be a member of Strata Community Australia, but says there is no inherent problem with managers receiving commissions with regard to insurance as long as these are adequately disclosed.

Furthermore, he stresses, as a strata manager, he does not make decisions for people but merely provides information from which an owners corporation can make decisions.

In contrast to arguments about brokers being the best party to assist with insurance, Honeyman counters that in fact this indeed requires an in-depth knowledge of the property and things such as the way the owners corporation is structured, properties of the premises (tiles, wall and floor materials) and the date of construction (because of asbestos) – matters which require an in-depth understanding of the premises in question.

“(As a strata manager,) I know my owners. I know the properties – I visit them regularly. I can easily get them formally valued if the owners require it,” he said. “Because I have a history with these properties, I understand what needs to be done and what they are made of – are they solid brick, brick veneer or any other form of construction? I also understand about common property and of course common property is more than just the driveway. Common property can be shared services so everything that is under the concrete driveway, whether that be storm water, utilities are all part of common property and must be insured.

“There are a range of considerations that one has to look at when preparing quotes, and to expect a broker to simply do that when they have no knowledge of the property is just asking for problems.”

In terms of overall industry practices, Honeyman stresses that he can only comment on an anecdotal basis about the situation outside of Victoria, but says a large part of the problems which occur through strata can be put down to ignorance on the part of not only owners but also everybody involved within the strata supply chain.

Oftentimes, he said, real estate agents will fail to tell prospective purchasers that what they are about to buy is subject to a strata arrangement, developers are unaware that they were indeed building an owner’s corporation and do not understand the requirements as to when to set an owners corporation up, local councils would issue planning permits without advising developers that this is an owners corporation, and conveyancers and solicitors will transfer property without advising about the need for an owners corporation certificate outlining any issues associated with the property in question.

All these things could be avoided, he said, if governments ensured that the ignorance factor was addressed.

“Every single organisation which is involved in the development or conveyancing of the property should be by legislation be required to provide adequate information to their clients,” Honeywell said. “When you ask me, ‘is (media attention on strata) overblown?’ To a degree, clearly, there is an issue, but the issue simply wouldn’t exist if people understood what they have bought. It simply wouldn’t exist. This is the core problem of the entire industry.”

Finally, as demand for strata managers heats up amid the growing popularity of multi-residential living, Styles says there is a growing challenge surrounding a potential shortfall of suitably qualified people to do the job.

She hopes a number of people trained in the legal profession might consider this area, as a legal type of mindset would prove invaluable within an OC role.

“That needs to be address quickly,” she said. “Demand is growing very fast.”

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