Flat Preloader Icon

Lessons for Building Managers from a Recent Court Case

WHAT NOT TO DO AS A BUILDING MANAGER

BACKGROUND

A recent decision of the NSW Civil and Administrative Tribunal (NCAT) has provided Owners Corporations in NSW with what is now seen as a more “risk free” pathway to terminate a Building Management Agreement.

Until recently, if an Owners Corporation was not satisfied with the performance of its Building Manager, it has been usual practice that the Owners Corporation would commence legal action to terminate the Agreement, by alleging that the Building Manager was in substantial breach of one or more of the Agreement terms – or failed to satisfactorily perform the building management duties under the Agreement.

The danger however with this approach has always been that if the Court later decides that the Building Manager was not in substantial breach of the Agreement, the Owners Corporation is then liable to pay substantial damages to the Building Manager for the wrongful termination of the Building Management Agreement.

SECTION 72 OF THE STRATA SCHEMES MANAGEMENT ACT 2015
1. an order terminating the Agreement,
2. an order requiring the payment of compensation to a party to the Agreement,
3. an order varying the term, or varying or declaring void, any of the conditions of the Agreement,
4. an order that a party to the Agreement take any action or not take any action under the Agreement, or
5. an order dismissing the application.

The section further states that NCAT may make an order under this section on any of the following grounds:
(a) that the Building Manager has refused or failed to perform the Agreement, or has performed it unsatisfactorily,
(b) that charges payable by the Owners Corporation under the Agreement are unfair,
(c) that the Building Manager failed to disclose that he had a direct or indirect pecuniary interest in the strata scheme, or was connected to the developer, and
(d) that the Agreement is, in the circumstances of the case, otherwise harsh, oppressive, unconscionable or unreasonable.

THE CASE

The strata plan in this matter was registered in January 2001 and covered two buildings in Ultimo, Sydney that were originally developed by Meriton. In October 2000, Meriton sold the caretaker management rights to a building management company which has had control of those rights since that time. However, for whatever reason, the Owners Corporation did not receive a full copy of the Building Management Agreement until 2020!

When the Owners Corporation eventually reviewed the Building Management Agreement, they discovered that the Agreement only provided for annual increases in management fees in accordance with the CPI. The building manager however, had been charging annual increases of 5% – since October 2000.

The Owners Corporation was also dissatisfied with the performance of the Building Manager and ultimately commenced proceedings in NCAT, seeking an order that the Building Management Agreement be terminated pursuant to s72 of the Act. Specifically, the Owners Corporation sought an order on the basis of several parts of s72, including:
• that the Building Manager had performed the Agreement unsatisfactorily;
• that the charges payable by the Owners Corporation under the Agreement were unfair;
• that the Building Management Agreement was, in the circumstances of the case, harsh, oppressive, unconscionable, or unreasonable.

WHAT THE BUILDING MANAGER DIDN’T DO

On my reading of the case, the Building Manager made a lot of mistakes that would have been avoided, if they had read and understood their Agreement.

For example, the Building Manager:
1. refused to provide the Owners Corporation access to CCTV footage;
2. failed to provide keys when requested by the secretary of the Owners Corporation;
3. failed to provide the Owners Corporation with a proper copy of the Building Management Agreement until 2020;
4. had been charging the Owners Corporation based on 5% annual increases, instead of the CPI increases as specified in the Building Management Agreement;
5. allowed the principal of the Building Management company to be a member of the strata committee, although prohibited under the Building Management Agreement;
6. allowed its employee to improperly commence and pursue Supreme Court proceedings in the name of the Owners Corporation, attempting to prevent the 2020 AGM from going ahead, without proper authority or instructions; and
7. had, through the conduct of the principal and employees of the Building Manager prior to the 2020 AGM, falsely represented that the AGM had been cancelled, which conduct was allegedly borne out of a desire to control the Owners Corporation, rather than to serve the Owners Corporation, as required by the Building Management Agreement.

THE DECISION

The finding in this case was that the Building Manager had failed to perform the relevant Agreement satisfactorily, and that the Building Management Agreement, in the circumstances of the case, was harsh, oppressive, unreasonable or unconscionable.

TAKEAWAYS
• This sounds really basic, but always have a 100% understanding of what your duties are under your Building Management Agreement and don’t deviate from the performance of those duties.
• Although not relevant to this case:
(a) Diarise your option exercise dates and don’t miss them. If you are one day late, you lose the ability to exercise the option (and later options) and your remaining term falls away.
(b) Stay in regular touch with your owners by way of a newsletter. Let them know the good things that you do at the complex and remember, you only need 51% of those owners that vote at a meeting of the Owners Corporation (or Body Corporate) to extend the term of your Building Management Agreement.
(c) Wherever possible, maintain good lines of communication with your committee and strata manager.

