Victorian Owners Corporation Managers Running Amok 3

Friday, May 27th, 2016
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The vast majority of Victorians and indeed Australians who own property in multi-residential settings as part of an owners corporation (OC) would expect their owners corporation manager (OCM) to be competent, diligent, accountable and transparent.

Yet in a significant number of instances, it seems this has not been the case.

Owners within one (unnamed) block of 100 apartments in Victoria were shocked to find out by way of accidental disclosure that their owners corporation manager had secretly been receiving undisclosed commissions paid out from the insurance broker/building insurer on one occasion. The same manager had on a separate occasion received undisclosed payments from a third party in relation to a contract into which the OCM entered with the developer.

According to another owner, his OCM has refused repeated requests to provide access to bank statements in order to substantiate the monthly report on operation of the account. This raised significant levels of suspicion given that the owners say there is prima facie evidence that funds were withdrawn from the account in amounts which are larger than those necessary in order to pay invoices rendered to the OC for the provision of services.

All this highlights what many in Victoria at least see as inadequate regulation of owners corporation managers. As part of a broader review into consumer property law, Consumer Affairs Victoria is now looking into the adequacy or otherwise of OCM regulation under the Owners Corporation Act.

Having come into being only 50 years ago, the concept of strata title as a means to allow individual ownership of part of a property combined with a shared ownership of common parts of the property through an owners corporation has expanded significantly along with the growth in multi-residential apartment living. Nationwide, around 270,000 strata schemes cover more than two million individual lots across Australia, according to Strata Community Australia. In Victoria, about 88,000 OCs affect 1.5 million owners and govern property to the total value of $300 billion.

Yet regulation, at least in Victoria, remains light at best, and some would say it is extremely lax. Despite managing significant amounts of money, OCMs operating within that state are not subject to any form of licensing regime involving minimum requirements in terms of training, financial or personal probity or continuing professional development. Instead, they are merely required to be registered, for which they must demonstrate only that they are over 18 years of age, are solvent and hold professional indemnity insurance.

Whilst being required to act in good faith and with reasonable care as well as to avoid conflicts of interest, meanwhile, they are also not subject to any form of specific disclosure regime with regard to matters such as commissions, benefits, rebates and discounts from service providers when entering into contracts with third parties.

Some of the terms of contracts, too, are questionable. Whilst the Owners Corporation Act allows OCs to revoke a manager’s appointment by ordinary resolution (50 per cent agreement) which can be made at a meeting or via ballot, for example, some management contracts require a special resolution (75 per cent agreement) or unanimous resolution (100 per cent), or for resolutions to be passed only at a meeting as opposed to a ballot (which means those unable to attend in person are denied opportunities to vote). Many developers, too, are taking advantage of their effective control of OCs in the early years, whilst lots within the development are being sold to enter into long-term management contracts with associated entities. These contracts, compounded in some cases by a process of automated renewals, mean getting rid of unsatisfactory managers can be difficult.

Financial accountability, too, can be lacking. Currently, the Owners Corporation Act does not require the money from the OC to be kept in separate accounts, only for it to be accounted for separately. Rogue managers, as well, have reportedly billed members for costs associated with utilities they did not use or for more than what was actually spent (in collusion with the contractor).

Owners Corporation Network executive officer Karen Stiles acknowledges that there are a number of good managers operating within the industry but says the industry as a whole evolved from those managing the rent roles within real estate offices who started managing buildings and needed to move beyond cottage industry status toward being a profession. For this to happen in Victoria, she said, a robust licensing regime coupled with strong enforcement measures is needed along with other changes such as three-year maximum contract terms and insurance being arranged by an independent broker under a separate fee for service model as opposed to through commissions.

“Despite all the rhetoric, (owners corporation management is) still a cottage industry and it’s important that strata managers come up to speed with modern strata living,” Stiles said. “We are not talking about six packs anymore, we are talking about multi-million dollar buildings, multi-million dollar budgets, managing people and increasingly complex legislation.

“There is a trillion dollars (nationally) of the Commonwealth being managed by unskilled volunteers and executive committee members. These people need trusted advisors who are well trained and undertaking continuous professional development.”

Others agree that changes need to be made. Gerard Brody, chief executive officer of the Consumer Action Law Centre, said his organisation was aware of cases in which OCs, acting with their managers, have undertaken unduly harsh debt collection measures including legal action in order to recover owners corporation fees, and had often not had effective methods of communication in place with regard to different ways of ensuring those levies could be paid.

In some outer suburban estates, OC models have been set up, but some purchasers who have subsequently brought property within those estates have done so without understanding exactly what they are buying into. These purchasers have found that they are being made to pay large amounts of money into owners corporation fees or being subject to harsh penalties with regard to letterboxes, fences or gardens. Working out how and where to get help in the event of disputes, too, can be difficult and time consuming, Brody says.

He adds there should be a licensing regime with set standards for matters such as professional indemnity insurance requirements and the way in which members are treated in relation to debt collection. A one-stop-shop ombudsman service could help improve standards and remedy issues within the industry which can occur, he said.

Not all, however, are negative about the current situation. Tony Pena, chief executive officer of the Southbank Residents Association, says there are issues surrounding developers using their effective control of owners corporations during the early phase to lock OCs into contracts for matters such as management, electricity and internet. In one case, a contract locked the manager in place with CPI rate increases for several decades. In other cases, developers have stacked the OC whilst they owned large proportions of the properties prior to them all being sold and postponed the establishment of the maintenance plan and fund in order to avoid paying into the plan.

Nevertheless, Pena says, the majority of his members felt the current system was working effectively overall and required tweaking as opposed to radical overhaul.

“In general, the consensus amongst our members is that the current legislation supports us well,” Pena said. “There was not a lot of stuff where people were saying ‘this is wrong, this is an opportunity (for improvement).'”

Stiles, however, believes sensible changes are needed in order to help the industry transform and become a genuine profession.

“I think improving the legislation will support the good operators and the well intentioned managers and it will support the industry bodies in supporting them,” she says. “It will weed out the people who are dragging it down,” she said. “It needs to be a profession and managers need to feel proud of their profession.”

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  1. Kate Yeowart

    HI Andrew, An interesting article. Hopefully there will be a groundswell of support for the professionalisation of the industry but to date, this does not appear to have occurred. The biggest problem is that the courses being offered for professional credentials have little relevance to the actual management of Owners Corporations. The best courses are those presented by the REIV but unfortunately, these do not have recognition for professional credentials, despite the content being relevant, clear and informative. Kate

  2. Hi Andrew
    You managed to capture the essence of the most failures within the management industry.
    It's a well known fact that the buck stops with the Department of Consumer Affairs and all these issues can be addressed very easily if there is a will and insight.
    Great effort Andrew

  3. Michael Burhala

    Could not agree more. My company audits about 200 OCs a year and I would not be surprised to find that the majority of prescribed OCs which should have a financial audit carried out every year aren't even aware of this requirement! In addition to this, I find it totally ridiculous that some of the larger OCM have employed people with qualifications to carry out such audits and are using these employees to audit the OCs they manage! Hardly seems like an independent review to me! What I would like to know is who is charged with the responsibility of making sure that these requirements are complied with and are complied with correctly?!?! Hardly seems worth having these laws/requirements if no one is there to police or enforce them!