First it was “embedded networks” now it’s the pre-sale of management rights – it seems there are some NSW developers who don’t miss a trick when it comes to squeezing a few extra bucks out of naïve apartment purchasers.
In most states, it is illegal for developers to lock strata schemes into contracts before the first AGM of the building. That’s when apartment owners are allowed to accept or reject any contracts placed before them.
Even Queensland has this law – but with one exception: the pre-sale of management rights. Under that system, the developer takes a big chunk of money in return for giving the right to manage the strata scheme for up to 25 years to a company or individual.
Not only do the owners not get to choose their own managers, they have no say in the terms of the contract.
Adding financial injury to that insult, they have to pay a premium on their levies so that the caretaker-manager can pay back the money they borrowed to buy the rights from the developer.
Poor old Queenslanders, hey? Well, here’s the bad news – according to this article by a cross-border lawyer in a travel magazine, it’s already happening in NSW.
The article, which is actually encouraging businesses to follow suit, says one of our biggest developers is already pre-selling management rights. Now, this article has a couple of inaccuracies about NSW strata law so I wouldn’t set too much store by the fine detail.
For instance, it says there’s no limit on proxies in NSW, which is not true. It’s one proxy for every 20 units and managers aren’t allowed to use proxies to give themselves financial gain.
The article also says there’s no restriction on the length of building management contracts – again not true. There’s an initial limit of 10 years although they can be and often are extended.
The main thing is, you can see how the principle of the pre-sale of management rights could work, even though, strictly speaking, it’s highly dubious.
And it’s possible under the same regulations that allow the grubby practice of embedded networks.
What happens in those cases is that an infrastructure provider tells the developer they will install essential infrastructure for free, provided the developer gets the new owners to sign up to highly lucrative maintenance contracts of as long as 99 years (seriously!).
The developer then presents the contract at the first AGM, when the brand new owners who bothered to turn up are mentally wrestling with new concepts like by-laws, levies and pets.
The developer or, even worse, a compliant strata manager, tells the newbie owners that this is standard practice and unless there is someone super-savvy on the case, who is prepared to speak up, it goes through on the nod.
Now, I know strata managers who hate this. However, they are often pressured to mislead the owners, or at least stay silent, knowing that if they don’t, the developer will never give them another contract for setting up the strata scheme – a major part of their business.
If the AGM goes along with it, the developer has been saved a chunk of money and the owners have been locked into inflated, watertight maintenance contracts that will last long after they have sold up and moved on.
If the owners don’t agree, the developer has to pay for infrastructure that they should have paid for in the first place.
Which brings us back to management rights. If the Queensland lawyer’s article is correct in this regard, at least, developers will be able to present new owners with management contracts that they have sold on condition of their approval.
There is nothing illegal in this as the owners theoretically still have the right to refuse. Up in northern NSW, this is probably easier to achieve as, just across the border it is, indeed, standard practice.
But according to NSW Fair Trading, over 1000 new strata schemes are registered in the state every year, so the potential is huge for getting unsuspecting owners to agree to deals that benefit no one except the developers and the managers to whom they sell the contracts.
And now we know that the Fair Trading Minsier is at least aware of this.
“Although there’s no indication of issues in NSW with management rights contracts, we’re very aware of ongoing concerns around embedded networks in strata,” Minister for Better Regulation, Kevin Anderson told Flat Chat.
“The NSW government made changes to Strata laws in 2015 to limit developers’ powers and protect consumers before settlement occurs and we won’t hesitate to make further changes if the statutory review finds they are needed.”
To be fair, there are many developers who wouldn’t dream of dirtying their hands with such grubby deals, and we aren’t suggesting that the developer cited in the aforementioned article have done anything untoward. Also, there are plenty of strata managers who would have no part of it.
But there are enough opportunities for unscrupulous operators to fleece their clients for the government to take a long hard look at limiting all building management contracts to one, then three years, as they now do with strata managers.