Article Written by Col Myers of Small Myers Hughes Lawyers

Liability limited by a scheme approved under Professional Standards Legislation
Disclaimer – This article is provided for information purposes only and should not be regarded as legal advice.

COVID-19 Measures for Strata and Community Schemes Extended

NSW COVID-19 MEASURES FOR STRATA AND
COMMUNITY SCHEMES EXTENDED

The NSW Department of Fair Trading has recently announced that the State Government has extended its temporary COVID-19 emergency measures for strata and community schemes to 29 September 2022.

This means that strata Owners Corporations and Community Land Associations can continue, until 29 September 2022, to:

• meet and vote electronically, without passing a resolution to authorise this beforehand;
• validly execute documents, without affixing the seal of the Owners Corporation or Association.

The previous temporary measure of allowing certain documents to be sent by email has not been extended because of changes made by the COVID-19 and Other Legislation Amendment (Regulatory Reforms) Act 2022 (the Act) on 24 March 2022. The changes mean that an Owners Corporation and Association can send documents to an email address nominated by a lot owner, lot occupier or another person on the roll.

The Act makes other permanent changes to the strata and community scheme laws on ways of voting and using an electronic seal. These changes are currently expected to start on 30 September 2022, once supporting regulations are made.

The measures allow Owners Corporations and Community Land Associations to continue operating as they have been during 2020 and 2021, until the permanent changes commence.

NSW Strata Scheme Reporting

All strata schemes in NSW will have to report annually to NSW Fair Trading through a new strata portal by 31 December 2022.

The reporting will make it easier to access key strata information, and it will deliver a range of benefits. For example, emergency services will have access to a dedicated contact for each scheme in the event of an emergency.

The Department of Fair Trading will be implementing the portal’s functions in stages. From July 2022, Owners Corporations can register a scheme, set up a profile and access educational webinars. More features will be added in the following months.

Strata communities in NSW can now start to prepare for the reporting now by:

• knowing what information you’ll need to report and where to find it;
• deciding who will do the reporting and who will be the emergency services contact.

Liability limited by a scheme approved under Professional Standards Legislation
Disclaimer – This article is provided for information purposes only and should not be regarded as legal advice.

2022 08 Aug - COVID-19 Measures for Strata and Community Schemes Extended

SW SHORT TERM RENTAL ACCOMMODATION (STRA) – FURTHER UPDATE

NSW SHORT TERM RENTAL ACCOMMODATION (STRA) – FURTHER UPDATE

The NSW Department of Planning and Environment has recently clarified its views in relation to the application of the State – Wide Short term Rental Accommodation (STRA) planning laws.

You may recall that from the 1st November 2021, new rules commenced in NSW in relation to STRA, including:

• a state-wide planning instrument permitting the use of dwellings for STRA under certain conditions, including limits on the days the activity can take place; and

• a mandatory Code of Conduct that applies to online booking platforms, letting agents, hosts and guests; and

• allowing strata schemes to adopt a by-law that prohibits STRA where a lot is not a host’s principal place of residence. (Any such by-law has to be adopted by special resolution, with 75% of votes supporting the proposal at a general meeting), and

• STRA properties upgraded where necessary to meet certain minimum safety requirements.

After some delays and staggered starts, all these policies have now been put into effect.

Day Limits on STRA

The planning laws now include new ‘exempt’ and ‘complying’ approval pathways that enable STRA within certain day limits:

• where the host is present, STRA is ‘exempt development’ for 365 days per calendar year. This allows hosts to use an existing approved dwelling for the purposes of STRA, without requiring any further approval from the local council;

• where the host is not present, and the site is not on bushfire prone land or a flood control lot, STRA is ‘exempt development’ for:

• 180 days in Greater Sydney;

• 365 days in regional areas; except where a council varies this to no lower than 180 days (although Byron Bay is possibly looking to varying this to 90 days in some parts of the shire and 365 days in other parts);

(Note that where the host is not present, and the booking is for 21 or more consecutive days, the booking will not count towards the above day thresholds).

What does this mean for management rights operators?

Prior to the commencement of the STRA laws, only a limited number of Councils in NSW had local environmental plans that specifically regulated the use of properties for short term rental accommodation. Many operators conducted short term letting from complexes that were zoned (or had a DA) for “residential accommodation”.

