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Management contracts that are 25-year shackles

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Imagine you’ve interviewed for a job and the call comes:  “you got the gig … we’re sending over a 25-year contract.”

Twenty-five years? That’s half the length of a working life.  However, believe it or not, there are strata contracts for that long in Australia today.

First, let’s backtrack a little.  Until the new NSW strata laws were enacted in 2016, strata managers could sign contracts with strata schemes for 10 years with an option of another 10 on top.

Since these contracts were approved at the first AGM by people who had never met each other, let alone the strata manager who was paraded in front of them (usually by the developer) there was occasionally a disconnect between what was promised and what was delivered.

The 2016 laws changed that to a much more sensible and equitable arrangement.  NSW strata managers are now limited to the first year of a new strata scheme’s life, followed by a maximum of three years per contract thereafter.

The strata manager who had helped the developer to set up all the bureaucratic systems for the yet-to-be formed owners corporation is usually given the first shot at the job, which is only fair. They then have a year to prove themselves before the owners get to decide on a longer contract … or not. 

The days of 10 years plus 10 will also soon be a thing of the past in Victoria where a three-year limit on strata management contracts is likely to be imposed when their new strata laws come in.

However, building facilities managers – the people who manage the physical challenges in larger blocks – have no three-year “shape up or ship out” limits on their contracts, either in NSW or Victoria. 

In the former the limit is 10 years, in the latter the limit is whatever the developer thinks they can get away with when they sell the contract to the building manager or owners corporation (strata) manager.

Yes, sell, because it seems NSW is the only one of the three eastern states where it is clearly forbidden to pre-sell contracts to service providers, when the people expected to pay for them have no say in their terms and conditions.

Which brings us to Queensland. There, developers pre-sell the caretaker management rights to their new buildings to operators who could range from mum-and-dad businesses who become a part of their community, to large companies with little personal connection to the buildings they service.

The one thing they have in common is that the apartment owners have no say in the terms of the contracts and little hope of rescinding them if the managers turn out to be duds.

Ten years ago, the last time the Queensland government took a serious look at the caretaker management industry, they estimated it cost apartment owners about $200 million a year in direct fees and rental commissions.

The industry’s value, guesstimated at about $5 billion, is propped up by contracts starting at 25 years with a 10-year option on top.

The whole caretaker management system in Queensland, and the inflated costs that are shifted to owners, is worth a closer look at a later date.

Further south, things are better but could still be improved.  I am a relatively recent convert to the belief that the benefits of having strata and building managers from the same company can outweigh the potential pitfalls.

Just give them all the same contract structures and it would make as much sense as anything does in this crazy world.

A version of this column first appeared in the Australian Financial Review.

3 Replies to “Management contracts that are 25-year shackles”

  1. Avatar TonyC says:

    Jimmy, true it is that in Queensland 25 year caretakers agreements are standard for strata schemes. I see a lot of them.
    If I can share this information.
    The developers sell them. Buyers are willing to pay big money for a 25 year cash flow with CPI increases annually. Typically, the fee is $1,000 to $1,200 + GST per lot per annum. That’s $275 to $330 per quarter in terms of a component of strata levies. This is for residential strata schemes. It covers cleaning the common areas including the garbage bin areas, the gardening, and minor maintenance.
    But the flipside is that the strata management agreements in Queensland are three year agreements for strata schemes. Strata management fees are modest. Typically the fee is $120 + GST per annum. That’s $33 per quarter. This is for issuing levy notices, collecting levies, holding AGMs and EGMs and preparing financial accounts.
    In NSW, strata managers charge a lot more than strata managers in Queensland, and do more.. In contrast, caretakers are cheaper – they are usually engaged annually (or are on continuing contracts terminable by one year or less notice). Their fees are about $700 per annum per lot which is less than in Queensland.
    My analysis leads me to conclude that the caretaker’s fees in Queensland are about 35% higher than they would be if the caretakers agreements were 3 years renewable instead of 25 years. That’s about $400 per annum.

  2. Avatar Jimmy-T says:

    This is now being discussed in the Flat Chat Forum

  3. Avatar OPERAKAT says:

    If I may quote this item from Melbournes’ DOCKLAND NEWS regarding management contracts in Victoria
    “VCAT declares that committees have the power to terminate an OC manager

    By Tom Bacon – Strata Title Lawyers

    Many high-rise buildings will be aware of terms embedded within an owners’ corporation (OC) manager’s agency agreement.

    These agreements permit a manager to be appointed for a period of five years (with subsequent options) and require that they may only be terminated by ordinary resolution or special resolution at a general meeting of all owners.

    Often enough, it will be impossible to achieve an ordinary or special resolution because the OC manager holds the strata roll (and won’t release it) which makes it very difficult to run a ballot or gain sufficient support from the other owners.

    However, Member Buchanan of the Victorian Civil and Administrative Tribunal (VCAT) has just delivered a very handy judgment that will assist other OCs to find a way through to terminate the OC manager agreement by way of a committee decision.

    The case concerned the Upper West Side development in the CBD, which consists of thousands of apartments and many commercial lots.

    In this particular instance, the cases concerns only one of the residential OCs (OC6).

    In 2016, the developer appointed Australian Property Management (APM) to be the OC’s manager for a period of five years, with a further option at its election.

    In due course, the developer relinquished control to the lot owners, and a committee was formed. The committee passed an email ballot (and later ratified at a committee meeting) to terminate APM as manager, and acted to appoint a replacement manager.

    APM did not accept that it had been terminated and pointed to the wording of the resolution that the developer used to appoint it at its inaugural general meeting, which required any resolution to terminate it to be done by way of special resolution.

    In publishing the decision, Member Buchanan stated, “I find that the answer to the preliminary question is yes. I find that the committee of the OC had the power to terminate the APM management contract.”

    The proceedings are still ongoing at the date of this publication, and while there may be an appeal filed, at least as matters stand in Victoria, an OC need not find itself “stuck” in an uncommercial or untenable contractual arrangement set up by the developer.

    The committee of the OC must act fairly, honestly, diligently, in good faith and exercise all decisions in the interests of all lot owners. So, as long as committee members take good legal advice from a specialist strata lawyer on the exact circumstances of their case and exercise due diligence, then there are opportunities for the committee to terminate an OC manager agreement before expiry •

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