Pros and Cons of Pooled Letting

PROS AND CONS OF POOLED LETTING

 

When an owner lets out their unit through an on-site letting agent, there are two ways that the owner’s letting income is typically calculated. These can be described as the “direct income” method or the “pooled income” method.

The method to be used is set out in the letting appointment (i.e. the agreement between the letting agent and the owner of the investment unit).

The majority of letting appointments pay an income to owners using the direct income method, where the income collected from the unit bookings is paid directly to the owner, after deductions of all expenses.

The pooled income method is used predominantly for short term lettings in a hotel style business. When using pooled income, the combined income and expenses for all units in the letting pool are aggregated and then a share of the profit is paid to all the owners in the letting pool.

In a perfect world, the pooling of income would seem the fairest way for Managers to operate their letting businesses. By pooling the income, owners can’t accuse the Manager of favouring certain owners over others when allocating bookings, and all owners rise and fall together with the success of the letting business. However, as we all know, we don’t live in a perfect world!

There are a number of common issues that can arise when operating a pooled letting business. The types of questions you will encounter include:

  • How to fairly determine the income ratio? Do you allocate based on the number of beds, unit entitlements (which are designed to reflect value), quality of the unit, sea views or some other unique quality? Or do you divide everything equally regardless?
  • How to share expenses? Do you share any or all expenses across the letting pool? Do you share expenses only up to a certain cost? Do you use the same ratio for sharing income to also sharing expenses?
  • How to determine who authorises significant expenditure? Do you ask a committee or one or two owner representatives, or should you be asking all owners – as all owners are sharing the costs?
  • How to operate a maintenance fund? Do you deduct a maintenance levy each month or just withdraw expenses as and when incurred?
  • What happens when an owner leaves the pool or has only just joined the pool? Should part of the retained maintenance funds be returned to the leaving owner? What if an owner leaves the pool after the general maintenance fund has just paid out for a new hot water system or installed new carpet in their unit?
  • How to adjust income when the owner uses their unit? Do you make no adjustment, or do you pro rata adjust for the days used?
  • How to change the terms of the letting appointment? What do you do if not all owners agree to your proposed change?

If you elect to go the pooled income route with your letting business, all of the above questions need to be thoroughly considered and appropriately addressed in your letting appointments with your owners. Unfortunately, we see a lot of letting appointments providing for pooled income where the issues raised above are not sufficiently answered.

When these issues are not suitably addressed we see unfair scenarios arise where owners are not receiving an income that truly reflects their unit’s contribution to the letting pool income. For example, if two bedroom units are in demand far more often than three bedroom units, the owners of the two bedroom units are effectively supplementing the income of the owners of three bedroom units. To add insult to injury, if the distribution of the pooled income is based on unit entitlements (i.e. the value of the units), the three bedroom units will also receive a higher return from the pool than the two bedroom units.

When you look at the questions and examples above, you can see there are many situations where a disgruntled owner could easily start asking some difficult questions. Questions that will be uncomfortable to answer if the terms of your letting appointment are either vague or silent on the issue.

If you operate a letting business that pools the income given to owners and your letting appointment doesn’t have the answers to these questions, it’s definitely recommended that you prioritise a revision of your letting appointments, as it only takes an issue with one owner to be an issue with all owners.

Article Written by Col Myers (June 2021)

 

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.

 

 

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Resolutions Without Dissent

THE POWER OF ONE

 

The Queensland strata legislation, like other States’ legislation, includes varying motion types which necessitate different levels of voting support in order to become resolutions. Each State has unique categories of motions and different threshold voting requirements for such motions to be approved. Whilst there is some overlap, a special resolution in one jurisdiction may have a different meaning in another (at least in terms of the way votes are calculated).

In Queensland, the Body Corporate and Community Management Act 1997 prescribes the following resolution types (for general meetings):

  • Ordinary resolution
  • Majority resolution
  • Special resolution
  • Resolution without dissent

The most common resolution type is an ordinary resolution. Such a resolution is calculated quite simply in terms of a majority of those voting. The motion passes if there are more votes in favour than against. The qualifying aspect to this is if somebody (anybody entitled to vote) requests a ‘poll’. In such circumstances, the motion is passed if the total contribution lot entitlements in favour of the motion are more than the total contribution lot entitlements against the motion. An ordinary resolution is the only resolution type where a poll can be requested.

One infrequently used resolution type is a majority resolution. Because they are rarely required, there seems to be a tendency to assume (incorrectly) that a majority resolution is the same as an ordinary resolution – after all, it talks about a ‘majority’ doesn’t it? However, they are quite different things. A majority resolution is calculated based on the total number of lots in the scheme. The resolution carries only if the votes in favour of the motion are more than half of the lots entitled to vote on the motion. Given the general apathy and low voting turnout at general meetings, obtaining the required support for a majority resolution can be quite difficult.

Another misconception that owners and others in the strata sector frequently seem to have is the voting requirements for a special resolution. There appears to be a common assumption that such a resolution requires a simple 75% majority. Whilst perhaps that might be useful as a ‘rule of thumb’, the counting of votes for a special resolution is quite different. The test is a three-tier one, and requires all of the following requirements to be satisfied:

  • At least two-thirds of the votes cast are in favour of the motion.
  • The votes counted against the motion are not more than 25% of the number of lots in the scheme.
  • The contribution lot entitlements for lots voting against the motion are not more than 25% of the total contribution lot entitlements for the scheme.

That brings us to the final resolution type and the purpose of my commentary in this newsletter – the resolution without dissent. Such a resolution quite simply requires that no vote is cast against the motion. What’s more, this resolution type does not prohibit owners who owe a body corporate debt at the time of the meeting from voting on the motion. Accordingly, a single owner (financial or unfinancial) can ensure that such a motion does not carry – and this frequently occurs. 