Following the introduction of the STRA laws, management rights operators now need to make enquiries with their local Council to ascertain if the development approval (DA) for their building specifically allows short term letting in the complex. If a valid DA for STRA exists, the day caps set under the STRA planning policy do not apply to that building.

However, if the DA for the building was only for residential use (notwithstanding that it may have been used for STRA in preceding years without any Council intervention), the day caps will apply, which this obviously could have a detrimental effect on management rights operations.

It should be noted however that the Departments interpretation of these new STRA laws have not been tested yet in a Court of Law – so watch this space!

Liability limited by a scheme approved under Professional Standards Legislation
Disclaimer – This article is provided for information purposes only and should not be regarded as legal advice.

The Changing Face of MR Sales

Management rights, like all industries, change and evolve over time.

One of the biggest changes I have seen in recent years is the sale process itself. In the good old days, contracts were regularly prepared and settled on the basis of:
• Financial verification – 14 days from contract date;
• Legal due diligence – 21 days from contract date;
• Finance – 28 days from contract date;
• Body corporate approval – prior to settlement;
• Settlement – 45 days from contract date.

As soon as contracts were signed, the sellers would regularly go off and book that eagerly awaited European holiday – departing on the day after the due settlement date.

My, how things have changed!

These days, the stars need to align with the planets for a sale to be completed within 45 days.

So What’s Changed?

These days, most sales take at least 10-12 weeks to complete. There are a number of issues that are impacting on the length of a sale that are becoming the new norm.

For starters, body corporate committees are no longer rubber-stamping assignments – which is fair enough.

Bodies corporate are being advised by their solicitors that they don’t have to accept whoever is brought forward by the seller and they are probing far deeper into the work history, character and finances of buyers. Police reports and business plans were never asked for in the past, but are now par for the course. Committees, armed with predetermined questions about what the buyer is going to do for them, now regularly conduct lengthy interviews with buyers and even have some buyers assessed by third party consultants.

I have no problem with this process, as long as it does not become silly (like a body corporate solicitor recently wanting a buyer to justify how he could handle a 2% rise in interest rates, if it were to happen!).

Body corporate solicitors also play a much more involved role in the sale process and costs have ballooned as a consequence.

The Timing Problem

Once sale contracts are signed, a three-step process begins for the buyer:
1. Financial verification;
2. Legal due diligence;
3. Finance approval.

Once these steps are completed, the approval of the body corporate is then sought, with settlement to occur soon after.

Regardless of the seller’s or the buyer’s wishes, the banks and the body corporate solicitors are ultimately determining the timing of settlements. In Queensland, assignments of management rights can be dealt with by the body corporate committee and they do not have to go to general meetings for approval. In NSW, the approval must be given by an Owners Corporation at a general meeting.

Financial Verification is still usually completed within 14-21 days from the contract date. However, the banks are taking a lot more time to process loan applications. Valuers are engaged and they naturally take time to complete their valuations. Then the banks’ credit departments have to assess each application before an offer of finance is issued. Finance offers that used to be ready after one month are now usually taking two months.

This has a cascading effect, as the process of obtaining body corporate consent for a sale is usually only sought once finance approval has been received. Sellers notify their body corporate of the sale and it is at this stage that the body corporate appoints a solicitor to review and advise on the assignment documentation. In ideal circumstances, the body corporate consent is obtained in 30 days or less. In reality, this process is often taking 45+ days.

The Role of the Parties

Throughout the sale process, there is a constant clash of competing interests. The seller, the buyer, the bank and the body corporate all engage lawyers to look after their interests. Obviously, this is fine as long as the clash of interests does not become a clash of self-interest. Each party must play their part.

The sale is a PROCESS and each party has a role to play to complete the process. When embarking on this process, the selling agent is the first point of contact and needs to condition both the sellers and the buyers as to what are reasonable time expectations for settlement.

Sellers need to play their part by cooperating with buyers’ reasonable extension requests and being proactive in managing the sale process (particularly managing owners and committee expectations). Pressuring parties to adhere to unrealistic timeframes is counter-productive and, ultimately, can lead to the sale collapsing, leaving the seller to start the whole process all over again.

Buyers likewise need to hose down their expectations as to when they can start earning income. We all understand that most buyers go for lengthy periods without income in the lead up to settlement, where it is all money out and no money in.

