Embedded networks – the latest scam coming to a block near you

shutterstock_750163774.jpg

If crumbling buildings in Sydney and towering infernos in Melbourne are doing nothing else, they are drawing attention away from a sneaky scam that could cost new strata owners a small fortune over the years.

The problem is “embedded networks” and they represent long-term owner pain for developer and service provider gain.

The term initially came from deals done with energy suppliers that limited consumers’ abilities to switch suppliers to a cheaper alternative.  That is currently being dealt with through reforms in consumer law.

But there is a hidden version of this that has long-term implications for apartment buyers.

Every high-rise apartment block needs ancillary infrastructure like a fan-driven venting system, storm water retention tanks, lifts, lighting, garage gates, water pumps and heaters.

As purchasers, we take it for granted that these elements are provided as part of the building package. However, developers naturally look at any legal way they can save on building costs without damaging potential sales through cutting too many corners.

So a contractor who provides an essential component approaches the developer and offers to install that bit of the building free of charge provided the owners corporation pays inflated charges for materials and maintenance, over an extended period.

If the owners won’t sign up, the developer has to pay the going rate for the installation.

Many developers are seriously tempted.  They are getting an essential element of the building for free, effectively shifting that cost to unsuspecting apartment owners.

There is one obstacle, however; they have to get the owners to sign up and in most if not all jurisdictions in Australia, the developer can’t commit the eventual apartment buyers to any contracts before their first AGM (with the notable exception of Queensland and their totally immoral presale of management rights).

So the developer turns to someone, often the strata manager whom they’ve employed to set up the management systems and by-laws, as well as organise the initial AGM, and asks them to push the contract approval through at the meeting.

One strata manager told me that many of his colleagues fear that if they refuse, the developers will stop employing them. And they wouldn’t only lose future business in setting up new strata schemes, they’d also miss out on the ongoing strata management contracts that usually fall to them.

So strata managers can find themselves having to “sell” these maintenance contracts to unsuspecting owners as if they were the norm.

It’s not that hard to do. First-time owners of new apartments at their initial AGM, confused by all the agendas and by-laws and votes and committee elections, tend to go along with whatever the nice man or woman in the suit suggests: “It can’t be wrong or it would be illegal, right?”

And these aren’t insignificant figures. One example quoted to me involved an infrastructure maintenance contract at roughly double the going rate, and for 99 years.

It’s hard to say how widespread this practice is, but you can bet that if there’s a buck in it, it’s a trend that’s more likely to grow than go away.

Sadly, it’s just another example of an industry where some players view their customers the same way hyenas see gazelles at a waterhole.

However, there is a simple answer: if you are at the initial AGM of a new building’s body corporate, encourage the other owners to refuse to approve any long-term maintenance contracts until they’ve been reviewed by your newly elected committee.

Be a lion or be lunch.

2 Replies to “Embedded networks – the latest scam coming to a block near you”

  1. Sir Humphrey Sir Humphrey says:

    Long-time maintenance or any other sort of service contracts are almost impossible in the ACT. They are generally limited to 3 years. From memory I think they can be a perhaps two years longer for the first five years of a new OC but nothing like 99 years.
    Also, I think an embedded network is something quite different and there are strong consumer protections around them already. The embedded network I am aware of is where the OC negotiates a better price for an energy supply, usually electricity, on behalf of the owners. Rather than each unit paying a separate account with a retailer, the OC has an electricity meter for the whole site and pays for that one supply. Then the individual owners pay the OC pro rata for their consumption. This requires the OC to read meters but it might be able to that at lower cost than the retailer and multiples of supply charges are avoided. If the OC has a solar electric system behind its meter, the common property of the building and all the lot owners are likely to consume the entire solar production, thereby avoiding the retail price of electricity to the extent the building generates its own. The benefit is shared by all the owners since they collectively only have to pay for their share of the import by the building and the common property electricity costs are lower too.
    The Australian Energy Regulator has strict requirements that enable people to opt out of such embedded networks if they feel they can get a better deal by signing up with a conventional retailer.

  2. Avatar Jimmy-T says:

    This is now being discussed in the Flat Chat Forum

Leave a Reply

scroll to top