It holds true that there will be very serious decisions that a body corporate will need to make from time to time that should require strong majority support – even beyond the requirements of a majority or special resolution. However, the question arises as to whether a unanimous voting requirement is a step too far? 

Of course, there will be those that point out that any failure of a resolution without dissent to pass can be the subject of challenge in the Commissioner’s Office – the relevant test being whether it failed to pass ‘because of opposition that in the circumstances is unreasonable’ – a test for which we have High Court authority (Ainsworth v Albrecht [2016] HCA 40).

However, that still means that valuable time and resources are consumed in seeking to have an unreasonable vote overturned in the Commissioner’s Office. Conversely, if one or two votes were insufficient to prevent the passing of the motion, it would be up to those ‘aggrieved’ owners to take the initiative and commence dispute resolution proceedings to challenge the passing of the motion. Without good cause and reasons for their dissent, most owners will probably not take up this option – particularly as frivolous or vexatious applications can be dismissed with costs. 

That brings us to another question about whether the current statutory maximum of $2,000.00 is sufficient to discourage the lodging of frivolous or vexatious applications. Certainly not in my opinion. However, that is a debate for a different day – and a different newsletter!

Article Written by Jarad Maher (26 May 2021)

 

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.

 

 

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Reallocation of Exclusive Use Areas – A Cost on Who?, For the Benefit of Two

REALLOCATION OF EXCLUSIVE USE AREAS – A COST ON WHO?, FOR THE BENEFIT OF TWO

 

A situation that frequently comes across my desk is where two or more lot owners (but usually just two) are seeking to ‘swap’ exclusive use areas between their lots. Sometimes it is just one owner, who owns multiple lots, seeking to transfer areas between their lots (usually for the purpose of selling one or more of the lots with the different allocations in place).

Section 171(1) of the Body Corporate and Community Management Act 1997 (Act) sets out the following:

(1)       The common property or body corporate asset to which an exclusive use by-law for a community titles scheme applies must be—

(a)         specifically identified in the by-law; or

(b)         allocated—

i            by a person (who may be the original owner or the original owner’s agent) authorised under the by-law to make the allocation (an authorised allocation); or

ii           by 2 or more lot owners under a reallocation agreement (an agreed allocation).

Essentially, if two or more owners decide that they would like to swap areas of common property (that are subject to an exclusive use by-law), then they are entitled to such a swap by entering into a ‘reallocation agreement’. Such an agreement is defined in the Act to be ‘an agreement in writing under which two or more owners of lots for which allocations are in place under an exclusive use by‑law agree to redistribute the allocations between the lots.’

Other than needing to be in writing, there are no strict requirements about the form or content of a reallocation agreement. It could be as simple as a one page document setting out an extract of how the revised allocations will appear in the table in Schedule E of the Community Management Statement (CMS) and executed by the owners involved. I have also seen and prepared much more complex versions, setting out the terms of the reallocation in a formal deed of 10 or so pages. Much depends on the needs of the owners involved in the transposition, whether they are related parties, and whether the reallocation also involves the exchange of money.

Section 174(1) of the Act provides than an authorised or agreed allocation has no effect unless details of the allocation are given to the body corporate. Accordingly, once two or more owners agree to swap their exclusive use areas, the owners must give notice and details of the agreed allocation (ie a copy of reallocation agreement) to the body corporate.

Once the notification is received, the body corporate must lodge a new CMS with the Department of Resources (titles office) that includes the change within 3 months (section 176 of the Act).

Two questions that are frequently posed to me by a committee or body corporate manager following receipt of an agreed allocation are:

  1. What are the approval requirements for the body corporate to lodge the new CMS?; and
  2. Who is responsible for the costs of preparing and lodging the new CMS with the titles office?

It is important to note that body corporate consent is not required to the recording of a new CMS pursuant to an agreed allocation. The approval requirements set out in section 62 of the Act do not apply to an agreed allocation. The body corporate must simply comply with the legislative obligation to register a new CMS within 3 months of the allocation being notified (in accordance with section 176 of the Act).

Sometimes a body corporate will still be concerned to properly record the fact of the new CMS being lodged and, in such circumstances, my recommendation is that the committee pass a motion at its next meeting, or by voting outside committee meeting (VOC / flying minute), noting the agreed allocation and the fact of the new CMS being prepared and lodged with the titles office. A committee meeting may be required in any event to properly engage and instruct a solicitor to prepare and lodge the new CMS on behalf of the body corporate. That brings us to the next issue of the responsibility for the costs associated with preparing and lodging the new CMS.

Section 63 of the Act provides that the body corporate is responsible for the costs of preparing and lodging a new CMS (unless another section of the Act provides otherwise). There is no exception to the general position under section 63 of the Act in relation to the preparation and lodgment of a new CMS arising because of an agreed allocation. Accordingly, the body corporate is responsible for preparing and lodging the CMS at its own cost.

This often comes as quite a surprise to the committee given that an agreed allocation only benefits the lot owners involved and the body corporate may have no reason (other than the reallocation itself) to register a new CMS in the 3 months following notification of the agreed allocation. Nonetheless, the statutory obligations of the body corporate are clear in this regard and, whilst the owners providing the notification can be asked to contribute to the cost, the body corporate cannot insist upon it if the owners decline.

    Article Written by Jarad Maher (27th April 2021)

     

    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.

     

     

    GET IN TOUCH

    Tel:          +61 7 5552 6666

    Fax:         +61 7 5528 0955

    Office:      Level 2, 17 Welch Street, Southport Qld 4215

    Postal:      PO Box 1876, Southport QLD 4215

     

    OFFICE HOURS

    Open:        8:30am – 5:00pm Monday to Friday

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    Categories