And finally we solicitors, engaged by the buyers and sellers, also need to work cohesively, particularly in relation to satisfying the requirements of the body corporate’s solicitor. Yes, sales are taking longer but we do get there in the end.


Liability limited by a scheme approved under Professional Standards Legislation
Disclaimer – This article is provided for information purposes only and should not be regarded as legal advice.

Update on Caretaking Agreements in NSW Community Title

What is Community Title?

I recently wrote an article that explained the difference between community title and strata title in NSW.

To recap, a good example of a community title is a gated community estate where there may be say 20 houses, each separated by boundaries and each owned by different people. The owner of each house will own all of the building and all of the land on which the building is situated – just like a traditional housing lot. At the centre of the estate there may be a tennis court, swimming pool and parking area. To enter the estate, you need to pass by an electric gate, which is monitored by a security company. In this example, each owner still owns their individual house and adjoining land, but they all share common amenities, including the security system, the entrance gate, the tennis court, the swimming pool and the parking area. These areas are known as “community property” (same as “common property” in strata subdivisions).

A community title scheme is created by the registration of a Community, Neighbourhood or Precinct plan and (much like a strata scheme) caretakers are often appointed by the Community Association to maintain the community property, including all recreational facilities, gardens and parklands.

Term of Caretaking Agreements in Community Title

When the Strata Schemes Management Act was amended in 2003 to limit the term of caretaking agreements in strata complexes to no more than 10 years (including options), similar changes were not made to the Community Titles legislation. Accordingly, agreements between Community Associations and caretakers could still be for terms of 25 years – and often were.

However, this has changed in late 2021 when the Community Land Management Act 2021 (the “New Act”) commenced on 1 December 2021. The New Act is designed to bring the legislation for community title into alignment with, and ensure consistency with, the Strata Schemes Management Act 2015.

Under the New Act, caretakers became known as “Facilities Managers” and are defined in the New Act as any person who assists with one or more of the following functions (except as a volunteer, casual or committee member):
• managing association property.
• controlling use of association property by persons other than owners/occupiers.
• maintaining and repairing association property.

These duties capture all of the traditional roles of an on-site caretaker.

Most importantly, the New Act prescribed that the maximum term of these agreements moving forward was now 10 years.
It also prescribed that:
1. the proposed facilities manager must disclose interests, including connection with the original owner and any pecuniary interest, in the association;
2. NCAT is empowered to make variations to, or terminate facility management agreements in certain circumstances; and
3. if authorised at a general meeting, an existing facility management agreement can be transferred to another entity.

What about Caretaking Agreements Already Existing at the Commencement of the New Act?

Unfortunately, the New Act did not grandfather all existing caretaking agreements so they could continue to operate in accordance with the old legislation.

In fact, it provided that a caretaking agreement in force immediately before the commencement of the new legislation is taken to be a facilities manager agreement for the purposes of the New Act and the agreement is deemed to expire 10 years after the commencement of the New Act, i.e. they will terminate by 1 December 2031.

Is there a Loophole in the new legislation?

There is one exception contained in the transitional sections of the New Act that may exempt some existing managers from this harsh new write down of their agreement term.

If the caretaker is entitled to “exclusive possession of a lot or association property in the scheme”, any caretaking agreement in force immediately before the commencement of the New Act is not taken to be a “Facilities Management Agreement” for the purposes of the New Act and therefor the 10 year term limitation does not apply to that agreement.

In other words, the owner of the caretaking business must be the same entity as the owner of the lot where the business operates, or there must have been a lease in place prior to 1 December 2021 that grants to the caretaker exclusive possession of the lot or community property where the business operates.

If you are a caretaker or service provider for a community title it is strongly recommended you seek advice on this issue relevant to your circumstances.

Article Written by Col Myers of Small Myers Hughes Lawyers

Liability limited by a scheme approved under Professional Standards Legislation
Disclaimer – This article is provided for information purposes only and should not be regarded as legal advice.

Further Pending Changes to the Role of Building Managers in NSW – Part 2

FURTHER PENDING CHANGES TO THE ROLE OF
BUILDING MANAGERS IN NSW – PART 2

In last month’s article, I outlined some of the key issues raised in the current review by the NSW Government of the Strata Schemes Management Act 2015 and Strata Schemes Development Act 2015.

These issues included:

  1. Amending the definition of a Building Manager under the Act to more clearly distinguish the role of Building Managers from that of other contractors who engage with the Owners Corporation from time to time; and
  2. Imposing on Building Managers a higher degree of disclosure to the Owners Corporation of potential conflict of interest issues when engaging contractors and receiving referral fees etc.; and
  3. Further consultation in relation to the ongoing review of the term of Building Management Agreements (currently capped at 10 years).

Further recommendations which directly relate to Building Managers include:

  1. Building Managers be subject to a statutory duty to act in the best interests of the Owners Corporation in carrying out their duties.

               Background – Some stakeholders argued that, in addition to conflict of interest controls, Building Managers should be subject to an explicit statutory duty to act in the best interests of the Owners Corporation. For example, the Property and Stock Agents Regulation 2014 requires managing agents conducting letting to be licensed professionals subject to a fiduciary duty and an explicit duty to act in the best interest of their client.

  1. The Department of Consumer Service to consult with the strata and facilities management industries about ways to improve the expertise of Building Managers, especially in the management of defects, including the possibility of a licensing framework in the longer term.

          Background – The review panel noted that the maintenance and repair of common property is a critically important duty of the Owners Corporation, in order to ensure the ongoing safety and amenity of strata buildings throughout their life. In complex, multi-storey strata buildings, the Owners Corporation of necessity relies more on the Building Manager than in simpler buildings, for expert advice on managing defects, safety, repairs and maintenance. The lack of expertise of the Owners Corporation when dealing with issues of building defects, fire safety and maintenance has led to suggestions that overall management of maintenance and repairs should rest with an accredited or licensed Building Manager, who is subject to statutory duties to ensure the upkeep and safety of the building.

               The Facilities Management Association of Australia argued for the licensing of facilities (or building) managers and for a requirement to engage a suitably qualified Building Manager for buildings of a certain complexity. Other submissions were concerned that placing such a duty on a Building Manager would be unfair if, for example, they requested approval for repairs or upgrades but were refused by the Owners Corporation. The review considered that any proposal to delegate the obligation of the Owners Corporation to maintain and repair the common property to a Building Manager would require suitably qualified Building Managers supported by a licensing scheme and compulsory qualification requirements. Without such uniformity and oversight of qualifications, imposing such a duty could be unfair to some Building Managers who would not have the right expertise, and could risk dangerous practices and Owners Corporations placing their trust in unsuitable candidates.

              However, it was noted that at this time, there is a lack of a properly recognised qualification in the vocational educational framework that could be used to support such a scheme. Further, developing and implementing a licensing scheme would involve substantial costs which would be borne by the Government, the industry and Owners Corporations as the end consumer. The review therefore did not consider that a licensing scheme is a viable or supportable option at this time. Nevertheless, the review recognised that there is substantial support for improving the expertise of Building Managers, especially in the management of defects.

  1. Building Managers be subject to explicit statutory duties to:
    • disclose to the Owners Corporation the qualifications and experience that make them suitable for the role;
    • familiarise themselves with fire safety and building safety obligations to which the Owners Corporation is subject;
    • take all reasonable steps to ensure that the Owners Corporation complies with these obligations; and
    • promptly bring to the attention of the Owners Corporation any maintenance, repair or safety problems with the building, and provide a proposal for how these could be best addressed.

               Background – It was the opinion of the review panel that, prior to an Owners Corporation entering into Building Management Agreement, a potential Building Manager should be required to disclose to an Owners Corporation the qualifications and experience that make them suitable for the role. While such disclosure may already be common in practice, mandating it will ensure that all Owners Corporations are required to explicitly consider the qualifications of a prospective Building Manager.

  1. That a failure by a Building Manager to disclose to the Owners Corporation any commissions it has received be added to the existing grounds for termination of Building Manager Agreements under the Strata Schemes Management Act.

Current termination grounds are:

  • a failure to satisfactorily perform the duties;
  • if the caretaking fee is unfair;
  • a failure to disclose a connection to the original developer; or
  • that the terms of the Agreement are harsh, oppressive, unconscionable or unreasonable.

Background – The Discussion Paper asked whether any further grounds for termination of Building Manager Agreements should be added or if the grounds should be the same as those for strata managing agents. Submissions supported the current grounds for termination of Building Managers in section 72 of the Strata Schemes Management Act and the review recommended their retention. Given the recommendation that Building Managers be subject to the same requirement to disclose commissions and training services that applies to strata managing agents, the review recommended that the Tribunal should also be able to terminate a Building Manager’s contract on the grounds that the Building Manager has failed to make these commission disclosures or has failed to make them in good faith.

Liability limited by a scheme approved under Professional Standards Legislation

Disclaimer – This article is provided for information purposes only and should not be regarded as legal advice